The Changing Face of Proxy Voting and Stewardship

Quick View

• Glass Lewis announces major shift in approach, removing “standard” research reports and recommendations. Will eventually provide “multiple perspectives” to all of its clients and encourage custom voting policies per investor 
• Changes come on the back of increasing political pressure, but also reflect feedback from institutional investor clients and technological shifts 
• Greater fragmentation in voting likely to increase support for management at AGMs in instances where the previous Glass Lewis recommendation would have been adverse while simultaneously increasing uncertainty on overall vote outcomes 
• Alongside pass-through voting, the stewardship landscape and the impact of shareholder engagement strategies has become less clear 
  
• Change increases importance of shareholder engagement and thorough understanding of each investor’s voting policies 
• Open questions: 

1. 1. How many investors will adopt custom policies vs. subscribe to one of Glass Lewis “multiple options”?
   2. What will the final list of “perspectives” from Glass Lewis look like?
   3. Will one of the multiple perspectives become the one predominantly subscribed to by investors, creating a defacto “standard policy”? 

Glass Lewis Announces Major Changes 

On 15 October, Glass Lewis announced changes to its approach to issuing research to its institutional investor clients, arguably the most significant change to the proxy advisory industry in two decades. Over the next two years, Glass Lewis plans to end the provision of research and vote recommendations based on its house policy. Instead, it will provide “multiple perspectives.” In doing so Glass Lewis will evolve its offering to institutional investors to develop voting frameworks that reflect their individual investment philosophies and stewardship priorities, known as “custom” voting policies. Instead of its house view, Glass Lewis states it will provide a suite of perspectives, which “could range from one that leans toward management and others that reflect more governance fundamentals.” The current proposed perspectives, which are still under development, are “management-aligned”, “governance fundamentals”, “active owner” and “sustainability”, and may result in multiple reports being produced for every company. 

The decision to drop its house view is a departure from Glass Lewis’s previous position in May, when the proxy advisor committed to continuing its own proxy advice. Clients will now be able to use one of Glass Lewis’s new research perspectives as a basis for developing its own customised guidelines, including their own house view on issues such as climate change or board accountability for AI. In summary, from 2027, Glass Lewis clients will either vote in line with one of Glass Lewis’ “off-the-shelf” perspectives, or with their own custom policy.   

Currently, 30% of Glass Lewis’s clients rely on its house policy, of which 55% are in the US, 23% in Europe and 22% are from Asia Pacific, indicating that the change of approach will have a significant impact on how institutional investors view – and vote on – governance, remuneration and ESG. While still being finalised, the current intention is that the removal of the house view will also be reflected in Glass Lewis’s review of M&A and shareholder proposals. 

Market Context and Backdrop 

In announcing the change in practice, Glass Lewis’s CEO, Bob Mann, alluded to the political pressure being placed on proxy advisors, in addition to regional differences in the expectations of clients spurring demand for differentiated policies on voting. Glass Lewis, and its larger competitor, Institutional Shareholder Services (“ISS”) have been under consistent attack from politicians and lawmakers in the US, who argue that their recommendations include excessive reliance on ESG matters and have undue influence on proxy voting outcomes and corporate practices. Critics have also pointed to a lack of transparency in the formulation of voting recommendations, particularly on shareholder proposals which often include an ESG angle. In announcing the changes, Glass Lewis’ CEO referenced these pressures, noting that “some of the criticism has been that we lead the market and that we are using that influence.” By removing its house policy and recommendations, Glass Lewis aims to address the criticism around influence and place the responsibility for voting firmly back on institutional investor shoulders. Outside of political pressure, crafting individualised policies for all clients is seen as more lucrative than disseminating the house reports to almost a third of clients and will simultaneously reduce costs at the proxy advisor, as the labour-intensive production of research reports is replaced by technological solutions.  

As of now, ISS will continue to provide reports and recommendations based on its benchmark policies. 

Changing Stewardship Landscape 

The change from Glass Lewis is likely to have a demonstrable impact on the stewardship and proxy voting landscape. Public companies may view the change as the removal of a potential headache that reduces the risk of dissent at AGMs, with the cohort of investors that use the house policy perhaps electing to follow a more “management friendly” perspective. This may be a premature conclusion, however, as the “multiple perspectives” Glass Lewis will provide are still currently under development. One of those perspectives will be management friendly, but it remains to be seen what other policies are provided to clients.  

Once implemented in 2027, there is likely to be a reduction in media coverage related to Glass Lewis recommendations and lack of clarity as to which policies investors will elect to follow. The definitive impact on proxy voting is less clear. 

As things stand, companies have a level of clarity of how their current practices and decisions are likely to be interpreted by proxy advisors, based on detailed (public) proxy voting guidelines. Likewise, public companies will also have developed a clear understanding of how reliant their shareholders are on the house recommendations of the two major proxy advisors, Glass Lewis and ISS. On the one hand, the removal of the threat of a negative recommendation from Glass Lewis’ “house view” can be viewed positively; on the other, as investors are supported by proxy advisors to craft a higher number of specific custom policies, there may be a greater degree of variation and fragmentation in proxy voting approaches and outcomes. Higher levels of fragmentation in investor views and voting tends to result in higher levels of support for management, but in several areas, such as overboarding and compensation, certain investor policies are stricter than those set out by proxy advisors, ensuring a level of uncertainty over eventual approaches to specific issues from the market generally. Moreover, while Glass Lewis has announced the removal of its house policy, elements of it will likely remain through recommendations in one or more of their newly announced “perspectives”, at least one of which is likely to continue to place a high value on governance best practice as a core element of proxy voting. The eventual impact of the shift in practice at Glass Lewis, however, will only become clear if and when details of the proportion of Glass Lewis subscribers electing to follow each of the “perspectives”, are provided; or, indeed, how many clients develop fully custom policies, based on their own views outside of Glass Lewis’s new preset guidelines. 

Regardless of the risk of dissent, planning for reporting and preparation for AGMs among public companies will have to evolve, with efforts to secure Glass Lewis support for an approach removed from the landscape and more focus on investor selections of Glass Lewis policy to follow. In recent years, institutional investors have developed a range of options to offset their use of proxy advisors, including scaling up their in-house data and analysis capabilities, direct engagement with issuers, and pass-through voting, which allows beneficial owners to make voting decisions. Combined with the increasing use of pass-through voting among large investors, Glass Lewis’s decision to more formally place the responsibility for all voting decisions back on their clients has the potential to muddy the waters of effective shareholder engagement, with public companies having to dig further into their shareholder register to get a clear line of sight over likely voting intentions and impacts on final AGM outcomes. The evidence of how pronounced these risks are will become clearer in time, as investors previously reliant on Glass Lewis house recommendations take steps to develop their own customised policies on a range of governance issues, adopt one of Glass Lewis “off-the-shelf” perspective, or switch to the competition. In the meantime, there is merit in companies deepening their analysis of shareholder registers and continuing to develop direct channels of engagement with major shareholders, to ensure the evolution of approaches from investors do not cause any surprises over the next 12 to 18 months.