Robovoting — when institutional investors mechanically follow recommendations issued by proxy advisers — is more likely to occur at smaller companies engaged in proxy fights than their larger counterparts, partly because those battles tend to stay out of the media spotlight.
That’s the view of Paul Rose, the associate dean for strategic initiatives at Ohio State University. Rose spoke with The Deal for its Activist Investing Today podcast about a new study he developed showing that 114 institutional investors with $5 trillion in assets under management voted last year in lockstep with proxy advisers Institutional Shareholder Services Inc. or Glass, Lewis & Co. LLC on both routine and nonroutine matters.
Overall, Rose said, there is less robovoting at corporations embroiled in proxy contests, considering that some investors tell their beneficial owners they will follow proxy adviser recommendations on routine matters but do their own research for director contests. Even so, he added investors will do more of their own work and make independent decisions at bigger proxy contests, such as a boardroom fight targeting energy giant Exxon Mobil Corp. (XOM) this year.
“Big proxy fights are going to engender a lot more attention from funds than small proxy fights. Enhanced media coverage will put funds on notice that they will be scrutinized more,” Rose said. “You might see more robovoting at smaller companies and less attention by the big fund companies and less publicity so investment funds wouldn’t worry about being called out in the media for voting their proxies a certain way.”
Overall, Rose noted that robovoting declined marginally in 2020 from 2019. He pointed out, however, that, counterintuitively, some big institutions robovoted last year while smaller investment firms appeared to conduct their own research.
“Some really large funds are voting in line with ISS and Glass Lewis, and some small funds are doing their own research and voting independently,” he said. “It is clear a lot of funds don’t have the resources to do a lot of research.”
In addition, some active funds robovoted while passive investors did not. “You would assume that active managers would vote less in line with ISS — they have built into their cost structure the ability to do a bit of research if they chose to — and that passive index funds would vote in line with proxy advisers,” he said.
Instead, Rose said he found that some smaller active managers are robovoting while big passive index fund managers, such as BlackRock Inc. (BLK), have large governance teams and are doing their own research.
“Some index funds might be free-riding off the active funds in their same family on governance and proxy voting,” Rose added.
Finally, Rose argued that activist investors have benefited over the years from proxy adviser recommendations.
“Markets have become increasingly institutional, and we see the shareholder voice becoming more powerful,” he said. “You see shareholders eliminating poison pills, classified boards. That has certainly benefited activist investors. I’m not sure we would have the activist movement we have today without proxy advisers. The proxy advisers have had an important role, maybe unwittingly, in helping activist investors exercise power.”
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