As 2014 winds down and 2015 approaches, proxy advisory firms—and the investment managers who hire them—are finding themselves under increased scrutiny. Staff guidance issued by the Securities and Exchange Commission at the end of June and a working paper published in August by SEC Commissioner Daniel M. Gallagher both indicate that oversight of proxy advisory services will be a significant focus for the SEC during next year’s proxy season. Under the rubric of corporate governance, annual proxy solicitations have become referenda on an ever-widening assortment of corporate, social, and political issues, and, as a result, the influence and power of proxy advisors—and their relative lack of accountability—have become increasingly problematic. The SEC’s recent actions and statements suggest that the tide may be turning. Proxy advisory firms appear to be entering a new era of increasing accountability and potentially decreasing influence, possibly with further, more significant, SEC action to come.
Posts Tagged ‘Glass Lewis’
Recently issued SEC staff guidance addresses concerns that have been raised about proxy advisory firms by emphasizing that the investment adviser that retains and pays a proxy advisory firm is uniquely positioned to monitor the proxy advisory firm and is required to actively oversee the firm if it wants to benefit from the firm’s services to discharge its fiduciary duty. As a result of the greater oversight exercised by all of their investment adviser clients, the proxy advisory firms will presumably respond by enhancing their policies, processes and procedures, as well as the transparency of these policies, processes and procedures. In turn, the corporate community may indirectly benefit to some degree.
The 2014 proxy season, like previous seasons, has provided shareholders of public US companies with an opportunity to vote on a number of corporate governance proposals and director elections. Throughout this proxy season, proxy advisory firms have provided shareholder vote recommendations “for” or “against” those proposals and “for” or to “withhold” votes for directors. Certain proxy advisory firms, such as Institutional Shareholders Services Inc. (“ISS”) and Glass, Lewis & Co., LLC (“Glass Lewis”), have also published updated corporate governance ratings reports on public companies, including evaluations of a company’s corporate governance risk profile.
For many public companies, the new year marks the beginning of compensation season. As in years past, we have set forth below some of our thoughts on what to expect from the current compensation environment. Unlike previous years, the upcoming proxy season is not marked by new legislative or regulatory developments. And, as described in our memorandum of November 26, 2013, discussed previously on this Forum, here, the Institutional Shareholder Services (ISS) voting policies regarding compensation matters have remained largely unchanged. The most significant development this proxy season is the continuation of a single trend: increasing levels of shareholder engagement.
The boards of public companies are increasingly being assessed by a hoard of short-term focused “activist” investors and an increasingly third-party-advised stockholder base that relies heavily on proxy advisory firms to make important voting decisions for them. It is estimated that over 75 percent of all shares of public companies are held in a managed fund or institutional account.
Institutional Shareholder Services (ISS) and Glass Lewis control 97 percent of the market for proxy advice; and the two dominant proxy advisors reportedly affect 38 percent of votes cast at U.S. public company shareholder meetings. Their dominance in the proxy marketplace not only affects numerous votes but, more importantly, how companies manage and deal with their shareholders. Both firms wield enormous influence without having “skin in the game.” Perhaps even more concerning, given the influence they have on public companies, the proxy advisors (i) are understaffed and therefore establish generic voting recommendations and (ii) profit from engaging in activities involving material conflicts of interest, including marketing their advisory services to many of the same companies for which they provide proxy recommendations. In addition, Glass Lewis is owned by an activist fund with an agenda.
In our paper, Shareholder Votes and Proxy Advisors: Evidence from Say on Pay, which was recently accepted for publication at the Journal of Accounting Research, my co-authors (Yonca Ertimur of the University of Colorado at Boulder and David Oesch of the University of St. Gallen) and I examine the economic role of proxy advisors. As non-binding shareholder votes have come to increasingly affect firms’ governance practices, there has been growing interest in understanding the value of proxy advisors’ recommendations, a key driver of shareholder votes.
To shed light on this question, we follow the entire process surrounding proxy advisor activities and examine the analyses underlying proxy advisor recommendations, how firms, stock prices and voting shareholders respond to the release of these recommendations, firms’ reactions to the votes triggered by them and, ultimately, whether they have an impact on firm value. The setting we use for our examination is based on the analyses provided by the two most influential proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis & Co. (GL) to arrive at voting recommendations for the non-binding shareholder vote on executive pay mandated by the Dodd-Frank Act in 2010, commonly known as say-on-pay (SOP).
Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co., Inc. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2013 proxy season. The ISS U.S. Corporate Governance Policy 2013 Updates (the “ISS Policy Updates”), which are available at http://issgovernance.com/policy/2013/policy_information, apply to shareholder meetings held on or after February 1, 2013. ISS also has released updated Frequently Asked Questions (the “ISS FAQs”), available at the link above, relating to its 2013 policies. The Glass Lewis Proxy Paper Guidelines for the 2013 Proxy Season (the “Glass Lewis Guidelines”) will be effective for annual meetings held on or after January 1, 2013. A summary of the updates to the Glass Lewis Guidelines is available here. This alert reviews the most significant ISS and Glass Lewis updates and suggested steps for companies to consider in light of these updated proxy voting policies.
Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. have each made several important revisions to their proxy voting policies for the 2013 proxy season. ISS released new and updated FAQs relating to application of ISS proxy voting policies to compensation (including peer groups and realizable pay), board responsiveness to shareholder proposals, hedging and pledging of company stock, and other matters. This post provides guidance to US companies on how to address these policy changes.
We have been observing the corporate governance movement in the United States for the past several years. Share voting decision makers at most institutional investors inhabit an alternate universe from investment decision makers.  Two incompatible economic and philosophical belief systems drive these alternate universes:
- Investing professionals, overwhelmingly, are rationally apathetic about exercising the voting franchise embedded in stock ownership.  Absent a readily observable and positive correlation between exercise of the corporate franchise and creation of shareholder value (as is the case in most M&A votes and proxy contests), investing professionals view the task of making voting decisions on each ballot item for each of their portfolio companies as not merely time consuming and distracting but, worse, economically wasteful. 
- On the other hand, notwithstanding the lack of a demonstrable connection between what is labeled good corporate governance and a positive increase in share valuation, corporate governance advocates continue to maintain that good corporate governance does, in the aggregate, enhance share values.  Accordingly, in their view, voting on all ballot issues at each and every portfolio company in order to achieve better corporate governance is a value creator. Starting from this core ideology, corporate governance advocates have successfully persuaded many national politicians, most regulators of the securities and investment industries and virtually all of the financial press, that its so-called corporate governance best practices are an essential requirement for shareholder value creation and that professional investment managers, as a matter of their fiduciary duty to their customers, should be required to vote all portfolio shares on all ballot matters.
My colleagues, Jim Barrall and Alice Chung, and I have co-authored an article titled Say on Pay 2011: Proxy Advisors on Course for Hegemony. The article analyzes the results of the first year of mandatory Say on Pay advisory votes and discusses the implications of these results for Say on Pay advisory voting during the 2012 proxy season. We begin by noting that based on the Say on Pay votes of a universe composed of the Russell 3000 companies that were subject to mandatory Say on Pay voting, recommendations by the two principal proxy advisory firms (ISS and Glass Lewis) appeared to have a significant effect, with a recommendation by ISS accounting, on average, for an approximately 25% vote swing, and one by Glass Lewis accounting, on average, for about a 5% vote swing. The data also indicates that companies receiving a negative SOP recommendation from ISS averaged less that a 70% favorable vote.