In 1972, Robert Monks had an epiphany. Staying at a motel overlooking the Penobscot River in a small town in Maine, the wealthy Bostonian, woken by a bout of hayfever, looked out his window and saw a huge wall of foam emerging from the water.
“My God, what was that happening last night,” he asked the motel owner the next morning. “Oh, that’s just the river,” came the response, dispassionately.
Monks, who was running as a Republican candidate for a Maine senate seat at the time, was told that local paper companies pumped toxic effluent into the Penobscot at night, polluting it.
The revelation would have enduring consequences for corporations worldwide and their investors.
After his election defeat, Monks became chairman of a trust company with holdings in paper businesses and urged them to improve their environmental practices.
His passion for shareholder activism was ignited and he went on to establish Institutional Shareholder Services. ISS has since become a giant, advising more than 4,000 clients, including some of the biggest pension funds and is valued at $2.3bn (£1.8bn).
It and other proxy advisers, such as its smaller rival Glass Lewis, have become hugely influential, especially during annual meeting season. They issue lengthy reports about listed companies, advising whether or not shareholders should support certain proposals.
But the power of proxies has come under fire in recent years, with critics arguing that they are merely anonymous box-tickers who promote a narrow, Left-wing agenda.
One former FTSE 250 director says: “They’re a bunch of guys that are only interested in their own PR. And no asset manager wants to pay for something that tells you to vote in favour of all the motions at an annual meeting.
“The problem with proxies is that too often they take a box-ticking approach. And it is not uncommon that they have no knowledge of the context of the company or its wider industry. I can see that ticking a box makes a good headline. But we live in a world where nuance and context matter.”
One recent row revolved around the pay of Pascal Soriot, the chief executive of AstraZeneca.
Despite the FTSE 100 company delivering a Covid vaccine that most likely saved hundreds of thousands of lives, ISS, Glass Lewis and Pirc all recommended that investors vote against his pay increase in 2021, leading to a significant shareholder revolt.
Proxies are also increasingly taking a hard line on issues such as climate change and gender and ethnic diversity. In many cases, they have recommended that directors, including chairmen, be ousted for a lack of female representation on company boards.
Last year, this even extended to Evraz, the former FTSE 100 miner, when ISS called for Alexander Abramov, its chairman and a Russian oligarch, to be sacked despite him and Roman Abramovich owning nearly half of the company’s shares. Unsurprisingly, its recommendation fell on deaf ears.
In terms of climate change, ISS also backed an investor revolt at US energy giant ExxonMobil last year, arguing that the company’s strategy remained too reliant on overly optimistic assumptions about future oil consumption.
It said Exxon “continues to base strategy decisions on what appear to be overly optimistic demand and technology assumptions, and does not provide shareholders with enough information to fully understand how prepared it actually is for an energy transition”.
The criticism of proxy advisers comes as Russia’s invasion of Ukraine has raised questions about ESG funds pressuring investors to avoid backing companies that produce arms.
Rupert Soames, the chief executive of Serco, said in February that the invasion of Ukraine should remind investors of the ethical value of the defence industry.
“I don’t think that type of investing has had an impact on the UK defence yet, but there’s a threat it will,” he said. “If you see what is happening to Ukraine, it’s easy to see that military defences are a social good and have an inherent social value.”
