(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By John Foley
NEW YORK, April 25 (Reuters Breakingviews) - Jamie Dimon is a busy man. Yet the JPMorgan boss found time to devote more than a page of his annual letter to shareholders this year to his disdain for two small companies: Institutional Shareholder Services and Glass Lewis. These shareholder advisory firms, tiny compared to the $550 billion U.S. bank Dimon runs, punch above their weight in influencing how companies and investors behave. Their impact is problematic, but they are not the problem.
Fund managers have a duty to vote when shareholder meetings roll around each spring, but evaluating every motion at every company would require an enormous amount of time and effort. That’s where proxy advisers come in. ISS and Glass Lewis pore through thousands of companies’ public filings on topics like pay, governance and sustainability, and publish recommendations for each item on the ballot. For most votes, like reappointing auditors or re-electing directors, there’s little controversy. When contested issues pop up, so does attention to what proxy firms say.
Executive pay and activist investors are classic flashpoints. Proxy firms dig into the alignment between top managers’ compensation, their performance, and broader principles in a way equity analysts generally do not. And when a dissident shareholder nominates its own directors to a company’s board, proxy advisers will opine on whether other investors should concur. The two main firms don’t always agree: When Nelson Peltz’s Trian Management recently tried to win a seat on Walt Disney’s board, ISS backed him and Glass Lewis did not. In the end, Disney shareholders sent Peltz packing.
Nobody is forced to use ISS, Glass Lewis or any proxy adviser. But Dimon, like some of his peers, cannot abide their role. JPMorgan’s long-serving CEO argues that the firms have “undue influence”, and that they provide information that is “not balanced” and “not accurate.” He even warns that Glass Lewis and ISS are owned by non-American investors, a complaint that jars with the Wall Street veteran’s otherwise globalist leanings. Germany’s Deutsche Boerse bought ISS in 2021. Glass Lewis is owned by Canadian investors.
Dimon’s anger isn’t surprising, because the proxy advisers’ views directly affect him and his counterparts. Shareholders in American companies are becoming more active in submitting proposals for annual meetings. Many address topics such as lobbying and climate goals only indirectly related to maximizing near-term profit. The U.S. Securities and Exchange Commission, which can shield companies from investor micromanagement, is letting more motions through.
One issue that keeps coming up is the question of whether CEOs like Dimon have too much power. On May 21, JPMorgan shareholders will vote on whether to split the chair and CEO roles that Dimon holds, a question he argues has no bearing on shareholder value. Last year, 38% of shareholders supported a proposal to split the positions. Investors in Goldman Sachs
and Bank of America on Wednesday rejected similar motions to clip the wings of the banks’ respective leaders – but in each case around one-third of investors agreed with the proxy firms, who had supported the motions at both banks.
Nor is the animosity unique to U.S. companies. AstraZeneca’s chairman argued last week that proxy firms – who opposed CEO Pascal Soriot’s $23 million maximum potential pay – were doing “serious harm” to the competitiveness of British businesses. Over one-third of the London-listed pharmaceutical giant’s voting shareholders rejected its pay plan at the April 11 meeting.
Though the firms’ influence is hard to gauge, it’s probably declining. Big fund managers like BlackRock and State Street have their own stewardship teams and own a greater chunk of listed companies than they used to. Studies that analyzed proxy firms’ impact have reached different conclusions. One paper in 2010 estimated that ISS’s advice shifts less than 10% of the vote. Another in 2022 suggested a much greater influence over institutional votes, if not retail ones. Some asset managers “robo-vote” – meaning they automatically follow proxy advice. But around 70% of ballot recommendations by Glass Lewis are customized to client's preferences, for example. ISS is launching a bespoke menu for conservative-leaning investors.
The process isn’t without its problems. For one, the guidelines the firms draw up are based on principle - for example, the idea that an independent chair is a better steward of a board than someone who is also CEO – but not necessarily empirical fact. The proxy advisers also adapt to local norms. Glass Lewis says large U.S. companies should aim for a board that is at least 30% composed of gender-diverse candidates. In Hong Kong, the lower limit is one diverse candidate. It’s hard to find scientific reasons for either option.
Moreover, there’s not much accountability, because it’s hard to gauge whether the recommendations were “right” or not. That makes proxy advisers different from stock-picking analysts, say, whose recommendations can have measurable monetary consequences for their customers. Glass Lewis allows companies to file “unfiltered” rebuttals which it then attaches to its reports, though very few do so.
There’s a further market failure: ISS and Glass Lewis have outsized influence because they are effectively a duopoly. There are two likely reasons for that. The barriers to entry for proxy advisers are high given the sheer number of companies they cover. Furthermore, there’s not much scope for deriving lavish profit, because it’s hard to make investors value something that has no short-term impact on performance. Fewer than one-third of retail shareholders bother to vote at annual meetings, so it’s unlikely they would stomach higher asset management fees for the vague promise of better long-term governance.
Ultimately, proxy advisers do more good than harm. They at least provoke debate on governance issues that otherwise might go without much scrutiny. Even if they were to misfire, many of the votes on which they opine, including “say on pay” at U.S. firms, are only advisory. And as Disney, Goldman and Bank of America demonstrate, investors still largely do what they’re told. The very fact that Dimon can use JPMorgan’s annual report as an opportunity to bash proxy advisers shows that the playing field is still firmly tilted in executives’ favor.
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(Editing by Peter Thal Larsen and Aditya Sriwatsav)
((For previous columns by the author, Reuters customers can click on john.foley@thomsonreuters.com; Reuters Messaging: john.foley.thomsonreuters.com@reuters.net))
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