Actually, the WSJ headline is somewhat misleading. What Donatiello and Pitt actually address in their provocative op-ed is the influence of proxy advisory services ISS and Glass Lewis. They argue that:
Voting decisions are often effectively controlled by proxy advisory firms—namely, Institutional Shareholder Services and Glass Lewis. There is considerable evidence that a “no” recommendation from such firms translates into about a 30% “no” vote by institutional shareholders. ...
While proxy advisory firms claim they merely advise and do not make voting decisions, their influence is unmistakable.
Donatiello and Pitt find that influence worrisome (as do I):
Proxy advisory firms have no financial interest in shareholder votes. They rarely understand the companies on which they report, their competitive situations or their strategic challenges. They use opaque processes, and they often solicit consulting fees from the same companies on whose issues they advise, without disclosing specific arrangements. Most important, proxy advisory firms claim no duty to the shareholders whose votes they effectively control. ...
The decoupling of proxy voting from the investment process, and in many cases from investor interests, might be less troublesome if it increased shareholder value, but it doesn’t. Research from 2009, also conducted by Stanford’s Rock Center, found that governance ratings by proxy advisory firms have no ability to predict future performance, and that their proxy voting policies are negatively correlated with shareholder value. Proxy advisory firms have offered no research showing that their recommendations do enhance shareholder value.
It's long since time that the government (especially the SEC but also the Department of Labor in its oversight of ERISA plans) reconsider the policies that encourage reliance on proxy advisory services. It's also long since time that the SEC start regulating proxy advisory services, especially given the rampant conflicts of interest inherent in their current business model.
