We Will Always Have ... Proxy Advisory Firms?
One of the most memorable lines in movies was in Casablanca when on the rain swept tarmac Rick (Humphrey Bogart) utters to Ilsa (Ingrid Bergman), “We will always have Paris.”
Ah, Paris, the best France has to offer: good wine, fine food, the Eifel Tower…oversight of proxy advisory firms?
Yes, oversight of proxy advisory firms.
Large and institutional investors, in order to fulfill their legal duty and cast the votes of their shares, often hire proxy advisory firms to perform due diligence and sometimes cast their votes. The proxy advisory industry has grown up over the course of time and with this growth, two firms—Institutional Shareholder Services (ISS) and Glass Lewis have become a defacto standard setter on corporate governance issues.
Unlike financial reporting standard setters, such as FASB, the work of proxy advisory firms is done without oversight by the Securities and Exchange Commission. This has led to various stakeholders complaining about the disjointed processes used to determine voting policies and recommendations with some or no transparency.
Faced with similar issues, France has recently proposed oversight plans to create transparency and accountability for proxy advisory firms. France’s plans show a stark contrast to the policies stateside. Below are a comparison of the four major proxy advisory firm recommendations from French securities regulator AMF and current ISS and Glass Lewis (GL) policies:
· AMF: Establishing and issuing the voting policy – Proxy advisors should publish their proxy voting policies, including definitions of any specific notions or concepts, on their website to bring transparency to the reasons behind the proxy advisor’s positive or negative recommendation. The voting policy should be established through a transparent process that takes into consideration the opinions of the investors that will use the reports as well as other parties involved.
o ISS: publishes summary policy but does not always clarify definitions necessary to fully understand how the policy is applied. Solicits public input but largely perfunctory.
o GL: publishes summary policy but does not always clarify definitions necessary to fully understand how the policy is applied. No outside input on policy development.
· AMF: Establishing and submitting voting recommendations to investors – The proxy advisor should ensure adequate skill and experience of its personnel in charge of reviewing analyses and should define policies to be followed by personnel as a basis for establishing their analyses. Policies should be available on the advisor’s website.
o Both ISS and GL claim their staffs have ‘adequate skill and experience’, neither addresses this point directly.
· AMF: Communicating with listed companies – Advisor should submit a draft analysis to the subject company for review or, failing that, clearly state in the report that it did not submit for review and explain the reasons for no review. Companies should have at least 24 hours for review, and the subject company should have the opportunity to include concise comments in the final report. Companies should receive a copy of the final report as soon as it is made available to investors.
o ISS: Submits draft analyses to S&P 500 companies only. Makes final report available to subject companies. No opportunity to include a statement in the report.
o GL: No draft review. Companies must obtain final reports from their advisors who are GL clients or purchase them from Glass Lewis. No opportunity to include a statement in the report.
· AMF: Preventing conflicts of interest – Proxy advisors should develop and publicly post a conflict of interest policy and expressly state any ties to the company whose draft resolutions it is analyzing, any shareholder who has submitted items for the agenda, and any direct or indirect control persons of either. If any conflicts exist, the advisor should state in the report how such conflicts have been managed.
o ISS: only provides a generic statement in reports that ISS may have conflicts, and clients can request more information.
o GL: Discloses when its owner, Ontario Teachers’ Pension Plan, has a large position in a company. Claims to have policies in place for other types of conflicts.
While the French system may not be entirely transferable to the U.S., the Chamber believes that for markets to operate efficiently and investors to have useful information to make decisions, transparent and accountable procedures are a necessity.
The call for oversight and transparency isn’t an effort to round up the usual suspects. It’s intended to kick off a debate that will allow all stakeholders to have a voice in good corporate governance that benefits investors and the economy.