Recently, a lot has been written about proxy advisors’ impact on shareholder votes. What do the institutional investors that rely on their services have to say?  The Principles for Responsible Investment (PRI) recently published new research into how asset managers, asset owners and others actually use proxy research. Their findings indicate that proxy advisors play a critical role in institutional stewardship – but that the influence of their voting recommendations may be overstated.

About the PRI and its Research

The PRI is an independent UN-backed investor body that supports its 3750-plus institutional signatories in fulfilling their stewardship obligations by incorporating environmental, social and governance factors into their investment and ownership decisions and using responsible investment to enhance returns and better manage risks.

Their findings reflect qualitative interviews with 25 stakeholders, and quantitative research based on a sample of over 500 PRI signatories across dozens of countries, covering nearly 100,000 environmental and social votes and over 1 million governance votes from 2011-2022.

The PRI’s Findings

The PRI research indicates that proxy advisors play a crucial role, finding that “investors would struggle to cover the breadth and depth of issues in-house without proxy adviser support.” However, it also found that investors who use proxy advisor research “are not simply following recommendations,” echoing the findings of a 2023 study from the UK’s Financial Reporting Council (PDF).

Ultimately, “[i]nvestors make their own decisions in line with their fiduciary duty, based on their internal voting policies and a range of data sources.”

“ Investors would struggle to cover the breadth and depth of issues in-house without proxy adviser support.”

This reflects the “diverse” ways that institutional investors integrate proxy research into their stewardship processes, ranging from “using research and voting recommendations from one or more proxy advisers of various sizes and locations, alongside additional data and research sources”, to using “different proxy adviser voting packages” which can include generalised benchmark services, specialty/thematic policies or custom voting policies. Some investors simply utilize their voting execution services. Overall, “[t]he vast majority of votes processed on behalf of institutional investor clients … were linked to tailored / customised voting policies.”

To the extent that there is a correlation between proxy advisor recommendations and investor votes on ESG proposals, it is strongest on standard governance-related proposals, rather than the environmental and social proposals that tend to generate headlines. Moreover, the influence of proxy advisors on ultimate voting outcomes may not be as strong as has been claimed: “when overlaid with our qualitative analysis and a more detailed understanding of how investors use proxy advisory services, it is apparent that any correlation is more complex than investors solely following … recommendations.”

These findings align with our own experience as a proxy advisor. Glass Lewis clients have a wide range of needs, and we offer corporate governance and stewardship solutions tailored to support them.

“ The vast majority of votes processed on behalf of institutional investor clients … were linked to tailored / customised voting policies. ”

Our role is not to persuade investors to adopt a particular voting policy or to vote in any particular way, but to provide corporate governance expertise, objective research and complementary tools to help them vote as they see fit.

Challenges for the Proxy Industry

The PRI study also highlighted challenges, including local knowledge gaps, a need for further integration of systemic risks, low levels of investor feedback on proxy advisory services, and limited investor knowledge of the voting chain and proxy industry.

PRI also noted that while “most investors ensure that their potential manager’s proxy voting policy / guidelines are aligned with their own … only a minority of investors evaluate specific actions taken, such as reviewing voting records.”

Not all of the challenges relate directly to proxy advisors or investors – instead, issues like the tight turnaround time for considering proxy research before casting a vote result from corporate disclosure practices and structural issues in the voting chain.

“ Investors make their own decisions in line with their fiduciary duty, based on their internal voting policies and a range of data sources.”

Lastly, PRI offered suggestions for investors to address these challenges, including encouraging asset owners to ensure external manager votes are aligned with their voting policies, and encouraging asset owners and managers to engage more closely with the services they choose.

Looking for More?

  • Read the PRI’s findings.
  • Get an overview of Glass Lewis’ range of custom and thematic voting policy options.
  • Learn about the proxy advisory industry’s Best Practice Principles and how Glass Lewis discharges its obligations, including our BPP and local stewardship code compliance statements.
  • Read how Glass Lewis integrates feedback from investors and other market participants through its annual policy survey.