Proxy Advisory Firm Guidance Expected, Again

By Cydney Posner

Word has it that the SEC will soon issue "guidance" designed address to proxy advisory firms, such as ISS. According to the WSJ, the new guidance will focus primarily on disclosure of conflicts of interest. But don't hold your breath—similar guidance was expected in 2012. (See my news brief of 6/8/12.)

The common complaint expressed by companies is that proxy advisors hold too much sway over votes on board, executive pay and other governance matters. The article acknowledges that new rules "may have little practical effect on the ability of firms like Institutional Shareholder Services Inc. and Glass, Lewis & Co. to weigh in on governance debates. But it highlights how contentious their role has become at a time when corporate elections have grown more competitive amid a rise in activist investing." Of course, advice from proxy advisors is not always followed blindly. Research by a law professor "suggests that ISS actually shifts about 6% to 10% of votes on uncontested directors, in part because the biggest investment managers don't vote in lock step with the adviser, and smaller investors have less of an influence on vote outcomes."

According to the article, the new guidance calls for "better disclosure among proxy advisers that also sell corporate-governance consulting services to the same companies subject to their voting recommendations. SEC staff is likely to say they don't believe the current practice of requiring investors to contact an advisory firm for more information about potential conflicts conforms with the agency's interpretation of an existing SEC rule…." Most impacted will be ISS, since, the article claims, it is the only major proxy advisor that also provides consulting services. ISS has long been the subject of criticism for peddling consulting services to the same companies about which it makes vote recommendations. In addition, proxy advisers have "been criticized for selling their research to activist investors, many of whom propose proxy measures subject to recommendations from the advisers. Glass Lewis, the second-largest proxy adviser, is owned by the Ontario Teachers' Pension Plan Board, a Canadian fund that sometimes takes activist positions."

Inquiring minds want to know: whatever happened to the types of rule requirements that were floated in connection with the SEC's proxy plumbing concept release? In addition to requiring more disclosure regarding potential conflicts of interest, the discussion surrounded the possibility of mandatory proxy advisory firm registration, requiring proxy advisory firms to describe their review processes in filed reports and requiring proxy advisor recommendations to be filed with the SEC. In 2010, the NYSE Commission on Corporate Governance had commended the SEC for issuance of the proxy plumbing concept release, including provisions regarding proxy advisors. The NYSE Commission advocated that proxy advisors be held to appropriate standards of transparency and accountability, including adherence to strict codes of conduct and requirements to disclose the policies and methodologies that they use to formulate specific voting recommendations, all material conflicts of interest and the company's response to the firms' analysis and conclusions. Of course, SEC guidance on conflicts disclosure will certainly be welcome, but it seems meagre in the context of the types of regulations that had previously been discussed.

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