ISS and Other Proxy Advisory Firms' Conflicts of Interest

Daskal, Dan

This Note discusses the impact of conflicts of interest on the proxy advisory firm industry, with a particular focus on conflicts plaguing Institutional Shareholder Services, the dominant proxy advisory firm. The increased proportion of shares held by institutional investors, strong reliance on voting recommendations by certain investment advisors and continuing dominance of Institutional Shareholder Services have culminated in Institutional Shareholder Services’ substantial influence in proxy voting. The lack of sufficient regulatory oversight has precipitated considerable risk of proxy voting that serves the best interest of proxy advisory firms rather than that of shareholders. Recent rules and guidance issued by the Securities and Exchange Commission have not adequately addressed these concerns. Several possible reforms may help this situation, including eliminating robo-voting, separating voting advice and corporate governance consulting services and mandating engagement in voting research beyond that provided by proxy advisory firms. Pursuing these avenues of reform could help restore the integrity of voting recommendations and ensure that proxy advisory firms are used in the way they were initially intended: to reduce information costs and help investment advisors vote shares in their clients’ best interests. 


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December 7, 2022