The global proxy system is at a crossroads. Frustrations from investors and issuers in the proxy process are leading to frequent headlines from both camps calling for reform, but solutions have been elusive. Furthermore, frustrations with the proxy process are often cited as one of the reasons companies question the need to be publicly listed, especially given the rise of private markets investing in the last decade.
FCLTGlobal has conducted research on the topic since late 2024, looking for areas of common ground that could lead to a better system for the entire value chain – corporate issuers, asset managers, asset owners, and service providers.
Our research has yielded insights into initiatives, some more nascent than others, that offer compelling opportunities to enhance the proxy system. The first set of initiatives listed here are steps that companies and/or investors can take within the current regulatory environment in most countries, though some regulatory safe harbors or amendments to company bylaws may be necessary in some instances. The second set of initiatives would require policy or regulatory interventions in most countries. Together however, they would each contribute to restoring the proxy system to its most valuable intent: a mechanism for open and constructive investor-corporate dialogue, focused on the most salient issues for long-term, sustainable value creation in public markets.
If scaled appropriately, each initiative is feasible, pragmatic, and genuinely value-enhancing for all proxy system participants. Furthermore, each of them can be complementary, and therefore has the potential to help move “beyond the blame game” and enhance the value while reducing the cost of the proxy system.
Based on our work, three primary ideas for improving the system would require a change of practice, but not a change of regulations in most countries:
One frequent complaint by issuers and asset owners alike about the proxy system is the lack of transparency about the voting intentions of major asset owners and asset managers until the vote actually takes place. Everyone is left guessing until the final deadline.
More widespread use of declared voting intentions from leading institutional investors could significantly improve the proxy system and reduce the temptation to blame the other side. Such voting intentions, especially if coupled with clear rationales, could form a more consistent market signal about the value of each proxy issue to some of the leading shareholders in each company. With more widespread disclosure, such leading investor intentions could help form a consensus-driven market signal for voting expectations, not unlike the consensus earnings expectations from sell-side analysts.
Twenty-one investors currently pre-disclose their voting intentions, according to data provided to us by rezonanz, a stewardship analytics platform that collects and shares proxy voting and engagement data. Fourteen of those 21 are asset owners, all based either in North America or Scandinavia, including Norges – by far the largest – as well as CPP Investments and British Columbia Investment Management in Canada, and a diverse range of public pension plans in the US ranging from Texas and Florida to California (CalPERS and CalSTRS) to New York City. The remaining seven are asset managers, most below $40B AUM, but also including Kempen in the Netherlands and Storebrand in Norway.
Further enhancing the pragmatic angle of this innovation, data providers are also working hard to capture these voting intentions. Bloomberg has developed a module on its terminal that gathers publicly disclosed voting intentions, records, and rationales, and makes them available to its terminal subscribers. This can only serve in time to enhance overall market access to voting intentions and past voting records of leading investors. The advantages of this approach are similar to common market mechanisms, such as earnings estimates:
Overall, the benefits for the marketplace should lead to a safe harbor or similar assurance that this practice is not only allowable for large investors but also beneficial.
Proxy advisors offer many services to investors (in addition to their services for issuers). Typically, proxy advisors offer four services to investors:
There is broad agreement that proxy voting was much more difficult before standardization and operational platform efficiency were introduced in the system via the leading proxy advisory firms.
The current debate on proxy advisory firms is therefore not whether their platforms introduce systemic benefits, but whether their recommendations are the legitimate determinants of the merit of certain proxy proposals. Unsurprisingly, this question is most often vocalized by corporate issuers, who make counter-arguments to the negative recommendation they may face from proxy advisors. The counterpoint is that proxy advisors are simply meeting their clients’ demand and are often blamed as the messenger.
This classic “blame game” dynamic is unproductive. For the proxy system to be a genuine vehicle for long-term sustainable value creation, issuers and investors have to stop blaming the middleman and take responsibility for the outcome. The solution must be market-based: let the marketplace decide whether proxy advisors should sell their services as one “bundle” – i.e. platform, data, research, and recommendations – or unbundled: each one priced separately.
Today, a few investors have gotten the proxy advisors to unbundle these services and allow them to simply pay for what they need – usually the operational platform and the data rather than the research or the recommendations.
As we have seen with the implementation of MiFID II, when research is no longer “free,” the demand patterns change, and the need to compete on the quality of the research rises.
Paying only for the services that an investor uses is appropriate and in line with established fiduciary principles. Furthermore, those investors who choose to rely on proxy advisor recommendations will explain their decisions to their clients or stakeholders. Changing the proxy advisor fees from a “set menu” to an “à la carte” approach will therefore highlight the services the investors use and provide a clearer market signal on the value of advisors’ recommendations.
A consistent complaint about the proxy season is its intensity and crowded calendar. Often linked to rules about shareholder vote solicitation in markets where these matters are codified, the timing of the issuance of the proxy materials, often just a few weeks away from a vote, is a clear roadblock to meaningful engagement during proxy season, typically during the spring months.
More time to unpack the details of key proposals for shareholder votes would benefit shareholders and issuers alike. We also found that many matters that come up for votes are considered routine and unlikely to generate much shareholder interest. Conversely, we know some issuers have tried to upgrade their pre-proxy season engagement methods but face scalability issues when doing so.
We also know that different geographies – Japan in particular – have different timing considerations altogether, and that in some jurisdictions shareholder proposals are binding on management, so the distinction between binding and advisory proposals cannot be made.
In many large markets, however, proxies include both mandatory or binding items, such as the election of directors or approval of the auditor, and advisory issues (often determined to be so by the issuer.) For advisory issues, companies look for their shareholders’ views on a matter and take them seriously, but they are not usually bound by the outcome. These issues are often related to compensation, climate issues, or shareholder proposals.
The crowding of these issues is often an obstacle to genuine investor –corporate dialogue on long-term value creation. Companies that would like to give advisory issues to the discussion they deserve could explore separating these processes and holding an ‘Investor Engagement Day’.
The advantages of these suggested approaches are that they help put each key part of the proxy process in more clearly defined and materially relevant places to allow for effective corporate-issuer dialogues.
Regulators could encourage the above practices to streamline the proxy process to limit distractions to companies while ensuring shareholders retain the ability to vote on key issues. In addition to changing market habits, regulators in most countries could:
Shareholder proposals are issues raised by shareholders rather than the company. While shareholders need to be able to raise issues of importance, this process has become a distraction in many countries where shareholders raise issues that are not material to the company’s strategy but instead pursue another objective.
Requirements differ across countries, but in general, there is an opportunity to focus on these issues and limit them to strategic, company-specific issues. Furthermore, these issues are almost always advisory, so moving them to autumn would be helpful.
In particular, regulators could:
Strengthening these requirements – perhaps along with moving the process to the autumn – would lead to deeper engagement on matters of real importance and less distraction for companies.
Given recent uncertainty in the U.S. around 13D/13G disclosure requirements for large managers, regulators could specify that pre-disclosure is an appropriate activity that does not trigger regulations that shift investors from the passive to active category.
Many investors rely more on rote habit and implicit assumptions about fiduciary duty rather than firm legal opinions when deciding to vote. Among the habitual reasons cited for needing to vote, many asset managers believe they have a consistent and permanent fiduciary duty to vote shares for their clients even when a value for money test could be cited for not doing so. Others have begun “pass-through voting,” where those votes are transferred to the client. Other managers, such as many hedge funds, vote shares with extreme diligence in the case of concentrated or activist funds, more mechanistically via off-the-shelf policies unless an important issue is at stake for multi-strategy platforms, or not at all.
The cross-value chain interviews FCLTGlobal conducted in this project delivered consistent feedback: many investors rarely vote their shares in many markets. It is unclear whether shareholders care if proxies held in their funds are voted on, particularly if they are focusing on minimizing fees, for example in an index strategy.
In some situations, there is an obvious economic value to a vote. For example, a vote could clearly lead to differing performance in a merger situation. However, in most votes, often categorized by market participants as routine, it is virtually impossible to put a value on the vote itself or to tie the outcome of a vote to future performance.
We highlighted these issues in our first paper on this topic, Beyond the Blame Game: Why the Proxy System Needs to Change. We conclude that most investors value the option to vote when it is important for them to do so, but do not consistently value the vote itself. Whether it is appropriate for shareholders to have an obligation to vote is a regulatory or policy decision that could vary by country or type of investment. Still, regulatory clarity on this issue would provide a more level playing field.
The proxy system is a vital part of the long-term value chain as it provides a necessary tool for shareholders and issuers to engage on key issues in corporate governance. However, this vital role has been undermined by the tendency for market participants to blame each other for its shortcomings, rather than look for mutually beneficial solutions.
FCLTGlobal has sought to put all the issues we have uncovered in our research on the table and ask what the best and most feasible solutions are. We believe the three solutions we have highlighted meet the needs for the system to be both higher in value and lower in cost.
While other mechanisms – such as regulation, engagement forums, and AI – will also certainly continue to evolve the proxy advisory system, it is time for market participants to act. Investors and companies can, once and for all, move “beyond the blame game.”
A special thank you to Rob Hardy for his valuable insights and contributions to this project.
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