We are discussing the Roundtable recently held by the SEC on proxy advisory firms.
One of the issues in the debate that came up repeatedly was the concentration in the proxy advisory industry. Commissioner Piwowar described proxy advisory firms as a "stable duopoly" (with the word "duopoly" becoming much repeated throughout the day). There was some agreement on this. Damon Silvers from the AFL-CIO (who began to speak around minute 37.10) acknowledged that the issue of concentration was "very real." Others took similar positions.
Mike Ryan, Vice President, Business Roundtable, and former president and COO of Proxy Governance, Inc., speaking late in the day (around 2:09), made it clear, however, that this was not likely to change. Barriers to entry were simply too high. He noted that the business was low margin. Moreover, to enter, a firm would have to front the resources necessary to cover at least 10,000 securities (out of 40,000 globally), with approximately 4000 in the US and the remainder overseas. The firm would also have to invest in robust technology and retain qualified staff. At the same time, investors had incentives not to change firms. They have invested in technology that allows them to interface with specific proxy advisory firms, making it costly to switch to a new entrant.
The Roundtable also brought out that the problem of concentration is not limited to proxy advisory firms. Damon Silvers specifically referenced auditors (which he described it as a "quadropoly") and rating agencies. If the concern was concentration, he indicated that, with respect to proxy advisory firms, "this is about the last place to start, that the really serious problems lie elsewhere."
With respect to concentration, one intermediary that went unmentioned was Broadridge. Broadridge is responsible for forwarding proxy materials on behalf of brokers. For the most part, this is a plumbing sort of task and raises little controversy. There have been exceptions, however. During the JP Morgan battle over the separation of chair and CEO, Broadridge announced a policy change. The company would no longer provide ongoing voting tallies to shareholders. The same information would, however, be given to companies.
Concentration is therefore a structural issue that exists in many places in the securities markets and the proxy process. With respect to proxy advisory firms, regulatory changes can add expense and burdens to the existing firms but they are not likely to induce additional entrants into the market.
The webcast of the Roundtable is here.