These Obscure 'Advisors' Are Hurting America's Energy Security
Government bureaucracy isn’t the only obstacle standing in the way of energy security, job creation, and economic growth. Every now and then, businesses encounter roadblocks that have been set by other actors in the private sector. In recent years, a number of energy producers — along with businesses from other industries — have been beset with challenges created by so-called proxy advisory firms. These entities help environmental activists achieve through financial means what they have not — and cannot — achieve through normal and legitimate political means.
Two major proxy advisory firms dominate the ‘market:’ Institutional Shareholder Services (ISS) and Glass Lewis & Co. Big investment companies that hold billions of dollars in stock — usually on behalf of pension funds and 401(k) account-holders — hire ISS and Glass Lewis to help them decide how to use their shareholder voting power on matters of corporate governance. In the past, this normally just included relatively mundane, company-specific stuff, such as whether or not to appoint a person to a company’s board of directors, or to approve an executive’s compensation plan.
All of that has changed in recent years, with more and more large institutional holders deciding to prioritize politics over performance. Case in point is Larry Fink, the CEO of BlackRock, an asset manager with more than $6 trillion under management, who issued an open letter earlier this year demanding that the companies that BlackRock owns “serve a social purpose” — as if creating jobs and providing support to the communities in which they live and work somehow doesn’t count. Fink’s letter came on the heels of decisions by BlackRock and other institutional holders during the previous year to target management at Occidental Petroleum, PPL Corporation, and ExxonMobil by siding with activists on climate-related shareholder proposals.
With BlackRock and big public pension funds from California and New York deciding to step-out into open advocacy, proxy advisory firms have been more than happy to follow the lead of their biggest clients. They do this despite plenty of evidence that politically motivated activism doesn’t help investors in any way (one of those studies actually came from within BlackRock). ISS even went as far as to acquire a boutique firm that rated companies on environmental and social qualities and labeled the division “ISS Ethix.” The firm approaches these ratings with about as much attention to detail as it applies to spelling its own name.
Most institutional investors follow the recommendations of ISS and Glass Lewis on how to vote their shares, resulting in the proxy firms’ recommended voting decisions being followed by 80 percent of investors. As ISS and Glass Lewis began recommending that energy producers should aggressively move to reduce their greenhouse gas emissions, or file reports on how climate change could affect their businesses, or more generally do anything other than provide the energy that powers the modern economy, large institutions have blithely followed suit. After all, there are no other opinions in the proxy advisory industry because ISS and Glass Lewis collectively hold 97 percent of the market share.
But proxy advisory firms don’t have to disclose how or why they arrived at their decisions. Did political preferences play a role? Nobody knows. If investors are going to be following the proxy pied pipers — likely to their own detriment — at the very least we should know what tune those firms are playing and why. The Securities and Exchange Commission (SEC) has just announced that it will convene a roundtable to discuss the issue later this Fall, an important first step to installing some sort of corrective measure. Meanwhile a bill is being considered by the U.S. Senate, The Corporate Governance Reform and Transparency Act (H.R. 4015) which would require proxy advisors to register with the SEC and disclose their conflicts of interest. Passing this bill into law would be a course-correction on prior legislation that planted the seed for this very problem to exist in the first place.
Without this reform, proxy advisory firms could easily lead investors blindly into voting for proposals that would send some of America’s greatest companies down the wrong path. When pension-controlling politicians like New York State Comptroller Thomas DiNapoli wants to burnish his green credentials by pushing oil companies away from producing oil, investors shouldn’t be fooled when proxy advisors back his stance. H.R. 4015 will ensure that the proxy advisory firms keep investor returns and corporate profitability their top priority and prevent political preferences from getting in the way of America’s very real — and very spectacular — ongoing energy renaissance.
Thomas J. Pyle is the President of the Institute for Energy Research.