In his comprehensive annual letter to shareholders, Jamie Dimon, the esteemed Chairman and CEO of JP Morgan Chase, delved into the intricate dynamics shaping the US public market landscape. A notable focal point of his discourse was the contentious role played by proxy advisors, which Dimon identified as a key factor contributing to the contraction of the public market sphere in the United States.
Dimon elucidated how many asset managers rely heavily on stewardship committees, entities entrusted with the stewardship of investment portfolios, who in turn lean heavily on the recommendations provided by proxy advisors. This intricate web of dependence, according to Dimon, creates a scenario where actual portfolio managers find themselves constrained in their ability to exercise independent decision-making, owing to the overpowering influence of these intermediary bodies.
Of particular concern to Dimon was the consolidation of power within the hands of a select few proxy advisors, wielding considerable sway over institutional investors’ voting behaviors in American corporations. What heightened Dimon’s apprehension was the revelation that these pivotal advisory entities were owned by entities hailing from Canada and Germany, raising pertinent questions about the appropriateness of foreign entities dictating the contours of American corporate governance standards.
Taking proactive steps to address these systemic issues, JP Morgan Asset Management has embarked on a transformative journey to overhaul its proxy voting process. The multifaceted approach involves augmenting the participation of portfolio managers in proxy committee deliberations, thereby diminishing the reliance on proxy advisor recommendations. Moreover, the initiative aims to foster enhanced communication channels between companies and their managements with decision-makers at the asset manager, facilitating a more nuanced understanding of the underlying issues at play.
Crucially, the revamped approach also entails a paradigm shift in the dissemination of voting decisions, with companies promptly apprised of the asset manager’s stance once determinations are made, rather than awaiting the culmination of the voting process.
By undertaking these sweeping reforms, JP Morgan Asset Management endeavors to not only dispel the perception of undue reliance on third-party advisor recommendations but also to instill a culture of informed decision-making and direct engagement with the tenets of corporate governance. As Dimon’s missive concludes, these strategic maneuvers serve as a clarion call for a recalibration of the power dynamics governing the US public market, ensuring greater transparency, accountability, and efficacy in the realm of corporate governance.
He wrote, “There are essentially two main proxy advisors in the United States. One is called Institutional Shareholder Services (ISS), and the second is called Glass Lewis. These proxy advisors started out providing reams of data from companies to help their institutional investor clients vote on proxy matters (information on executive compensation, stock returns, detail on directors, policies and so on). However, they soon also began to provide advice on how shareholders should vote on proxy matters. And, in fact, institutional investors generally execute their voting on an ISS or Glass Lewis platform, which often includes a clear statement of the advisory service’s position.”
He added, “I should also point out, because it may be relevant, that ISS is owned by Deutsche Boerse, a German company, and Glass Lewis is owned by Peloton Capital, a Canadian private equity firm. I question whether American corporate governance should be determined by for-profit international institutions that may have their own strong feelings about what constitutes good corporate governance.”
Dimon wrote that asset managers may rely on various information sources to support their decision making but their votes “should ultimately be based on an independent application of their own voting guidelines and policies”.
On how proxy advisories influence the voting of asset managers through stewardship committees, Dimon wrote, “Almost all asset managers receive proxy advisor data and recommendations; while some asset managers vote completely independently of this information, the majority do not. Most asset managers have formed corporate governance or stewardship committees that are responsible for their voting, and these committee positions are often held not by portfolio managers and research analysts (i.e., the people buying and analyzing the individual securities) but by stewardship experts. While it is good to have stewardship experts, the reality is that many of these committees default large portions of what they do to proxy advisors and, more troubling, make it harder for actual portfolio managers to override this decision making.”