Understanding Robovoting & Why It Affects ESG Initiatives For Retailers
By Bryan Junus, The Corporate Citizenship Project
A bedrock principle of American democracy always has been one man, one vote. Shareholder elections are different because, typically, the voting power a shareholder has is directly proportional to their ownership stake. While this is not one man one vote, it is at least one share one vote.
Unfortunately, most shareholder elections are as fake as the elections in autocratic nations because shareholders themselves rarely actually vote. Instead, due to something called “robovoting,” two companies most Americans have never heard of get to decide the fate of many large corporate decisions. “Robovoting” or “proxy voting advice,” as the Securities and Exchange Commission (SEC) calls it, has been in effect since July 2020 and is supposed to ensure institutional investor clients of proxy advisor businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.
Robovoting has been causing an outsized effect on the vote outcomes at corporate retail companies, in which the transparency of these proxy advisors has been beset by controversy, not only stemming from the integrity of making informed votes on retailer ESG funds being called into question but also the rating process of how a retailer’s ESG efforts are graded on an ABCD+- level.
Given the widespread reliance on proxy advisors, like Institutional Shareholder Services (ISS) and Glass Lewis, to provide recommendations on a retailer’s ESG program, robovoting can be “market moving” in the retail industry and affect company financial portfolios, which ultimately impacts sustainability initiatives.
Why Is Robovoting So Problematic?
As proxy advisory firms also provide consulting services to corporate retailers on each of their company’s ESG standards, robovoting presents a clear bias in their support of specific retailer ESG initiatives. Essentially, ISS and Glass Lewis both advocate for ESG services and profit from ESG activities, while also advising shareholders on how to vote on ESG proxy measures.
Given the power of these proxy advisors, retail investors may suffer from wrongly investing in retailers that received a high number of votes because they paid for consulting rather than because they are good corporate citizens. This apparent conflict of interest leaves retail investors troubled as to whether robovoted ESG criteria are based on the retailer’s ESG performance or the company paying for ESG consulting.
First seen as a user-friendly, automatic tool to help make informed decisions on retailer ESG shares to now being seen as a freedom of choice eliminator in terms of transparency, robovoting has made corporate ESG accountability difficult and even unfair, which is why the SEC needs to end it now.
What Can Retailers Do About Robovoting?
While the SEC has yet to eliminate robovoting or even address the transparency concerns that come with it, commissioners, such as Hester M. Peirce, have already gone on defense to disavow the rule. In a response statement to the Commission, Pierce wrote that robovoting has caused “proxy advisors to amend their own research reports and change their voting recommendations to correct earlier errors, which can be costly and bring reputational risk.” This just proves that even the SEC’s commissioners want robovoting gone.
To add to the underlying message that the SEC must crack down on robovoting, retailers can fight back themselves by contacting their elected officials to demand that they stop working with any institutional investors who support robovoting because it goes against the democracy of the country.
Protecting our U.S. democracy is of the utmost importance and robovoting is inherently undemocratic. Effective SEC action will embolden retailers making the most positive impact, and not those who are being robovoted on.
The retail industry relies heavily on its investors and voting on key issues such as ESG initiatives should not be left up to computer voting machines.
About The Author
Bryan Junus is the Chief Analyst of The Corporate Citizenship Project, which is an independent think-tank focused on a data-driven approach to addressing corporate governance issues in publicly traded companies and large private enterprises. Mr. Junus is a Chartered Financial Analyst (CFA) with over 10 years of experience working in the financial industry. He has worked in a variety of roles including managing client assets, corporate finance, capital raising, consulting, financial education, and real estate. His experience in ESG-related matters includes, among other things, working with green-energy companies on securing investor funding. He received a Bachelor of Science in Management Science from the University of California, San Diego. For more information, visit https://corporatecitizenshipproject.com/