Proxy Voting Reform: What Is on the Agenda, What Is Not on the Agenda, and Why It Matters for Asset Owners.

Abstract

Investor proxy voting practices have entered the public spotlight again in 2018 as Congress and the Securities and Exchange Commission ("SEC") consider changes to the rules which govern proxy voting and regulation of proxy advisors. The focus has largely been on companies 'frustration with an asserted out-sized influence of proxy advisory firms and the corporate community's long standing pushback to shareholder proposals, especially those dealing with environmental, social, and governance ("ESG') issues. However, an accurate recognition of the longstanding principles which underlie institutional investors 'fiduciary duties and provide the legal context for the exercise of proxy voting rights has been largely missing from the debate. In this Article, we explore current fiduciary duties of institutional investors, asset managers, and proxy advisors and how those legal principles apply to processes for analysis, voting and oversight of proxies on behalf of fund beneficiaries. We also review what current research shows concerning the financial effects of material ESG issues. We conclude that fiduciaries, when voting, monitoring or advising on voting, must apply an up-to-date understanding of fiduciary duties and must correspondingly evaluate how ESG factors and systemic risks can often be material economic issues at individual companies and across industries. We counsel that fundamental-fiduciary duty principles require more explicit and forward-looking attention in proxy voting processes to (1) evolution in research on ESG factors and the knowledge base which are driving changes in voting trends, (2) balancing intergenerational short- and long-horizon transfers of risk and return, (3) aggregate influence of systemic risks that can spread across companies and compound over time; (4) improved asset owner oversight of investment manager and proxy advisor business model conflicts of interest, and (5) cost-benefit advantages of collaborative asset owner and investment manager use of proxy and other advisors. Thus, concerns expressed in Congress and at the SEC about integrity of the proxy voting system largely miss the mark because they come from a perspective that is outdated and misguided.