THE WALL STREET
MARKETS | Updated
May 22, 2013, 6:42 p.m. ET
Advisers, Influence Wanes
The landscape for proxy
advisers is getting rockier.
Big firms that sell
recommendations on how to vote in corporate elections are losing some
of their relevance, as companies more aggressively court key investors
ahead of big votes and those investors handle more of the voting
J.P. Morgan CEO James
Dimon at a Capitol Hill hearing last June.
J.P. Morgan Chase
Co. The two biggest proxy advisers—Institutional Shareholder Services
Inc. and Glass, Lewis & Co.—recommended that shareholders support a
nonbinding proposal to split the roles of chairman and chief executive
But the nation's largest
bank by assets mounted an unusually intense shareholder lobbying
effort to defeat it. And at Tuesday's annual meeting, the proposal won
just 32.2% of the vote.
"Our power is probably
shrinking a little bit,'' said David Eaton, vice president of proxy
research for Glass Lewis.
ISS and Glass Lewis
dominate an industry that evolved to bring a critical lens to the
management proposals that mutual funds and asset managers
traditionally had rubber-stamped in corporate elections.
Money managers may invest
in dozens of companies, and many have relied on ISS and Glass Lewis
for a second opinion about how to vote on ballot issues like
shareholder proposals, the election of directors and merger deals.
Those investment firms,
however, are doing more of the work themselves.
BlackRock Inc., the world's largest money manager by assets,
relied more on proxy advisory firms until it bought
Barclays Global Investors in 2009. Barclays had its own team of
corporate governance specialists, which now handles research on
companies across the world for the entire company, a spokesman said.
BlackRock has become more
vocal on corporate governance issues. Last year, it mailed a letter to
600 of its biggest holdings urging the companies to meet with
BlackRock before meeting with proxy advisers.
Vanguard Group Inc., the
biggest mutual-fund firm by assets, employs about a dozen analysts to
research companies year-round, said Glenn Booraem, a principal and
fund controller. ISS and Glass Lewis reports represent only one tool
for making voting decisions, he said. "Their recommendations don't
determine where we end up," Mr. Booraem said.
In recent years, Vanguard
has communicated more often with companies it invests in, Mr. Booraem
said. Chief Executive F. William McNabb III has written companies
explaining Vanguard's position on certain issues, he said.
ISS, founded in 1985, has
1,700 clients that manage about $25 trillion in assets world-wide. Its
corporate-election recommendations "matter more now than they have
ever mattered,'' said President Gary Retelny. "Ninety-four percent of
our clients renew every year."
ISS was owned by
RiskMetrics Inc., a J.P. Morgan spinoff, before it was acquired by
MSCI Inc. in 2010. The firm has long been criticized for selling
corporate governance consulting services to some of the same companies
that are the subject of its voting recommendations. ISS said it has
adopted policies to guard against possible conflicts of interest.
Glass Lewis is owned by the
Ontario Teachers' Pension Plan Board, a Canadian pension fund. Founded
in 2003, the firm counts as clients more than 900 institutional
investors that manage more than $15 trillion world-wide. Glass Lewis
lacks a consulting arm.
Proxy advisers' advice has
carried considerable clout. According to a 2002 study published in the
journal Financial Management, a negative recommendation on management
proposals from ISS influenced between 13.6% and 20.6% of the vote.
Their influence increased
after a 2010 federal law required companies to give shareholders a
vote on how they pay executives. Companies don't have to act on those
say-on-pay votes, but poor outcomes can embarrass board
members and fuel wider shareholder discontent.
About 70% of 110 large and
midsize companies said their executive-pay practices are influenced by
proxy-advisory firms, according to a 2012 study co-led by the
Conference Board, a New York research group.
Hewlett-Packard Co. is a typical example. ISS had opposed the
technology company's pay practices this year, criticizing the board
for not taking into account an $8.8 billion write-down related to a
flawed acquisition when determining incentive awards. H-P modified its
compensation plan just days before the annual meeting. ISS responded
by dropping its negative recommendation. The
say-on-pay vote passed. An H-P spokesman declined to
But that influence is
starting to change the picture. Companies eager to head off "no" votes
are more aggressively dispatching top executives and board members to
court investors and argue against ISS's and Glass Lewis's
recommendations. The outreach is having an effect.
"We have seen less failed
say-on-pay votes this year than either of the previous two years,''
said Mr. Eaton, the Glass Lewis executive. Glass Lewis and ISS also
said they are making proportionately fewer negative recommendations on
pay votes this year.
Smaller investors still
rely heavily on proxy advisers, in part because they often lack the
resources to fund their own analysts.
David Royal, deputy general
counsel of Thrivent Financial for Lutherans, an insurance company and
mutual-fund firm with $85 billion in assets under management, said ISS
reports help guide its thinking about corporate ballots. Thrivent's
stakes in companies are often too small to justify doing all the
"We can't justify spending
an inordinate amount of time on it," he said.
Joann S. Lublin at
email@example.com and Kirsten Grind at
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