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The arguments below are presented at the author's request to supplement her initial response to the following articles by John Carney of CNBC:


The Corporate Library Blog, October 27, 2010 posting



October 27, 2010

CNBC's John Carney Cannot Believe Anyone Would Want Advice on Proxies

On the CNBC website, John Carney has written two separate posts about proxy advisory services.  It's as though he didn't just publish the Chamber of Commerce talking points without editing them; it seems as though he never even read them before he slapped on his by-line. 

When did it become permissible for a journalist to publish an attack on an industry sector without making any attempt to get a reaction from representatives of the industry itself or its customers or even an objective outsider?  And when did journalists stop checking for spin?  The core principle of journalism is, "If your mother says she loves you, check it out."  Yet Mr. Carney accepts every self-serving allegation from a segment of the corporate community without ever asking whether they are, well, self-serving. 

In the first post, "Why You Should Be Worried About Proxy Advisory Firms," he says

The reliance by institutions on advisors is a bit surprising. Sophisticated mutual fund managers and pension fund managers might be expected to be in the best positions possible to make their own determinations about the wisdom of voting for board candidates or executive pay recommendations.

One "sophisticated" judgment professionals make is that the opinion of outside experts can be useful.  This is why they review sector and company-specific analysis from a variety of sources from business and trade press to specialized reports from those who are well-informed on matters like securities analysis, accounting, and, yes, corporate governance.  Mr. Carney acknowledges that proxy proposals are increasingly complex and will become more so under the new Dodd-Frank law.  And yet, he is so convinced that no sophisticated investor is capable of making an informed judgment on whether additional analysis is worthwhile and which analysis is superior that he thinks the SEC should step in to tell them what they should and should not buy and to tell proxy advisers what they should and should not say.  Mr. Carney, who apparently never so much as read a proxy advisory service's report, somehow intuits that despite the acknowledged complexity and importance of these issues, the only reason sophisticated investors purchase the service is a regulatory burden.  And so, preposterously, he wants to address that problem by imposing a whole new regulatory program on the system to make sure that a robustly competitive industry that meets the most stringent market test (and is already regulated as many of the companies are registered investment advisors with the requisite compliance and disclosure obligations) should be subject to government control.

It is sometimes said that a liberal is someone who believes anything goes between two consenting adults except for an act of capitalism. Mr. Carney and the small segment of anti-shareholder corporate interests who have fed him this baloney believe that anything goes in a free market except for interference by capitalists -- the shareholders who provide the capital and might wish to challenge what managers are doing with it.  Forget about trying to respond on the merits; just shut down any dissent.

It's not even much of a dissent.  The proxy advisory services support management proposals in the overwhelming majority of cases including more than 90 percent of management-nominated board candidates.  And yet, their temerity in advising clients that in some cases managements' proposals may not be in the shareholders' interests is so terrifying that we need to bring in the government to stifle an independent source of analysis.  Mr. Carney, who never questions the motives of corporate managers in trying to extinguish a modest source of occasional criticism that can at worst result in an embarrassing but almost never binding vote, assumes the worst motives on the part of the proxy advisory services.  That free market you have so much faith in, Mr. Carney?  That's the reason the clients buy these reports. 

Mr. Carney's second post is more existential: If Proxy Advisors Don't Really Matter, Then Why Do They Exist?  He cites one paper showing that proxy advisers determine or even significantly influence the outcome of matters put to a shareholder vote in a very small fraction of instances.  Of course, most of the time the matters put to a vote are routine, the re-election of unopposed directors, the approval of the auditors.  It is the difficult and complicated items like mergers, proxy contests, and some executive pay plans where proxy advisory services can be of greatest value.  Once again, this is a decision that should be left to the market to determine.  And once again, Mr. Carney should speak with the providers and users of these analyses before jumping to another wrong conclusion.  indeed, he could benefit from a little outside, independent analysis himself.

So, to recap: proxy advisors are too powerful, so we should worry and the government should step in.  No, they're actually not powerful at all, so we should worry that they are creatures of government regulation and so the government should regulate more.  No, it's okay for them to be influential when they're recommending votes consistent with management recommendations but not when they oppose management entrenchment or enrichment or externalization of costs.  Isn't it fascinating that whether they are influential or not, the solution is always the same. 

Oh, and large institutional investors are sophisticated enough to make their own judgment about proxy issues even though they are getting more complex, to say nothing of being sophisticated enough to make decisions about buying and selling tens of millions of dollars of securities but not sophisticated enough to make a decision about whether they would like to review the analyses of outside advisors and which advisors they would like to hear from.  And whether they are sophisticated or not, the solution is, amazingly, the same.

And, as Alanis Morrissette might say, isn't it ironic that the very people who squeal that the world will end at the prospect of any regulation that might interfere with the purity of the free market (unless it can be used to impose barriers to entry or limit liability) don't trust the market of commerce or of ideas to handle the problem of sophisticated money managers choosing the sources of information and analysis they find helpful. 


Nell Minow, Editor





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