The Dodd-Frank financial-overhaul law
gave shareholders a vote on executive pay, starting this year. Some
companies are fighting back by denouncing proxy-advisory firms that
tell shareholders how to vote.
A lobbying group
representing companies from
International Business Machines Corp. to Lowe's Cos. to McDonald's
Corp. asked 100 large institutional investors in a letter late last
month to grill Institutional Shareholder Services Inc. and Glass Lewis
& Co. about potential conflicts of interest in their work.
The large investors,
BlackRock Inc. and Vanguard Group Inc., were prodded to scrutinize
whether recommendations from the two proxy-advisory giants lead to
better company performance. The Center on Executive Compensation also
urged the banks, asset-management firms and pension funds to push for
greater oversight of proxy advisors by the Securities and Exchange
"We have some pretty grave concerns,"
says Charles Tharp, executive vice president for policy at the
ISS and Glass Lewis say they don't
deserve to be attacked. "This is a case of shooting the messenger
rather than addressing the underlying concern that shareholders have
about pay," says Robert McCormick, chief policy officer at Glass
Lewis. The San Francisco firm is owned by the Ontario Teachers'
responsibility to weigh these pay practices, and proxy advisers work
for them," says Gary Hewitt, a spokesman for ISS, a unit of
There has always been friction between
U.S. companies and proxy advisers, which are relied on by many money
managers for a second opinion on the election of directors,
shareholder proposals and other items voted on at annual meetings.
According to recent studies cited by the Center for Executive
Compensation, a negative recommendation sways 6% to 20% of
Proxy advisers are paid
fees by the investors who subscribe to their services. Consolidation
has left the industry dominated by ISS and Glass Lewis, much as the
bond-ratings business is led by the Standard & Poor's unit of
McGraw-Hill Cos., Moody's Corp. and Fimalac SA's Fitch Ratings.
The proxy firms got even more influence
as part of last summer's Dodd-Frank law. Any U.S. company with more
than $75 million of shares trading publicly must let shareholders cast
a nonbinding vote on whether they approve of the company's pay
The change took effect in January and
will affect companies that hold shareholder meetings this spring. Such
say-on-pay votes give shareholders a chance to voice disapproval
without taking the much more dramatic step of voting down a company's
Since say-on-pay votes
became mandatory, ISS has recommended that shareholders vote "no" on
13 of the 129, or 10%, of the proposals reviewed by the advisory firm;
Glass Lewis had made "no" recommendations on 18 of 171, or 11%. Only
Jacobs Engineering Group Inc. of Pasadena, Calif., has suffered a
defeat in a say-on-pay vote so far this year, according to the Center
on Executive Compensation.
The SEC is weighing new rules for the
U.S. proxy-voting system, and the agency's staff might make
recommendations later this year, a spokesman said Friday. Issuing
rules could take another year or two because of the large number of
regulations that the SEC is required to write under the Dodd-Frank
In comment letters, some companies have
complained that the SEC needs to regulate proxy advisers because of
their clout, especially over small institutional investors that often
do little of their own corporate-governance research. Some companies
also said they shouldn't be compared to smaller companies by proxy
advisers, since that wrongly makes their pay levels look excessive.
The SEC should "take strong
measures to rein in these firms through stricter regulations," wrote
Christine P. Richards, general counsel at delivery giant
FedEx Corp., in a letter last fall.
Exxon Mobil Corp. told the SEC that proxy advisers aren't
transparent enough and make factual errors. Exxon declined to comment
beyond the letter.
The proxy-advisory firms acknowledge
occasional errors or disagreements about data, but say they don't
usually affect the recommendation. The firms also insist they are
quick to correct any mistakes, sometimes after draft versions of
reports are shown to companies. They also say investors can make up
their own minds and aren't bound by recommendations issued in
The California Public Employees'
Retirement System and Capital Group Cos.' Capital Research and
Management Co. unit urged the SEC to require more disclosure of
potential conflicts of interest at proxy advisers.
ISS does consulting work for the same
companies that are the subject of its voting recommendations. Glass
Lewis doesn't have a consulting business.
Mr. Hewitt, the ISS spokesman, says
institutional investors can ask if a company does consulting business
with the proxy adviser.
In a letter to the SEC, BlackRock said
issuing new regulations would be less effective than the existing
oversight of proxy advisers by institutional investors that are
customers of the firms. BlackRock declined to comment beyond the
asset-management firm's letter.
In 2010, some large financial
institutions had to put say-on-pay votes on their proxy statements as
a result of rules that came with infusions of U.S. government aid.
Glass Lewis recommended
votes in favor of the pay at
Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co.
and Bank of America Corp., while recommending a "no" vote" at
Citigroup Inc. The pay-advisory firm said it used 36 different
measurements to decide that Citigroup's pay wasn't justified given the
company's performance. All the say-on-pay votes passed.
Aaron Lucchetti at