Proxy advisors consult to investors about how to vote on the range of matters that require shareholder approval at the public corporations in an investor portfolio. They have become a critical stop on the road show when management and activists contest these matters, such as over electing directors.
An activist investor that seeks to elect directors to a company board, or to approve a resolution at the annual meeting, inevitably will need to persuade one or more proxy advisor to recommend the activist’s position over management’s. Below is a checklist of items to consider in engaging with a proxy advisor
In the U.S., two firms have emerged as the principal proxy advisors: ISS and Glass Lewis. A third, Manifest, tends to focus on European votes. There’s not much difference between the firms, although ISS is the oldest and largest, and thus tends to carry a bit more weight with its decisions. An activist investor usually needs to solicit the endorsement from both ISS and Glass Lewis (in the US) for a slate of corporate director candidates, supporting various shareholder proposals, and for other matters for which the activist needs the votes of other shareholders.
These endorsements can matter a great deal. Except in the most controversial situations, most large institutional investors, including pension funds, endowments, and mutual funds, usually follow proxy advisor recommendations when voting their shares. These investors have way too many companies to follow to do anything but, and besides, that’s why they pay the considerable fees to these firms.
It’s worth noting that proxy advisors evaluate a given activist investor’s proposal (for example, which director candidates to endorse) with respect to a set of their own policies or guidelines. So (continuing with the example), if ISS requires incumbent directors to attend 75% of the board and committee meetings in the past year, and an incumbent failed to do that, ISS will usually recommend that investors not support that incumbent, and support an activist investor’s candidate. The proxy advisors spend a considerable amount of effort reviewing, refining, and updating these policies, since they allow firms simply to compare a given proposal to the existing policy, rather than evaluate each proposal individually. These policies also allows each proxy advisor to render consistent advice across proposals and companies.
How does an activist investor go about obtaining support from proxy advisors? The process resembles meetings with debt rating agencies or equity analysts, with some nuances related to the matters at hand. Corporations and investors alike cultivate relationships with analysts at each of the three firms, who usually specialize in one or another industry sector. In contested matters, such as a competitive director election or controversial shareholder proposals, corporate executives and portfolio managers will meet (separately, of course) with those analysts, making the case for their side of the story.