Larry Zicklin facilitates discussion about proxy votes on company proposals

Caryl Anne Francia, Business Editor

Baruch College alumnus Larry Zicklin discussed issues regarding how shareholders vote on company proposals in the latest installment of his “Zicklin Talks Business” webinar series on Feb. 14.

Titled “Corporate Proxies, Shareholder Votes, and Making Your Voice Heard,” the webinar explained how proxy voting works. However, the discussion also highlighted the problems with transparency concerning voting rationale and the influence that proxy advisory firms have.

At a company’s annual meeting, a proxy is a person who is authorized to represent and vote on behalf of an investor. Proxy voting enables investors who cannot physically attend the meeting to have their say on issues that affect a company’s financials.

Proxies may vote on management proposals regarding who should be on the board of directors, what auditing firm the company should work with and what the compensation plan should be for the company’s executives. Long-term investors who own a significant number of shares may also add their own proposals on the ballot.

Zicklin facilitated the conversation with Jay Dahya, a finance professor at Baruch, and Caitlin McSherry, the investment stewardship director at the financial services company Neuberger Berman Group LLC.

McSherry explained that companies put out two types of proposals. A binary proposal that would have a legal requirement if shareholders voted against it. And an advisory proposal that simply asks shareholders to provide their viewpoint on action items, such as a company’s compensation plan.

“When you see there’s clearly a broad, maybe wide-sweeping amount of shareholder opposition to an issue, engage and try to be responsive to addressing what those concerns are, even though you may not be required to,” McSherry said.

Dahya discussed Institutional Shareholder Services Inc. and Glass Lewis & Co., which are two prominent firms that provide proxy advisory services. He noted how the firms “seem to have an overwhelming effect” in voting outcomes as more financial institutions, including BlackRock Inc., are following their recommendations.

After bringing up that Neuberger Berman adheres its own governance and voting guidelines, McSherry said the company is “not blindly following the recommendations” of the advisory firms. She reiterated that by being transparent about voting rationale, institutional investors can address concerns about the advisory firms’ power.

Zicklin said he was concerned about how the two firms “control” roughly 97% of the market. Although he did not want to use that term because people could vote against the advisory firms’ suggestions, he said he could not remember a case where ISS and Glass Lewis voted the same way and the outcome of the proxy vote did not hold.

The Baruch alumnus added that the two firms — which are privately owned and for-profit companies — influence how corporate governance systems work around the world. Dahya said bond ratings are in a similar situation because there are also two dominant ratings agencies in the industry. 

“They’re getting paid by the very corporations, as they’re influencing the shareholders on voting their proxies,” Zicklin said. “It’s the same company that’s advising you how to vote, and they’re getting fees from the corporations. I find it frightening.”

Dahya said that this was the same situation with credit ratings agencies, adding that the Securities and Exchange Commission is examining conflicts of interest within them. Although the finance professor said he was unsure of how far the SEC would go with proxy advisory, McSherry said she was optimistic about seeing “more clarity in this coming year.”

“It’s always worrisome because there are people that stay awake all night, figuring out how to bypass the system or manipulate the system,” Zicklin said. “We’ve got to take another look at this and give shareholders more authority as to what goes on in the corporation.”