

The Florida State Board of Administration, the $170bn (€129.6bn) US pension giant, has called for proxy advisory firms to be registered with the Securities and Exchange Commission (SEC) as investment advisors.
Michael McCauley, the SBA’s Senior Officer, Investment Programs and Governance, in evidence before a House of Representatives committee, said mandatory disclosures under the act would “expose conflicts of interest and how they are managed, and establish liability for firms that withhold information about such conflicts”.
The disclosures should also include “material information” about the methods behind the firms’ recommendations, which would make them “more valuable to institutional investor clients and more transparent to other market participants.”
“We believe proxy advisory firms should provide clients with substantive rationales for vote recommendations, minimize conflicts of interest and have appropriate oversight,” McCauley said.
McCauley stressed that the SBA makes all its voting decisions independently, albeit with input from advisory firms ISS, Glass Lewis and the UK’s Manifest. Of the three, only ISS is currently registered at the SEC, according to the regulator’s website.
The firms’ recommendations “inform but do not determine” how the SBA votes.
He was speaking at the House of Representatives Committee on Financial Services’ subcommittee on capital markets, which is investigating the “market power” of proxy firms, the researchers who advise institutional investors on voting at company annual meetings.
The hearing, chaired by New Jersey Republican Scott Garrett, also heard from former Glass Lewis research head Lynn Turner. Turner, currently with consulting firm LitiNomics, is also on the board at the Public Employees Retirement Association of Colorado (PERA), where he chairs the shareholder responsibility committee.He made the point that most large US public pension funds and the 15 largest money managers such as Fidelity, Vanguard and BlackRock have custom voting guidelines: “To say that Glass Lewis dictates to their clients how they must vote couldn’t be further from the truth.”
Indeed, buying research “should not be criticized in the context of trying to be fully informed about an issue”.
Turner also hit out at the “absurd” notion that ISS and Glass Lewis should submit draft recommendations to company management – as it would create an “inherent conflict”.
He called on the SEC to “establish a regulatory scheme that makes sense and can achieve the desired result” for the firms. He also suggested the SEC and the Department of Labor should clarify who has the principal fiduciary obligation in proxy voting.
The hearing also featured evidence from business lobby groups such as the US Chamber of Commerce, the National Investor Relations Institute and the Shareholder Communications Coalition.
The Chamber was represented by former SEC Chairman Harvey Pitt, who said: “The lack of transparency and accountability of proxy advisory firms is a troubling trend that undermines confidence in, and stalls progress of, strong corporate governance.”
Chairman Garrett released a statement after the hearing, saying: “By exploiting the proxy system to push special interest agendas, proxy advisory firms and activist shareholders have increased the costs of doing business for many public companies and dis-incentivized private companies from going public, all without a corresponding benefit to investor returns.”