Many lawmakers, regulators, and industry professionals question whether or not the proposed regulations are needed. As the debate continues, this ISS web page is intended to provide factual information about the important and valued role of proxy advisers, background information on the business practices of ISS, and other pertinent information surrounding the reform discussion. Here you will find links to news articles, ISS correspondence with policymakers and lawmakers, letters from organizations that rely on proxy advisers, and other resources.
MYTH: Proxy advisers are not regulated by the Securities and Exchange Commission (SEC), which allows for these firms to operate in the shadows – unaccountable to their clients and millions of American investors.
FACT: ISS is an SEC Registered Investment Adviser (RIA) and falls under the regulatory authority of the SEC. The discussion in Washington, DC is whether or not to require registration for all proxy advisory firms.
MYTH: Proxy advisory firms, including ISS, are not fiduciaries and therefore have no obligation to act in their clients’ best interests.
FACT: ISS indeed does have fiduciary duties to the investors who hire ISS. ISS is one of three proxy advisory firms in the U.S. that are Registered Investment Advisers (RIA) with the SEC under the Investment Advisers Act of 1940. ISS and its employees must carry out their duties solely in the best interests of clients and free from any compromising influences and loyalties.
MYTH: Proxy advisers wield immense influence over a public company’s operations while bearing no responsibility for the financial impact of their recommendations.
FACT: Proxy adviser services are requested and paid for by investors because they see value in the products. Additionally, most of the time proxy advisers are aligned with management. Ninety-five percent of the time, proxy advisers recommend vote outcomes that are in line with corporate leadership. In the instances where proxy advisers make a recommendation against corporate leadership, the resolution will often still pass.
In 2017 itself, ISS’ recommendations for the largest 500 U.S. companies agreed and were aligned with corporate management 91.3 percent of the time. This demonstrates that ISS and the vast majority of corporate managers are by and large in agreement on good governance policies. For example, while ISS recommended against roughly 12 percent of say-on-pay resolutions for the top 3,000 U.S. companies in calendar 2017, around only 2 percent failed to pass. Clearly, investors make up their own minds.
MYTH: Proxy advisers such as ISS are minority activist investors trying to use corporate governance voting mechanisms as a way to advance a social and cultural agenda that may be inconsistent with many investors’ wishes.
FACT: ISS is a policy-based organization. Any proposal, no matter who is filing it, must be measured against that policy, which is publicly disclosed. ISS supported full dissident slates in proxy contests just one-third of the time in 2014, and one-quarter of the time in 2015 and 2016. By comparison, some active managers see support rates in excess of 50 percent.
In 2017, ISS voting recommendations for shareholder meetings of the largest 500 U.S. companies were aligned with those of management roughly 92 percent of the time. What’s more, in the roughly eight percent of the time that ISS’ recommendations did not agree with those of corporate management in 2017, it was merely due to good-faith differences of opinion involving matters like director qualifications, board oversight failures, and other items such as CEO pay.
MYTH: Proxy advisers like ISS have the ability to sway a vote by 25 percent.
FACT: There is no requirement that an investor vote in the manner recommended by the proxy adviser, nor is there a requirement that investors even hire a proxy advisory firm in the first place. Institutional investors often seek recommendations from multiple advisers and cast their own votes.
In In The Power of Proxy Advisers: Myth or Reality?, academics analyzed the effect of proxy adviser recommendations on voting outcomes in uncontested director elections. The analysis concluded that media reports substantially overstate the extent of ISS’ influence by failing to control for the underlying company-specific factors that influence voting outcomes. Controlling for these factors, the researchers estimate that an ISS recommendation shifts only 6 to 10 percent of shareholder votes.
MYTH: Proxy advisers provide “cookie-cutter advice” that gives the same advice to all clients.
FACT: Proxy adviser firms like ISS are hired to conduct research and analysis, and make recommendations based on the proxy voting policy positions of many of its institutional investors – not its own views and opinions. Most proxy voting policies are custom-designed by these institutional investor clients, versus opting to use one of several ISS “benchmark” or “specialty” policy guidelines (which are developed with client and public comment, and regularly reviewed and updated). In fact, 85 percent of ISS’ largest 200 clients utilize custom-designed proxy voting policies. Additionally, 87 percent of all ISS client shares voted in 2017 utilized client custom proxy voting policies.
MYTH: Proxy advisers like ISS have been known to provide faulty research to their clients, which in turn harms shareholders by giving them incorrect information to make informed decisions.
FACT: ISS has a more than 99 percent (99.3%) accuracy rate for its research. Where there is a factual error reported (not a difference of opinion), there is an established process to correct any inaccuracies before votes are cast via an alert that is sent to clients.
MYTH: ISS is rife with unchecked conflicts of interest.
FACT: All proxy firms have a legal and ethical responsibility to eliminate, or manage and disclose conflicts of interest. ISS discloses all real and perceived conflicts of interest to our clients per our compliance policies and per the requirements of the Advisers Act. ISS has adopted a significant relationship disclosure policy and installed robust steps to enhance transparency. ISS regularly updates and tests the adequacy of these policies and procedures and the effectiveness of their implementation.
MYTH: Many institutional investors will simply take ISS’ recommendations and vote in lockstep with them, potentially to the detriment of their shareholders. This robo-voting is mostly driven towards social and environmental shareholder proposals.
FACT: Many institutional investors have responded forcefully at the offensive suggestion that fund companies merely vote lock step with whatever proxy advisers tell them. According to data by the Investment Company Institute, in the 2017 proxy season, there were a combined 25,859 management and shareholder proposals presented to shareholders for a vote. Only 241 were environmental/social in nature. This represents a mere 0.93% of all votes in 2017. Meanwhile say-on-pay proposals represented 10% of all management proposals in 2017, and 70% of proposals represented the election of directors to the board.
For ISS, the Morning Consult conducted a poll on proxy adviser services and new potential regulations from August 27-29, 2018, among a national sample of 1,975 Registered Voters. The interviews were conducted online and the data were weighted to approximate a target sample of Registered Voters based on age, race/ethnicity, gender, educational attainment, and region. Results from the full survey have a margin of error of plus or minus 2 percentage points.
On August 21, 2019, the U.S. Securities and Exchange Commission issued Release Nos. IA-5325 and IC-33605, Commission Guidance on Proxy Voting Responsibilities of Investment Advisers. As articulated by the SEC, the Guidance was provided to “assist investment advisers in fulfilling their proxy voting responsibilities.” More specifically, in the words of the SEC “Fact Sheet” explaining the Guidance, it “clarifies how an investment adviser’s fiduciary duty and Rule 206(4)-6 under the Adviser Act relate to an adviser’s proxy voting on behalf of clients, particularly if the investment adviser retains a proxy advisory firm.