Concerns Over Proxy Advisors' Conflicts
Egan-Jones emphasizes a significant trend in which asset managers are distancing themselves from major proxy advisors. This shift highlights increasing unease over structural conflicts within the U.S. proxy process. The current state of affairs is alarming, as a handful of dominant firms manage incompatible roles, including proxy advisory services, corporate consulting, and vote execution.
The Stakes of Structural Conflicts
These firms are compensated by parties that have conflicting interests, namely shareholders and management. Unfortunately, the nature of this revenue model means that managing these conflicts simply through disclosure is ineffective. Essentially, it becomes clear that one cannot truly serve two different masters. As these conflicts perpetuate, they jeopardize investor trust, corporate accountability, and the long-term outcomes of retirement plans.
Dimensions of the Proxy Problem
This complex issue can be broken down into three critical components: conflicted proxy advice, flawed proxy plumbing, and excessive market concentration.
1. Conflicted Proxy Advice
The proxy advisory sector is significantly influenced by just two major firms. Interestingly, these same firms possess far more corporate consultancy clients than proxy advisory clients. This dual-client scenario creates a challenging conflict of interest, where those determining shareholder voting recommendations are also consulting for the companies involved in those votes. This is an intricate problem that simple solutions like disclosures or protective barriers cannot fix.
2. Issues within Proxy Plumbing
The infrastructure that supports proxy operations also suffers from serious conflicts. Currently, a single entity dominates over 90% of the distribution of proxy materials and the processing of votes. This dominance grants it substantial authority over shareholder voting procedures while it supports corporations in crucial operational tasks. This same company also provides proxy advising services to shareholders, which amplifies the conflict and becomes more problematic when they extend their services into advising companies on governance and compensation issues.
3. The Expansion of Conflicts
Strikingly, the normalization and escalation of these conflicts seem to be ongoing. New market entrants are increasingly mimicking this integrated model, which only enhances concentration and deepens the prevalence of conflicts. A new player in the market, originally limited to supporting voting infrastructure, has begun offering AI-enabled proxy advisory services. Instead of fostering competition, this expansion reinforces existing conflicts within the ecosystem.
Rethinking the Proxy System
In healthy financial markets, maintaining clear separations among key roles is essential for checks and balances. Broker-dealers, custodians, asset managers, and exchanges should each engage in distinct functions. The proxy system must mirror this by separating proxy material distribution, vote counting, advisory services, and corporate consulting. Firms active across these areas face untenable conflicts of interest, reinforcing the principle that one cannot adequately serve two distinct masters.
Impact on Market Integrity
The proxy system is a cornerstone of U.S. capital markets and shareholder democracy. It is imperative to acknowledge and rectify the structural conflicts within this framework to preserve market integrity. Ignoring these issues only serves to undermine public companies’ willingness to participate while putting at risk the retirement savings of millions of individuals.
About Egan-Jones Proxy Services
Founded in 2002, Egan-Jones Proxy Services has committed to providing shareholders with objective and credible proxy voting advice. As the leading independent proxy advisor in the U.S., Egan-Jones prides itself on offering clients guidance that aligns with their interests rather than following a conflicted benchmark policy.
Frequently Asked Questions
What prompted asset managers to move away from proxy advisors?
Concerns about structural conflicts and misaligned interests have driven asset managers to seek alternatives to major proxy advisory firms.
How do conflicts of interest arise in the proxy advisory sector?
Conflicts arise when firms are compensated by both shareholders and management, leading to potential biases in their advisory recommendations.
What are the main dimensions of the proxy advisory problem?
The three main issues are conflicted proxy advice, flawed proxy plumbing, and the growing market concentration within the industry.
Why is separation of proxy roles important?
Clear separations help maintain checks and balances in financial markets, reducing conflicts and promoting fairness in shareholder voting.
What is Egan-Jones' mission?
Egan-Jones aims to provide independent, accurate proxy voting advice that aligns with shareholders' interests, free from conflicts of interest.
