By Bryan Junus
A bedrock principle of American democracy has always been one man, one vote. Shareholder elections are different because, typically, the voting power a shareholder has is directly proportional to their ownership stake. While this is not one man one vote, it is at least one share one vote.
Unfortunately, most shareholder elections are as fake as the elections in autocratic nations because shareholders themselves rarely actually vote. Instead, due to something called “robovoting”, two companies most Americans have never heard of get to decide the fate of many large corporate decisions. “Robovoting” or “proxy voting advice,” as the Securities and Exchange Commission (SEC) calls it, has been in effect since July 2020 and is supposed to ensure institutional investor clients of proxy advisor businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions1.
Robovoting has been causing an outsized effect on the vote outcomes at corporate financial companies, in which the transparency of these proxy advisors has been beset by controversy, not only stemming from the integrity of making informed votes on financial company ESG funds being called into question, but also the rating process of how a financial company’s ESG efforts are graded on an ABCD+- level.
Given the widespread reliance on proxy advisors, like Institutional Shareholder Services (ISS) and Glass Lewis, to provide recommendations on a financial company’s ESG program, robovoting can be “market moving” in the financial industry and affect company portfolios, which ultimately impacts sustainability initiatives.
Why Is Robovoting So Problematic?
As proxy advisory firms also provide consulting services to corporate financial companies on each of their ESG standards, robovoting presents a clear bias in their support of specific financial company ESG initiatives. Essentially, ISS and Glass Lewis both advocate for ESG services and profit from ESG activities, while also advising shareholders how to vote on ESG proxy measures2.
Given the power of these proxy advisors, financial industry investors may suffer from wrongly investing in financial companies that received a high number of votes because they paid for consulting rather than because they are good corporate citizens. This apparent conflict of interest leaves financial investors troubled as to whether robovoted ESG criteria are based on the financial company’s ESG performance or on the company paying for ESG consulting.
First seen as a user-friendly, automatic tool to help make informed decisions on financial company ESG shares to now being seen a freedom of choice eliminator in terms of transparency, robovoting has made corporate ESG accountability difficult and even unfair, which is why the SEC needs to end it now.
What Can Financial Companies Do About Robovoting?
While the SEC has yet to eliminate robovoting or even address the transparency concerns that come with it, commissioners, such as Hester M. Peirce, have already gone on defense to disavow the rule. In a response statement to the Commission, Pierce wrote that robovoting has caused “proxy advisors to amend their own research reports and change their voting recommendations to correct earlier errors, which can be costly and bring reputational risk3.” This just proves that even the SEC’s own commissioners want robovoting gone.
To add to the underlying message that the SEC must crack down on robovoting, financial companies can actually fight back themselves by contacting their elected officials to demand that they stop working with any institutional investors who support robovoting because it goes against the democracy of the country.
Protecting our US democracy is of the upmost importance and robovoting is inherently undemocratic. Effective SEC action will embolden financial companies making the most positive impact, and not those who are being robovoted on.
The financial industry relies heavily on their investors, and voting on key issues such as ESG initiatives should not be left up to computer voting machines.
About The Author: Bryan Junus is the Chief Analyst of The Corporate Citizenship Project, which is an independent think-tank focused on a data driven approach to address corporate governance issues in publicly traded companies and large private enterprises. Mr. Junus is a Chartered Financial Analyst® (CFA®) with over 10 years of experience working in the financial industry. He has worked in a variety of roles including managing client assets, corporate finance, capital raising, consulting, financial education, and real estate. His experience in ESG-related matters includes, among other things, working with green-energy companies on securing investor funding. He received a Bachelor of Science in Management Science from University of California, San Diego.
