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Sustainable Finance Newsletter - Corporate rage at proxy advisers may be misplaced

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By Ross Kerber

May 29 (Reuters) - Proxy advisers have taken a lot of heat from corporate big shots including, most recently, JPMorgan CEO Jamie Dimon . Now a new academic study puts more context around complaints facing the firms that provide proxy voting recommendations.You can read about that study in this week's main story below.

I've also written up the results of the "due diligence" shareholder resolution at Amazon last week, a rare case of Israeli-Palestinian issues coming up for a public corporate debate this annual meeting season.

You can connect with me on LinkedIn. If you have a news tip, potential content, or general thoughts you can email me at ross.kerber@thomsonreuters.com

Also we're running a survey to see what people think of this newsletter so far. We welcome your feedback here .

Corporate rage at proxy advisers may be misplaced

A new academic paper offers ammunition for both supporters and critics of the top proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis.

The two firms face attacks from various U.S. Republican politicians and CEOs, such as the claim they have "undue influence" by JPMorgan JPM.N Chief Executive Jamie Dimon in his recent annual letter to shareholders.

In a paper published in the Journal of Financial Economics in April, University of Utah finance professor Chong Shu found that a proxy adviser's critical vote recommendation makes its customers about 20 percentage points more likely to oppose management. He also found so-called "robo-voting," where funds automatically vote as recommended, is on the rise.

But Shu also found both proxy advisers seem to take account of investor feedback, likely deferring to investors' own knowledge and preferences. In other words, both of the for-profit companies try to give customers what they want.

"If ISS is just channeling the preferences of investors, that's a good thing," Shu told me in an interview. "If we observe they have influence, that doesn't mean its a bad thing."

Shu noted previous papers he co-authored such as one from 2020 finding that proxy advisory firms might slant their recommendations in response to socially responsible investors. In another paper, he found 33% of mutual funds robo-voted in 2021 but they tended to have fewer assets, controlling only 1.5% of shares on average.

"Overall, the evidence suggests that robo-voting is more prevalent than its defenders suggest but may exert less influence on corporate governance than its critics suspect," wrote Shu and co-author John Matsusaka of the University of Southern California.

As a business reporter, I found it especially interesting that Shu was able to parse out how the fund firms use the advisers based on the format of their filings.

Using that formatting, and controlling for firms hiring more than one proxy adviser, Shu found that ISS' market share has been stable around 47% through 2021, while Glass Lewis' grew to 37% in 2021 from around 10% in 2007.

Germany's Deutsche Boerse DB1Gn.DE bought most of ISS in 2020, and Canadian private equity firm Peloton Capital bought Glass Lewis in 2021.

I sent the paper to both proxy advisers for comment. ISS did not respond to questions.

A Glass Lewis representative referred to a document that covers its process for developing its voting policies and guidelines. Among other things the document notes that most of its institutional clients, including top public pension funds and asset managers, vote according to a custom policy or process.

"Our role is to provide objective research and other tools to help our clients vote as they see fit," the document states.

Company News

Live Nation LYV.N "suffocates its competition," said U.S. Attorney General Merrick Garland as officials sued to break up the big concert promoter, saying it and its Ticketmaster unit illegally inflated ticket prices and hurt artists.

Electric carmaker Tesla TSLA.O cut output of its best-selling Model Y vehicle at its Shanghai plant, aiming to address weakening demand for the aging model in China. Amid an economic slowdown in the country a brutal price war has erupted among electric vehicle makers.

Support falls for Amazon "due diligence" call

A shareholder resolution at Amazon.com's AMZN.O annual meeting on May 22 that included criticism of Israeli security policies won 17% support, according to a company filing, just half of the 34% support a similar resolution received last year.

As newsletter readers know, the resolution called for a report on Amazon's "customer due diligence process" related to whether its products and services contribute to human rights violations. Its supporting statement referenced a contract with Israel's Project Nimbus and international complaints about Israeli treatment of Palestinians.

The Anti-Defamation League (ADL) advocacy group had called the resolution's language inflammatory and hateful, given threats including the Oct. 7 Hamas attacks on Israel. Ari Hoffnung, managing director of ADL affiliate JLens, told me via e-mail that with the vote, "investors sent a clear message that attempts to use the corporate governance processes to advance an anti-Israel agenda will not be tolerated."

Filers of the resolution did not respond to requests for comment. An Amazon representative declined to comment.

On my radar

Only 18.6% of shareholder votes supported a resolution calling on Shell SHEL.L to adopt a carbon-emissions target, after the company weakened a previous target because of expectations for strong gas demand and transition uncertainty.

Airfares in Europe are starting to plateau or fall in a sign that a post-COVID travel boom is waning, a setback for airlines struggling with higher costs and limited aircraft availability.

Morgan Stanley's MS.N executive chairman James Gorman told the bank's annual meeting thathe would step down Dec. 31. The meeting ran less than 30 minutes, which Gorman said the shortest in 15 years and proof of the "stellar start" made by his successors.

Reporting by Ross Kerber in Boston; Editing by David Gregorio


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