Shaking Up a (Shareholder) Legacy

Not unlike most people, investment managers don’t like to be told how to vote—at least when it comes to the firms they hold shares in.

In a move that could change the landscape, as well as the outcome, for shareholder proposals on everything from executive compensation to sustainability initiatives, one of the largest investment banks in the world will no longer rely on proxy firms to advise on voting decisions. Instead, the firm will use a proprietary AI platform to analyze data like past voting trends, historic company performance, and more to provide recommendations to asset managers. The decision represents a “significant inflection point” for corporate governance, says Chad Astmann, co-head of global investment management at Korn Ferry. “It’s a clear signal that the largest asset managers want more direct ownership of their voting decisions,” he says.

To be sure, asset managers and institutional investors, who control trillions of dollars and hold a lot of influence in the companies they invest in, make their own decisions on how to vote on shareholder proposals. But historically, proxy advisory firms would serve as a middleman, doing the heavy lifting of compiling and analyzing the data, issuing reports, and making recommendations on which way to vote.

Critics say these firms wield too much power—in part because many investment managers simply vote their shares the way the advisor recommends—and have raised questions about impartiality in shareholder proposals. “Corporate leaders have had issues with proxy firms,” says Dennis Carey, a vice chairman at Korn Ferry and co-leader of the firm’s Board Services practice. Regulators have issues with proxy firms as well, recently launching an investigation into the business. Carey says AI can do the same work as proxy advisors, only much faster and presumably without any bias or conflict of interest. “Now that the first domino has fallen, others will likely follow,” he says of investment firms decreasing their dependency on proxy advisors.

What that means for corporate leaders is that shareholder voting behavior could change dramatically as voting becomes more individualized. Astmann says AI gives investment managers a more granular view into issues unique to the firm’s overall goals and strategy, allowing managers to align votes on specific shareholder proposals across industries and companies with them. Or, as Astmann puts it, “Voting will become less cookie-cutter and more reflective of each firm’s investment philosophy.”

From an investor relations perspective, the kicks off a “huge reset for proxy season,” says Peter McDermott, head of the Corporate Affairs practice in North America for Korn Ferry. One bank moving away from proxy advisors isn’t likely to change much at first, he says. But as the landscape evolves, it could have massive repercussions, such as bringing more shareholder proposals to a vote, changing the outcome on certain issues, and more. “It’s the shaking up of a legacy, and we won’t know the full impact for years,” says McDermott.

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