Inside Investor Relations – Volume 17 – What is a proxy advisor?

Around this time every year global proxy advisors publish their updated policies for the following year of annual shareholder meetings (AGM). The two leading proxy advisors used by global institutional investors are Institutional Shareholder Services (ISS) and Glass Lewis.

What is a proxy advisory firm?

Fifty years ago, many institutional shareholders did not vote at shareholder meetings. This began to change with the Employee Retirement Income Security Act (ERISA) enacted in the United States in 1974. The Act established minimum standards for pension plans which included regulations on exercising its fiduciary duty through voting proxies on securities held in these investment portfolios. This required the pension plan providers to read through the shareholder meeting proposals for each of the companies in their portfolios and submit voting decisions on each agenda item.

This time-consuming process created an opportunity for service providers. ISS was founded in 1985 and is the oldest proxy advisory firm in the US. It currently has 2,000 employees working at 30 U.S. and international locations. Glass Lewis, founded in 2003, is the second largest proxy advisor firm in the US and globally. Each year they cover over 20,000 meetings across 100 different markets. Researchers estimate that these two firms together have a 97 percent market share.

The teams at these proxy advisory firms review meeting materials published by publicly-listed companies to provide voting recommendations for their institutional investor clients. To make these decisions they use internal policies based on globally-accepted practices and in consultation with their clients. But different markets have vastly different practices, so ISS and Glass Lewis have consequently established regional policies taking into consideration local regulations. Last week ISS published updates to their regional policies and Glass Lewis is expected to publish its updates in December.

For ISS, there were no major changes announced for voting recommendations in the Taiwan market for 2021, although a global policy update on votes against directors will also apply to Taiwan. ISS announced an update regarding director accountability for material failures of governance and risk oversight. New policies explicitly note that significant risk oversight failures related to environmental and social concerns may constitute material governance failures, and as such, may trigger vote recommendations against board members.

The full policy is below:

General Recommendation: Under extraordinary circumstances, vote against individual directors, members of a committee, or the entire board, due to:

▪ Material failures of governance, stewardship, risk oversight , or fiduciary responsibilities at the company;

▪ Failure to replace management as appropriate; or

▪ Egregious actions related to a director's service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.

ISS also clarified its general recommendation on proposals regarding employee restricted stocks in Taiwan. It will recommend voting against the employee restricted stock plan if any of their three requirements are not published in the company’s disclosures.

The full policy is below:

General Recommendation: Vote case-by-case on employee restricted stocks and/or employee stock warrant plans. Vote against the employee restricted stocks plan and/or employee stock warrants plan if any of the following features is not met:

▪ Existing substantial shareholders are restricted in participation;

▪ Presence of challenging performance hurdles if awards are issued or exercised for free or at a deep discount; or

▪ Reasonable vesting period (at least two years) is set.

How does this type of voting policy affect AGMs in Taiwan?

Last year in June, a semiconductor company in Taiwan asked shareholders to approve its Employee Restricted Stock Awards Plan. The company followed local regulatory disclosures but did not offer any supplemental information for investors on its performance hurdles. Consequently, close to 32% of shareholders either voted against or abstained from voting. In comparison, an electronics components company in Taiwan had a similar proposal at this year’s June AGM but cited EPS and ROE performance hurdles in its AGM disclosures. In this case only 14% of shareholders did not support it with only 1% of that total voting against (the remaining 13% abstained).

Proxy advisor recommendations still carry a significant amount of weight given that in most markets institutional investors have significantly higher voting participation rates which can lead to a larger influence over voting outcomes. Research has estimated institutional investors vote on 91 percent of the shares that they hold compared with only 29 percent for retail investors. Larger institutional investors have been building up their own internal resources and have established their own voting and stewardship policies. According to BlackRock’s website, it currently has 45 employees as part of their global stewardship team and Vanguard has stated that their team is now 35 members. Other global firms such as Fidelity International and State Street Global Advisors also continue to build up their ESG and stewardship teams.

Institutional investors may use ISS, Glass Lewis or both proxy advisors’ research in making their voting decisions for annual meetings. Firms with larger teams will generally consult the research but ultimately make their own decisions after internal review and analysis. When seeking support from institutional investors for AGM proposals, companies in Taiwan need to disclose the right information in the right language to allow investors to make informed voting decisions.

If you would like to learn more about proxy advisory firms and their research process QIC invites you to join our webinar with the research team at Glass Lewis who will discuss how you can engage with their team. We are also pleased to have two major institutional investors join the discussion to offer corporates insight into how they integrate ESG into their decision-making process and engagement priorities with corporates. If you are a listed-corporate in Taiwan and would like to register for this free webinar please contact yvonnehuang@qtumic.com.