June 7, 2012, 2:50 PM ET
SEC Plans New
Guidance on Proxy Advisers
The Securities and Exchange
Commission is planning to issue guidance concerning how investors should use
proxy advisory services in casting their annual votes following a slew of
complaints from companies that such services are presenting inaccurate or
misleading information when making recommendations.
The addition of advisory say-on-pay votes to proxies over the past two years
has increased both investor and corporate focus on how proxy advisers like
Institutional Shareholder Services and Glass Lewis & Co influence investor
In response, after this proxy season, the SEC staff will look at issuing
fresh “interpretive guidance” about the fiduciary duties investors have in
assessing the information they get from proxy advisers and how those
services handle conflicts of interest, Meredith Cross, director of the SEC’s
Division of Corporation Finance, said this week.
“I will clearly acknowledge that there is frustration in the corporate
community around proxy advisors,” Cross said in comments to the National
Investor Relations Institute in Seattle this week. “We think there are some
things people need to be reminded about now.”
Cross said the SEC is unlikely to address complaints that there is a
perceived lack of competition among proxy advisers, or to do anything that
would limit investors’ ability to use proxy advisory firms. But the agency
aims to provide more guidance based on already existing rules about investor
fiduciary duty and conflicts of interest, she said.
“In order [for investors] to rely on the advice of proxy advisory firms, it
has to be reasonably reliable advice,” Cross said.
She told the conference she wants companies to provide more information
about real inaccuracies in proxy advisory reports that go beyond basic
disagreements. She also said she would like to hear more from companies that
say the proxy advisory firms are comparing them to illogical peer groups and
would look at how the proxy advisory firms disclose conflicts of interest.
Corporate advisors at the conference said companies are most concerned that
investors are getting inaccurate information from proxy advisory firms.
“We feel there’s some unfairness in [the proxy firm recommendations],
particularly in the area of making sure they get the facts straight in their
analysis,” Jeff Morgan, CEO of NIRI said.
Some corporate groups said they would like the SEC to require proxy advisers
to provide drafts of reports to companies ahead of their final distribution
to investors so the companies can verify their accuracy.
“We would very much like to see a practice of providing drafts to companies
in advance,” Kenneth Bertsch, chairman and CEO of the Society of Corporate
Secretaries and Governance Professionals, said at the conference. Right now,
ISS provides drafts of its reports to about 500 companies, but other proxy
advisers do not have that practice, Bertsch said.
The proxy advisory firms have been more open in the past few years about
communicating their recommendation methodologies. ISS publishes its policies
each year ahead of proxy season. Glass Lewis has an “issuer engagement
portal” where it tries to field corporate complaints and provide more
information about the methodology the firm uses to come up with its
recommendations, Robert McCormick, chief policy officer at Glass Lewis, said
at the conference.
He said the proxy firms were open to new regulation or guidance from the
SEC, but that they have already done a lot of work to disclose conflicts of
interests and quality control issues.
“We’ve done basically everything that could be asked of us,” McCormick said,
saying the firm doesn’t do other work for public companies, like the
corporate governance advisory work its rival ISS does. He also said the firm
discloses conflicts prominently if its parent, Ontario Teachers’ Pension
Plan, has a stake in a company where Glass Lewis is making a recommendation.
ISS is owned by MSCI Inc.
Glass Lewis spends a lot of time talking to companies both during and
outside of the proxy season, but it’s not always productive, McCormick said.
“It can be a little uncomfortable if some of the concerns we raise are about
the CEO’s compensation and he or she is sitting across the table from you,”
However, more work could be done to open lines of communications with
corporate directors, he said.
He also said that requiring firms to provide drafts of recommendations to
companies in advance wouldn’t be “the right thing at this point,” since
doing so would add an additional burden to an already short timeframe for
the firms to come up with thousands of recommendations.
“It seems a bit cleaner in theory than in practice,” McCormick said. He
noted the advisory firm’s main role is to provide information to investors
and not to negotiate on compensation practices with companies on behalf of
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