Every vote counts in a mutual fund proxy campaign. But when those votes are increasingly coming from proxy advisory firms, they actually can count more.

Proxy advisory firms are engaged by various money managers and institutional accounts to act as a fiduciary, to review proxy materials and offer recommendations on proposals. In some cases, the money manager will have been delegated the voting authority and in other instances, may retain the voting authority. It is becoming more commonplace to see an institutional position that has been voted by one of these firms.

Why Clients Hire Proxy Advisory Firms

Many money managers and institutions engage advisory firms because they may not have the time or expertise required to fully understand proxy proposals. They engage the agent because it often is a known entity experienced in all manner of proposals and can provide a third-party recommendation as well as vote shares on their behalf.

There is a well-established process in place where advisory firms will review proposals, apply their analysis, and offer their recommendations. In the corporate space, recommendations are generally provided within days of the shareholder meeting. In the fund space these recommendations are published as much as two to three weeks before the shareholder meeting date.

Mutual funds need to understand the growing role that proxy advisory firms play, how they view certain types of proposals and the timing of their recommendations. Doing so will allow funds to assess the impact of the advisor recommendation on the vote, and if needed, alter their strategy to better manage expectations and outcomes throughout the voting process.

Proxy Advisory Firms Representation is Growing

Ten years ago, institutional representation in mutual funds probably represented 5% of outstanding shares, with the remainder being predominantly retail customers. Today, the institutional ownership in certain funds can be as high as 25%.¹

Proxy advisory firms representation is growing, and as a result, they are representing greater numbers of shares. This means that funds need to better understand how advisory firms view a particular proposal and whether they are being engaged to review the fund’s proxy material.

How Proxy Advisory Firms Review and Vote Fund Proxies

Proxy advisory firms are third-party fiduciaries engaged to provide institutional investors with research, data and recommendations on management and shareholder proxy proposals that are voted on at a fund’s shareholder meeting. It is important to understand what they look for and how they determine their recommendations. In general, these advisory firms are looking to ensure that the client’s best interests are being addressed. Proposals that can have an adverse impact on shareholders may be viewed negatively, and proposals that are seen as favorable to shareholders may be viewed positively. It is important to be familiar with how advisors review proposals and what they monitor. Having a clear understanding of the size of their role and their potential recommendations can help save money and better position the proposal for passage.

Advisors who are engaged and delegated responsibility for voting will issue a vote in most cases. Factoring that into the analysis and understanding where those institutional shares are—and what a recommendation or vote from the advisor is likely to be—can strengthen potential for passing a specific proposal.

Approaching Proxy Advisory Firms

Advisory firms are engaged to act as fiduciaries. As such, they maintain an independent position. It is not advisable to try and influence how a proxy advisory firm is going to recommend a specific proposal. When engaging with an advisor, the objective is to understand the rationale and to provide clarification on the proposal. Does the advisor understand the proposal? And if not, does the advisor require additional information? The interaction may be at the beginning of the campaign, or it may be subsequent to the recommendation being issued. In any event, the conversation should be focused on the proposal to ensure that it has been presented clearly.

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