Paul Hodgson: The latest bombardment in the war on proxy firms, the Proxy Advisory Reform Act

Corporate groups are getting behind legislation for proxy firms

Two more corporate bodies in the US this week came out in support of proposed legislation that seeks to get proxy advisory firms regulated by the Securities and Exchange Commission (SEC).

The Proxy Advisory Reform Act has been sponsored by Wisconsin Republican Sean Duffy and John Carney, a Democrat from Delaware.

The act aims to “improve the quality of proxy advisory firms for the protection of investors and the U.S. economy, and in the public interest, by fostering accountability, transparency, responsiveness, and competition in the proxy advisory firm industry”.

Now the Society of Corporate Secretaries & Governance Professionals and the National Investor Relations Institute (NIRI) corporate membership groups have become the latest to endorse the act in a joint statement.

The bill seeks to have proxy advisory firms register with the SEC by disclosing a set of information that includes vote recommendation procedures and policies, the organisational structure, the code of ethics, potential or actual conflict of interest and how these are managed, any ancillary services offered and a list of the 20 largest clients.

It will also require advisors to provide companies with their recommendations prior to publication and have access to the staff member who prepared them to resolve any inaccuracies.

The Society and NIRI support the bill for a number of reasons, including what they see as the firms’ undue influence, their one-size fits all policies, the conflicts of interest issue, and that they do not abide by proxy solicitation rules.

Darla Stuckey, president of the Society, said in the press release: “While outsourcing to proxy advisory firms is pragmatic and rational on the part of institutional investors, given their large number of holdings, the firms now have more voting power than the largest investor at most companies.”

But Katharine Rabin, CEO at proxy firm Glass Lewis made a statement to the House Financial Services Committe last month in which she argued the bill could lead to “severe negative impact and detrimental consequences not only on proxy advisors and their investor clients but on the capital markets as a whole”.

She told the Subcommittee on Capital Markets and Government Sponsored Enterprises that the requirement in the draft act to disclose analysis and recommendations to issuers [companies] before publication and to meet with issuers about the recommendations, would “infringe upon the firm’s ability to independently analyze the issues and to make unbiased voting recommendations to clients”.And she said this would “exacerbate the lingering misconception that companies should be primarily concerned with the views of proxy advisors rather than those of their shareholders”.

She went on: “It would also create the perception that proxy advisors are standard setters, or even quasi-regulators, empowered by their clients to negotiate changes to companies’ governance or compensation strategies.”

Rabin noted that GL reports, as with those from other proxy advisors, are based on publicly available information and that if they were changed as a result of private communications this would be based on information not available to shareholders. There was also no way of confirming the accuracy of such private communications. Rabin also countered the concerns over undue influence, saying that it is not supported by any evidence and that investors vote according to their own in-house voting policies and do not blindly follow proxy advice.

Finally, the GL statement says that the comply or explain best practice principles developed at the instigation of the European Securities and Markets Authority, with which most proxy advisors already comply, have superseded most of the compliance requirements of the act.

Also testifying to the committee was John Hayes, chair of the CEO-level Business Roundtable’s Committee on Corporate Governance. He said his organisation strongly supports the legislation “because it would improve the efficiency of U.S. capital markets and improve the quality of information available to shareholders and investors”.

He said his members are concerned GL and its rival ISS “fail to avoid conflicts of interest, frequently promulgate factually inaccurate information and are neither transparent in their business dealings nor publicly accountable for the recommendations they provide”.

He said ISS offers proxy voting recommendations while offering paid consulting services to the companies whose proxies it evaluates, saying “by definition, there are inherent conflicts in this process”. He also noted that GL is owned by the Ontario Teachers’ Pension Plan “which invests in companies on whose proxies Glass Lewis makes recommendations”. Hayes told legislators: “The owners, executives and staff of proxy advisory firms are free to invest in, or even serve on the boards of, public companies whose proxies they assess.”

Rabin, in her testimony, said GL operates independently of OTPP and co-owner the Alberta Investment Management Corp and that neither is involved in the day-to-day management of Glass Lewis. And the firm excludes OTPP and AIMCo from any involvement in the formulation and implementation of its proxy voting policies and guidelines.