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In Star Wars, a central plot point is the clone army. Despite some variation in their external armor, the clones are genetically identical. Eventually, they betrayed their jedi masters who mistakenly thought the clones could be controlled.

Shareholders who hire proxy advisors to give advice on votes are often unknowingly exposed to a similar issue. Although proxy advisors issue advice under various proxy policies, as one proxy advisor put it in a presentation to a pension fund, “these [thematic] policies use the House Policy as the basis for the policy, with modifications to reflect the particular policy objectives.”

A proxy policy is a framework by which proxy advisors craft voting recommendations. Just as two equity analysts might come to different conclusions about a company, two proxy policies might come to different conclusions about a proposal at a shareholder meeting.

Given the high volume of seasonal work facing proxy advisors, it may be tempting to base research of some policies off of a “benchmark” or “house” voting policy. However, it results in some problems.

Problem 1: Biased to the Benchmark

A faithful implementation of a proxy policy would build reports from the ground up. If a benchmark is used as a basis of analysis, there is the potential for an anchoring effect. That is, recommendations could be biased by those of the benchmark.

Additionally, the analysis required to faithfully implement each policy is unique and should be conducted differently depending upon the policy.

Problem 2: Poor Benchmarks

The use of a “benchmark” policy makes an implicit claim that there is a standard to which proxy votes should be compared. However, investors vary in their proxy voting priorities just as they do their capital allocation priorities. It isn’t the role of a proxy advisor to make a positive claim about the proper approach to proxy voting.

Jamie Dimon, Elon Musk, 23 state attorneys general, and others have voiced opposition to the benchmark policy recommendations of some proxy advisors.

A Remedy

Just as an ETF issuer seeks to faithfully administer an ETF based on public investment criteria, it too is the obligation of a proxy services firm to faithfully build analysis that is applicable to the policy at hand.

Egan-Jones has chosen to conduct research from the ground-up for each of our policies. That is, our research reports show analysis that is specifically tailored to each policy (Egan-Jones offers five off-the-shelf policies and custom policy options). To learn more about how Egan-Jones can reduce your compliance risk and cost through our independent proxy research and guidance, visit our website or schedule a meeting with us.