A bedrock principle of American democracy has always been one man, one vote. Shareholder elections are different because, typically, the voting power a shareholder has is directly proportional to their ownership stake. While this is not one man, one vote, it is at least one share, one vote.
Unfortunately, most shareholder elections are as fake as the elections in autocratic nations because shareholders themselves rarely actually vote. Instead, due to something called “robo-voting,” two companies most Americans have never heard of get to decide the fate of many large corporate decisions. Robo-voting or “proxy voting advice,” as the Securities and Exchange Commission (SEC) calls it, has been in effect since July 2020 and is supposed to ensure institutional investor clients of proxy advisor businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.
Robo-voting has been causing an outsized effect on the vote outcomes at corporate financial companies, in which the transparency of these proxy advisors has been beset by controversy, not only stemming from the integrity of making informed votes on financial company ESG funds being called into question, but also the rating process of how a financial company’s ESG efforts are graded on an ABCD+- level.
Given the widespread reliance on proxy advisors, like Institutional Shareholder Services (ISS) and Glass Lewis, to provide recommendations on a financial company’s ESG program, robo-voting can be “market moving” in the financial industry and affect company portfolios, which ultimately impacts sustainability initiatives.
Why Is Robo-Voting So Problematic?
As proxy advisory firms also provide consulting services to corporate financial companies on each of their ESG standards, robo-voting presents a clear bias in their support of specific financial company ESG initiatives. Essentially, ISS and Glass Lewis both advocate for ESG services and profit from ESG activities, while also advising shareholders how to vote on ESG proxy measures.
Given the power of these proxy advisors, financial industry investors may suffer from wrongly investing in financial companies that received a high number of votes because they paid for consulting rather than because they are good corporate citizens. This apparent conflict of interest leaves financial investors troubled as to whether robo-voted ESG criteria are based on the financial company’s ESG performance or on the company paying for ESG consulting.
First seen as a user-friendly, automatic tool to help make informed decisions on financial company ESG shares to now being seen a freedom of choice eliminator in terms of transparency, robo-voting has made corporate ESG accountability difficult and even unfair, which is why the SEC needs to end it now.
What Can Financial Companies Do About Robo-Voting?
While the SEC has yet to eliminate robo-voting or even address the transparency concerns that come with it, commissioners, such as Hester M. Peirce, have already gone on defense to disavow the rule. In a response statement to the Commission, Pierce wrote that robo-voting has caused “proxy advisors to amend their own research reports and change their voting recommendations to correct earlier errors, which can be costly and bring reputational risk.” This just proves that even the SEC’s own commissioners want robo-voting gone.
To add to the underlying message that the SEC must crack down on robo-voting, financial companies can actually fight back themselves by contacting their elected officials to demand that they stop working with any institutional investors who support robo-voting because it goes against the democracy of the country.
Protecting our U.S. democracy is of the upmost importance and robo-voting is inherently undemocratic. Effective SEC action will embolden financial companies making the most positive impact, and not those who are being robo-voted on.
The financial industry relies heavily on their investors, and voting on key issues such as ESG initiatives should not be left up to computer voting machines.
Bryan Junus, CFA, is the chief analyst of The Corporate Citizenship Project, which is an independent think-tank focused on a data-driven approach to address corporate governance issues in publicly traded companies and large private enterprises.