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The U.S. stock market is a complicated and intricate system in which many different types of professions and organizations play a vital part.
A big part of the stark market is institutional investments: investments made in public companies, by other companies, often (but not exclusively) focused on the growth of employee benefits. Most notably, this would include pension funds. With increasing requirements placed on institutional investors in recent decades — that they carefully research, weigh, and vote on matters put to the shareholders of the companies in which they are invested — America has seen the growth of proxy firms. These advisory firms perform research on a client enterprise’s behalf, reducing the burden on the client’s time and manpower.
What is a Proxy Advisor?
A proxy advisory firm, sometimes known as a proxy advisor, is a company which advises (primarily) institutional shareholders on how to vote in matters relating to their public investments. The concept was born with the establishment of Institutional Shareholder Services, or ISS, in the 1970s. The establishment of proxy advisory firms was further rooted in the newly-created need, thanks to changes in U.S. financial policy, for companies with investments to stop ignoring votes that were put to them as shareholders: from the 1970s on, U.S. federal policy required that companies in which pension funds were invested be voted on responsibly by institutional shareholders. Previously, such votes frequently went ignored, but other institutional investments promptly followed suit.
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What is an Activist Investor?
Often strongly associated with a proxy advisory firm, with the results occasionally maintained as expressing a wide-ranging conflict of interest, the activist investor is an investor (sometimes an individual, but normally a firm) which purchases large numbers of a publicly traded company’s shares.
Alternatively, they may try to secure seats on the company’s board, or they may do both. The ultimate goal, regardless, is to affect major changes in a company’s policy, to which other board members and shareholders are often opposed. When an activist investor works primarily through the purchase of shares, they are sometimes referred to as an “activist shareholder” instead. The general concern regarding proxy advisory firms and activist investors is that the companies which the firms advise can be influenced to further the firms’ own agendas, affecting changes which work in the firms’ own interests.
Concerns About Proxy Firms
In 2013, ISS, one of the two most prominent proxy firms in terms of activity within the U.S. stock market, was fined $300,000. This followed an investigation into activity through which it was determined that Institutional Shareholder Services had revealed non-public information with regard to its clients’ proxy votes. Primarily, the major concern with regard to proxy voting ethics is that the firms are known to do business with both their clients, and the companies in which their clients are invested. Following recent conflict of interest allegations, however, several firms have published an official code of conduct, including best practices principles with regard to their research. This was done in the interests of allaying fears and increasing transparency.
While the concept of the proxy advisor has come under increased scrutiny in recent years, many people in the financial industry regard them as being a crucial part of America’s investment infrastructure. Debates continue over the need for increased regulation of proxy advisory firms, with proponents for further restrictions citing the influence that these firms have on institutional shareholders’ votes over time.
