Council of Institutional Investors Questions Wall Street Journal Over Proxy Advisory Firms

The Council of Institutional Investors says it is fed up with proxy firms being picked on. 

The organization is specifically taking issue with a The Wall Street Journal editorial entitled “The Proxy Advisers’ Veto,” published on August 10. The gist of the article, written by the Journal’s editorial board, was that when proxy advisory firms Glass Lewis and Institutional Shareholder Services recommended that shareholders vote against grocery chain Albertsons’ acquisition of drugstore chain Rite Aid, it showed what an outsize role the two play in influencing shareholders. The editorial argued that the two proxy advisory firms control a combined 97 percent of the advisory market, “which encourages herd voting among investors.” 

The Council of Institutional Investors — a nonprofit association of pensions, endowments, and other major institutions — is now taking aim at The Wall Street Journal for its piece, claiming in a statement published on its website that herd voting is a “myth” and that proxy firms do not dictate voting outcomes. 

In the case of Albertsons and Rite Aid, the shareholders did follow along with Glass Lewis’ and ISS’ recommendations. But whether or not the recommendations were taken into account during the voting process is unclear. 

According to the Journal’s editorial, the two proxy advisory firms “carry substantial weight since the Securities and Exchange Commission allows institutional shareholders to fulfill their fiduciary obligations by relying on the advice of third-party proxy advisers.” 

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What’s more, the editorial stated, proxy firms do not have to demonstrate that their recommendations are in shareholders’ best interests, which can create conflicts of interest. The paper pointed out that Glass Lewis is partly owned by Alberta Investment Management Corporation — also one of Rite Aid’s 10 biggest shareholders. The editorial concluded that the proxy firms deserve more scrutiny, “given their oligopoly and clout,” and raised the question of who holds these firms responsible if they lowball deals.  

The Council of Institutional Investors said that institutional investors are willingly paying proxy advisory firms like Glass Lewis and ISS to do the work. 

“We are frustrated that we get the same false charges time and time again,” said CII deputy director Amy Borrus by phone. “If investors didn’t value proxy services, they wouldn’t pay for them.”

The Council of Institutional Investors said it plans to submit a letter to the editor of The Wall Street Journal. Both Glass Lewis and ISS are associate members of the Council of Institutional Investors, Borrus said. 

“Institutional investors are responsible for their voting,” a spokesperson for Glass Lewis said via email. “It is the job of proxy advisors to ensure that votes are cast in accordance with the specific instructions of their investor clients.”

Steven Friedman, general counsel for ISS, agreed. 

“Our clients are sophisticated investors who take their fiduciary responsibilities seriously, are not required to hire a proxy advisory firm nor follow their advice and set their own corporate governance standards and policies,” he said via email.

"Sounds like the editorial hit the target,” said Paul Gigot, the editor of The Wall Street Journal’s editorial page, via email when asked to comment on the CII statement. 

For its part, the council disagreed. 

“Pension funds and other institutional investors are taking a greater interest in the measures that come before members to vote,” Borrus said. “They are engaging companies directly, and while they may use proxy advisory services, they are not voting in lockstep or in a knee-jerk fashion.”