Verret: Fixing the Broken Proxy System

As more than half of publicly listed U.S. companies hold annual meetings between now and June, two small firms will have an inordinate impact on how votes are cast, according to Professor J.W. Verret.

In an April 23 op-ed co-written with James K. Glassman for Bloomberg, Verret explains how Institutional Shareholder Services, Inc. (ISS) and Glass Lewis & Company have become "the most powerful arbiters of corporate governance in the U.S. today" through their roles as advisers, with the effect of outsourcing proxy decisions for the institutions that hire them.

"Meanwhile, the SEC gave the proxy advisers protective treatment not granted to similar financial gatekeepers, such as auditing firms," Verret explains.

That system is not working, says Verret, citing the two firms' lack of resources to examine questions in depth, incentives that do not align with those of investors, and the potential for conflict of interest as evidence of this. 

The system can be fixed, Verret finds, through three steps.

First, Verret says mutual funds and other institutions should themselves decide when it makes sense to spend resources analyzing and voting on a proxy question. Second, he believes there should be an end to the preferential regulatory treatment that proxy advisers currently enjoy. Finally, he says, end extraneous proxy requirements, such as say-on-pay votes. 

Fixing the Broken Proxy System, Bloomberg, April 23, 2013. By James K. Glassman and J.W. Verret.

"In a classic case of unintended consequences, the 2003 SEC rule led to a result that was almost precisely the opposite of what many of its supporters, including Chairman Harvy Pitt, had wanted. Instead of eliminating conflicts of interest, the rule simply shifted them to the advisory firms. Instead of providing informed, sensitive voting on proxies, the incentive has been to outsource decision-making to two small organizations that most investors have never heard of."