27 Mar Jamie Dimon and the Proxy Advisory Services
Just over two weeks ago, at a retirement summit hosted by BlackRock, Jamie Dimon, the outspoken CEO of JPMorgan Chase, lit into the two major proxy advisory services, calling them “incompetent” and railing against their conflicts of interest. It wasn’t the first time Dimon has knocked the duopoly of ISS (Institutional Shareholder Services) and Glass Lewis, but his comments were more pointed and aggressive than before. Indeed, they were more pointed and aggressive than any public comments by a figure with as much heft in the capital markets as Dimon:
The JPMorgan chief described Institutional Shareholder Services and Glass Lewis as “incompetent” in an interview with Semafor on stage at BlackRock’s retirement summit in Washington Wednesday. He said ISS and its smaller rivals have contributed to a regulatory environment that is “driving companies out of the public market.”…
Dimon framed the issue as one of American principles: ISS, the largest of the proxy advisers, is owned by Germany’s Deutsche Borse, and smaller rival Glass Lewis is owned by a Canadian private equity firm.
“Anyone who gives them money — shame on you,” Dimon said. The firms “should be gone and dead and done with.”
This is welcome news, especially for those of us who have spent the last several years openly criticizing the proxy advisory services, their dominance in the marketplace, and their manifest conflicts of interest. Dimon is one of the few major financial players with widespread public name recognition, and his emergence as an open and unapologetic critic of ISS and Glass Lewis could mark a turning point in the effort to bring more common sense and transparency to the proxy voting system.
Nevertheless, Dimon’s comments also raise a series of questions.
First, Mr. Dimon, where’ve you been?
As I say, some of us have been fighting this fight for the better part of a decade now, without much help from financial giants like you. Your complaint about the proxy advisory services that “companies ‘can hire them’ to improve their corporate governance ratings” has prompted some observers to note that the duopoly acts like a protection racket, offering consulting services to corporations to help them better game the proxy advisory gauntlet. That’s not exactly news to readers of The Dictatorship of Work Capital, which I wrote roughly five years ago:
Today, ISS is the fourth largest third-party ESG ratings service provider in the world. That means it develops its own screens and measures; it sells those screens to institutional clients, helping them “discern” what is or is not proper behavior for a company and what is or is not a proper investment strategy for clients. Then it offers itself as a proxy advisor to those same clients, making recommendations on how to vote on shareholder proposals and performing the proxy votes on their behalf. In other words, ISS is shaping the perceptions of what investors’ interests should be and which companies they should invest in, before telling those same investors how to vote those interests. This is institutionalized, corporate “begging the question.” ISS is essentially fixing the game by creating shareholders who will, almost by definition, vote the way it wants them to on proposals ISS has decided matter. In this way, utilizing the successor operation to the SIRS, ISS can “create” the votes necessary to compel company management to comply with its wishes. This is coercive, conflicted, and most notably, intended to advance ISS’s interests rather than those of the investors.
But it gets worse.
ISS also has a division called ISS Corporate Solutions, which acts as a consultant to corporate clients on how to improve such things as governance, environmental record, pay disputes, etc. The proper term for this type of operation is “protection racket.” You buy our protection and we’ll make sure your windows don’t get broken. You buy our corporate solutions, and we’ll make sure that the asset managers we tell to buy your company are also aware that they should vote against any ESG proposals against your management. ISS has all bases and all aspects of the business covered.
Interestingly – given that I wondered where you’ve been on this issue – my book was inspired in part by the famous/infamous declaration issued by the Business Roundtable in 2019, redefining the purpose of a corporation to be more “stakeholder” centered. You recall that declaration, yes? If not, you can read about it here. Or…maybe you can ask the guy who was the chairman of the BRT at the time, the guy who signed off on the declaration and appeared in all the press releases about. Maybe you know him? His name is…Jamie Dimon.
A second question: are you serious?
Note here, that I don’t mean this sarcastically. I’m serious. Are you?
I ask because I know that Elon Musk’s chief complaint with the proxy advisory services is that they recommended against approving his Tesla pay package. I understand his frustration, I guess, but that’s a pretty niche complaint, not something that serves as a serious indictment of the whole system. Likewise, to date, your biggest complaint with the proxy advisors is that they are pretty outspoken about the need to create separation between the CEO and the chairman of the board. That’s a standard “good governance” thing, but it upsets you, because, as the CEO and Chairman of JPMorgan, you wield a lot of power and, more to the point, are in a good position to ensure that the board is always ready and willing to approve your pay package. Again, that’s niche matter, specific to your circumstances. And while that may be good enough for the CEO of a car company, it’s not enough for the CEO of a financial services giant. If you want to be taken seriously on this matter, if you want people to listen to you about the detrimental nature of the current system, then you have to have serious reasons for them to do so. It can’t just be that ISS and Glass Lewis are trying to make it harder for you to get paid. That’s not enough.
So…I’ll ask again: are you serious?
Finally, if you are serious, what’re you gonna do about it?
During your interview at the BlackRock event, you suggested that ISS and Glass Lewis “should be gone and dead and done with.” OoooK. I get it. Obviously, I’ve been grumbling publicly about these guys’ nefarious influence for much longer than you have. I’m not what you’d call a fan. But there’s a catch, isn’t there?
Proxy advisors exist for a reason, namely because they provide a service that the overwhelming majority of asset managers need. Some asset managers – BlackRock, Vanguard, State Street…JPMorgan Asset Management, etc. – have the resources to conduct all the due diligence regulatorily required of them in house. But most of them don’t. You know this, of course, and you also know, therefore, that making the proxy advisors “gone and dead and done with” without also overhauling the regulatory regime would result in that overwhelming majority of asset managers being gone and dead and done with as well. And the net result of that – as you also know – would be further consolidation in a business that is already outlandishly and distortingly centralized. Funny how that works, right? Kill the proxy advisors and suddenly BlackRock’s $11.7 trillion in AUM becomes $25 trillion, while JPMAM’s $4 trillion becomes $10 trillion. Nice work if you can get it – especially if you can get while remaining both CEO and Chairman of your company and while looking oh, so civically minded.
That leaves us (you) with very few other options. You can lobby to change the regulatory regime to make proxy advisors unnecessary. But since most asset managers would still want to conduct appropriate due diligence on proxy votes, that seems unlikely to help.
Another thing you could do would be to start a new service to compete with ISS and Glass Lewis, but that too seems unlikely. Proxy advising – as anyone who has tried it will tell you – involves a lot of work for not a lot of money. The services make their money from their consulting businesses, from their conflicts of interest. That’s why they do it.
You and Larry Fink and the rest of the gang from the BlackRock retirement conference could all get together and buy ISS and turn it into a more legitimate, less conflicted business. But again, there’s the question of a profit motive. You could turn it into a public utility of some sort, I suppose, but who would run that? You? The government? Is there a good option here?
The government could force a breakup of the proxy advisors, separating the consulting and the advisory businesses, but that would be a bit sticky. It could also compel greater transparency and disclosure of conflicts, which seems like basic common sense.
Of course, you’re the guy who gets paid tens of millions of dollars to run the financial world. Clearly, you have thoughts on the matter. Now’s the time to be helpful and share them with the class.
