Proxy Advisors “Remain a Problem,” Says New Report

Companies filed at least 64 complaints about inaccurate proxy advisor recommendations with the SEC this year, up from 50 in 2021 and 40 in 2020, according to a new report by the American Council for Capital Formation (ACCF).

Why it matters: Proxy advisors have an outsized impact on investor Say on Pay votes, with a typical swing of 25-30% for companies that receive a negative proxy advisor vote recommendation. Despite this, proxy advisors are under-regulated, with attempts to create more oversight squashed (see the overturned 2020 SEC rules that would have allowed companies to receive and respond to their reports before investors voted on them). 

By the numbers: The ACCF report, which has analyzed proxy advisor errors since 2016, found a number of egregious errors, such as:

• Monolithic Power Systems stated in a filing that Glass Lewis “incorrectly concluded that the value of stock-price based equity awards were more than 40% higher than the value of cancelled performance-based awards.” Glass Lewis refused to change its negative recommendation and the company received 56.9% Say on Pay support.
  
  
• Schnitzer Steel had both proxy advisors recommend against its equity plan due to an “erroneous calculation of 1.4 million shares being included in the plan,” leading to a 50% overcalculation of the company’s Shareholder Value Transfer Score, and an overcalculation of dilution by 40%. ISS refused to change its recommendation and the proposal was withdrawn.

What they’re saying: The ACCF study includes a comprehensive appendix of company supplemental filings which are instructive, though perhaps understated. As a WSJ opinion on proxy advisors points out, “these complaints are likely the tip of the iceberg” given the legal liability and time required to issue a supplemental filing. 

Center Take: Although supplemental filings are important, they may not result in a reversal of a negative proxy advisor recommendation. If a “no recommendation” is anticipated, it’s critical to engage with your top investors quickly to tell your story - before it’s told for you.