PRI Senior Fellow in Business and Economics, Dr. Wayne Winegarden, submitted written comments to the Securities and Exchange Commission on their proposed rule change regarding more disclosure of conflicts of interest by proxy advisory firms, calling it “a positive step that would lessen the problems currently being imposed on investment advisers and their clients.”
Among Winegarden’s key points:
- Under the current regulatory rules, there are serious conflict of interest concerns. Proxy advisory firms engage in numerous business lines that create conflicts of interests. The troubling disincentives that arise due to proxy advisory firms’ conflicts of interests are demonstrated by their position on environmental, social and governance (ESG) programs.
- The requirement for greater transparency will meaningfully lessen the conflict of interest problem. With full transparency, investors relying on the advice of proxy advisory firms will be fully aware of any potential conflict of interest. Further, the transparency rule will require proxy advisory firms to disclose the methodology behind their analyses. By eliminating the ability of proxy advisory firms to hide the methodology used to form their recommendations, the proposed changes will better ensure that proxy advisory firms’ recommendations are directly linked to enhancing shareholder value.
- The proposed rule clarifies that investment advisors cannot blindly follow the advice of a proxy advisory firm. Investment advisers have a fiduciary responsibility to enhance shareholder value while adhering to the goals and objectives of the fund. It is inconsistent with this responsibility to outsource a fund’s voting decision to a third party without conducting adequate review of the recommended voting strategies.
- Finally, it is important to note that, while these reforms are important improvements, more reforms are necessary. An important reform not included would eliminate the requirement that investment managers must vote on every proxy statement. Forcing advisers to vote on every proxy statement creates an artificial demand for the services of proxy advisory firms that ultimately distorts the market. Removing this artificial demand will improve the dynamics of the proxy advisory market, ultimately leading to better proxy advisory services for investors.
Winegarden has written extensively about about the biases and conflicts of interests of proxy advisory firms in steering their clients toward increasing their investments in ESG, or Environmental, Social, and Governance investments.
In November 2018, Winegarden argued in written comments to the SEC that, “without reforms that better align the interests of the proxy advisory firms and the interests of fund shareholders, reliance on these firms is not in the best interests of fund shareholder.”
Earlier this year, Winegarden released a study (“Environmental, Social, and Governance Investing: An Evaluation of the Evidence”) analyzing 30 ESG funds that have either existed for more than 10 years or outperformed the S&P 500 over a short-term period. The study found that over a 10 year period, a $10,000 ESG portfolio would be 43.9 percent smaller compared to an investment in a broader, S&P 500 index fund.