Board Games: Proxy advisory firms flexing some serious muscle
Monday's Globe and Mail
on Sunday, Nov. 21, 2010 9:00PM EST
updated on Monday, Nov. 22, 2010 2:06PM EST
The report landed
with a thud on a Tuesday evening at the beginning of September.
much-anticipated review, proxy advisory firm Institutional Shareholder
Services Inc. told its clients they should vote against Kinross Gold
Corp.’s $7.7-billion (U.S.) proposal to merge with smaller gold producer
Red Back Mining Inc.
a blow for executives at Toronto-based Kinross,
who were touting the deal as “potentially transformational” for the
company. Already, the merger was up against critics on Bay Street and in
the press; Kinross was accused of offering too much to get its hands on
Red Back’s properties in West Africa.
ISS report was the most serious threat yet. The gold miner estimated that
about one-third of its shareholders were clients of ISS, which is North
America’s dominant shareholder voting advisory firm, and it knew many of
them would automatically vote in accordance with ISS’s views.
executives quickly mobilized to counteract the ISS analysis. They issued
three press releases to neutralize ISS’s conclusions that Kinross was
overpaying for Red Back. Kinross chief executive officer Tye Burt offered
a rare public critique of the power wielded by a single advisory firm that
itself owns no shares, raising questions about the firm’s review process
and about the credentials of analysts who reviewed the takeover deal.
“It was clear to us
in the transaction with Red Back that ISS lacked particular mining and
geology expertise, which was critical in assessing the nature of the
deal,” Mr. Burt said in a recent interview. Kinross got its deal, but not
without a fight: Fully one-third of shareholders who voted were opposed.
Mr. Burt’s comments
touched a nerve in Corporate Canada, tapping into a deep vein of
discontent with the power wielded by proxy advisory firms, which are hired
by almost all major institutional shareholders to give them advice on how
to vote their holdings.
Companies and their
lawyers have complained privately for years of their frustrations with
proxy advisory firms, citing what they see as poor-quality analysis,
unclear voting decisions and perceived conflicts of interest when the
advisory firms also sell consulting services to the companies they assess.
But that quietly
bubbling discontent is now boiling over.
The U.S. Securities
and Exchange Commission issued a call for comments on ways to reform the
shareholder voting system, and received a flood of submissions from
companies and other organizations this fall – over 250 so far – with many
of them focused on proxy firms. (See
on the SEC's website here.)
Broader questions posed by the SEC about the flawed mechanics for voting
shares have attracted far less attention and passion in the public
outcry stems from the growing clout of the firms, especially market leader
ISS, a division of RiskMetrics Group, which controls a large majority of
the market share in the proxy voting area – far more than the other four
main players combined – and thus has enormous influence over shareholder
ISS and others were small players in the voting system two decades ago,
their power increased significantly with the expansion of institutional
share ownership – and because of new regulations that require many
institutions, such as mutual fund companies, to publicly disclose how they
vote their shares.
scrutiny has compelled more institutional investors to vote, and many, in
turn, have hired proxy advisers to help them ensure consistency across
holdings that can span thousands of different companies’ shares.
deeply ironic to me that the whole motion toward shareholder
responsibility has ended up in the hands basically of one firm whom people
accept advice from,” says corporate director David Beatty, who chairs the
board of Inmet Mining Corp. and also acts as an adviser to ISS competitor
Glass Lewis & Co. LLC.
large, the votes of $10-trillion of assets under management are determined
in the first instance by one company. ... It’s too much power in one
place, and a total abrogation of power by everyone else.”
however, disputes that it has as much clout over corporate votes as
companies suggest. ISS business head Stephen Harvey told the SEC the
perception that “votes are controlled” by ISS are wrong, but said the idea
has taken on a life of its own as it gets repeated.
said many big investors have their own research teams, so ISS is not their
primary decision-maker. The company cited a study by a University of
Pennsylvania law professor who estimated an ISS recommendation shifts six
to 10 per cent of shareholder votes on average in uncontested director
firm also countered criticism that it lacks expertise, saying it has to
make its work as accurate as possible because “competition is fierce” in
the proxy advisory industry.
with a computer, an ISP and an e-mail account/blog/website can make and
deliver their own vote recommendations,” Mr. Harvey told the SEC in a
Corporate giant International Business Machines Corp. says its experience
shows ISS has considerable sway over its shareholders.
analyzed shareholder voting patterns in 2009 and 2010 before the company’s
annual meeting, and found 13.5 per cent and 11.9 per cent of its total
shares voted came in on the day after ISS reported its recommendation,
compared with 0.2 and 0.27 per cent in the previous five business days
IBM voting block essentially controlled by ISS has more influence on the
voting results than IBM’s largest shareholder,” IBM vice-president and
assistant general counsel Andrew Bonzani told the SEC.
this voting block is controlled by a proxy advisory firm that has no
economic stake in the company and has not made meaningful public
disclosures about its voting power, conflicts of interest or controls.”
somewhat unusual move, Canadian companies and organizations have also
submitted comments to the SEC because the same U.S.-based proxy firms also
hold a dominant position in both countries.
Canadian Society of Corporate Secretaries told the SEC its members report
frequently finding errors in voting reports of proxy firms, but there is
no consistent process to have them corrected.
that data may be incorrect at a significant number of companies (100 per
cent in our sample) almost every year, the recommendations being made by
proxy advisers are at least based on false assumptions and at worst may be
frustrating the underlying objective of long-term shareholder growth,”
CSCS past chair Sylvia Groves told the commission.
CSCS recommended creating a formal correction and appeal process.
submission came from Kinross. Its victory in the Red Back vote did not put
an end to its concerns, and the company later urged the SEC to impose
requirements on proxy firms for greater transparency about their work.
are looking for at the end of the day is increased disclosure and some
form of regulation,” Kinross chief legal officer Geoffrey Gold said in an
opinions are divided about how much regulators can do to fix the concerns
companies have with proxy firms.
securities lawyer Carol Hansell, who recently completed a sweeping
229-page report analyzing concerns about the proxy voting system in
Canada, says she isn’t sure regulation can fix the things companies
complain about most, and has concluded the best way to deal with
complaints about advisory firms is to get major institutional shareholders
– the clients of the proxy firms – to insist on higher standards.
Hansell says an organization like the Toronto Stock Exchange or the
Canadian Coalition for Good Governance (CCGG) should create a forum for
companies to express their concerns to shareholders.
question is how can we solve this without throwing it over to the
regulators,” she said.
securities lawyer Lara Nathans said a basic level of regulation of proxy
firms – including a requirement they be registered as investment advisers
– would allow officials to impose standards for disclosure and
concern a lot of people have is that these firms have garnered more
influence without being regulated,” she said. “There’s no oversight over
them and no one really knows anything about them.”
investors who are clients of the advisory firms are not keen to press for
major reforms at proxy firms.
Denison, chief executive officer of the Canada Pension Plan Investment
Board, says the CPPIB uses two proxy advisory firms – ISS and Glass Lewis
– for analysis, but ultimately controls its own voting decisions and has
voted contrary to recommendations on a number of occasions.
our perspective, we hire them to provide input to us, not to tell us what
to do,” Mr. Denison said. “We make the decisions ourselves. They are just
Griggs, executive director of the CCGG, which represents most of Canada’s
largest investors, says the coalition often hears complaints from
companies about proxy firms, but said big investors need the service
because they have thousands of companies to vote on each spring. (Ask
Mr. Griggs your questions in a live discussion Wednesday.)
Griggs said the most useful regulatory reform would be more detailed
disclosure about conflicts of interest, such as when an advisory firm has
done paid consulting work for a company.
think there is a certain element of cynicism when there is a potential for
a conflict of interest, so I think it would be helpful for investors to
know whether or not there is a conflict.”
however, told the SEC it believes conflicts are not a concern because they
are carefully managed by the company. The company says it has strict
ethical guidelines and personal trading restrictions for staff, as well as
internal controls and “firewalls” so that people making voting
recommendations have no idea which companies have hired ISS to also do
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