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Wall Street Journal, February 6, 2011 article


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MARKETS   |   FEBRUARY 6, 2011, 3:39 P.M. ET

Companies Fight Back on Executive Pay


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, including 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 Commission.

"We have some pretty grave concerns," says Charles Tharp, executive vice president for policy at the Washington group.

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' Pension Fund.

"It's investors' responsibility to weigh these pay practices, and proxy advisers work for them," says Gary Hewitt, a spokesman for ISS, a unit of financial-research company MSCI Inc.

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 shareholders.

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 practices.

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 directors.

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 one company, 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 law.

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 say-on-pay reports.

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.

Write to Aaron Lucchetti at


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