Egan-Jones Reports Shift of Asset Managers from Conflict-Ridden Proxy Advisors

In a significant move reflecting rising dissatisfaction with the current proxy advisory landscape, Egan-Jones has reported that a notable second U.S. bank has decided to step away from a major proxy advisor. This shift emphasizes mounting concerns related to structural conflicts inherent in the U.S. proxy system.

An Overview of the Conflicted Proxy System

The contemporary proxy advisory market is increasingly dominated by a few key players, leading to a concentration of power that raises alarms. Currently, only two major firms hold a sizable share of the market. Both entities have a disproportionate number of corporate consulting clients compared to their advisory clientele. This reality essentially means that the organizations responsible for guiding shareholders' voting decisions also provide consultancy services to the very companies where those votes are directed, particularly in areas such as executive remuneration and governance frameworks.

These conflicting interests pose challenges that cannot be rectified merely through disclosures or internal barriers. Simply put, the revenue model under which these advisory firms operate generates unavoidable conflicts. It's a classic scenario: serving two masters is virtually impossible, leading to substantial risks that can undermine investor confidence and corporate accountability. This can have critical implications for the retirement outcomes of countless American citizens.

Dimensions of Conflict

Egan-Jones identifies three main dimensions contributing to the overall conflicts within the proxy advisory system:
1. Conflicted Proxy Advice: The proxy advisory market is not just experiencing tilt but is effectively skewed toward the interests of corporate clients over those of shareholders. Given that these advisors often double as consultants to the corporations involved, their recommendations may not always be impartial.
2. Conflicted Proxy Infrastructure: Furthermore, one company dominates over 90% of the distribution of proxy materials and vote tabulation, reaffirming its extensive influence over shareholder voting. This single firm also provides advisory services, creating a scenario rich with conflicts of interest.
3. Normalizing Conflicts: New entrants to the market are adopting similar vertically integrated business models, compounding existing issues rather than enhancing competition. A newcomer, initially focused on supporting voting mechanics, has now begun to offer AI-powered proxy advisory services, solidifying the concentration of power in this industry.

The Need for Systematic Change

To promote fair and functional financial markets, there must be a clear separation of duties among central players. Roles such as broker-dealers, custodians, and exchanges must not overlap, and similarly, aspects of the proxy system—like advisory services, vote tabulation, and corporate consulting—need to operate independently. Firms that straddle multiple layers in the proxy ecosystem face irreconcilable conflicts.

The proxy system is a vital component of the U.S. capital markets and shareholder democracy. Failure to address existing conflicts threatens not only market integrity but also the livelihoods of everyday investors. Egan-Jones emphasizes that proactively addressing these challenges is essential for safeguarding millions of American’s retirement savings and fostering confidence in the market overall.

Egan-Jones Proxy Services: A Response to Conflicted Systems

Founded in 2002, Egan-Jones Proxy Services was established with the aim of providing unbiased and accurate proxy voting advice. As the sole independent proxy advisor of significant size in the United States, Egan-Jones is committed to offering guidance based on clients' priorities rather than relying on flawed benchmarks or conflicted parties. This focus on independence is more crucial than ever, given the current landscape fraught with intrinsic conflicts.

Final Thoughts

As more asset managers recognize the issues within traditional proxy advisory models, it seems probable that the trend of distancing themselves from intermediaries will grow. Advocating for change and embracing independent advisory services will hopefully lead to a more transparent and fair proxy voting environment, ultimately protecting the interests of shareholders across the board.