A guide to engagement policies and other key details for different proxy advisers
From the moment they arrived on the scene en masse after the Enron crisis, proxy advisers have been stirring up controversy. Doug Wilburne, vice president of IR at Textron in Providence, Rhode Island, believes the rise of proxy advisers has led to unintended consequences. In the interest of demonstrating diligence vis-à-vis governance issues for the companies they own, money managers have hired proxy advisers with strong views. What’s happened, Wilburne says, is that ‘investment firms are voting against a company, its management and its board when those investment firms are delighted with that company, its management and its board.’
In addition, he decries the time that IROs and management devote to issues proxy advisers care about – but about which investors rarely inquire. ‘In the overwhelming majority of cases, governance issues have become the tail wagging the dog,’ says Wilburne. ‘We’re engaged in the process not to seek good governance practices, but rather to achieve approval in the proxy process – and those are very different things.’
Naturally, firms such as ISS, Glass Lewis, Manifest and Proxinvest hold different opinions. They believe proxy firms are necessary to provide detailed research and shake up the cozy dynamic that all too often exists between management and investors.
Sarah Wilson, CEO and founder of London-based Manifest, finds the ongoing battle between issuers and proxy advisers troubling. ‘We continue to be immensely disappointed with the ‘blamestorming’ – which often comes out of the IR community – toward proxy advisers,’ she says. Not only does she believe this is an example of shooting the messenger, but she also argues that the war on proxy advisers ‘can start to look like a suppression of free speech.’
One charge Wilburne and others lob at proxy advisers is that their recommendations tend to be one size fits all. Another is that proxy advisers simply cover too many companies to be accurate and accountable. ISS, the largest of the advisory firms, boasts of covering around 39,000 public companies, a statistic likely to make IROs uneasy: how can any firm assess that many companies fairly?
David Carey, senior vice president of capital markets for ARC Resources in Calgary, says his experiences with ISS have been ‘mixed’. He praises the firm for proactively asking him about a director whose attendance suddenly dipped; Carey explained that the director was undergoing chemotherapy, and ISS gave the director a pass because of extenuating circumstances.
Less pleasing was the comparison group ISS has chosen for ARC. A few years ago, ARC was compared with a true peer but also with a uranium mining company and an international player with assets exclusively in Asia. ‘I do not believe corporate governance is one size fits all but that’s how [proxy advisers] approach it,’ Carey notes. ‘They have hard and fast rules, and they believe those hard and fast rules apply to everyone. The first question we look at in governance is: does it make sense for our firm in our circumstances?’
Another lightning-rod issue is how proxy advisers run their own shops. Katherine Rabin, CEO at Glass Lewis, points out that one major distinction between her firm and ISS is that ‘we don’t provide consulting services to the companies we write on. There will always be conflicts in some form. But to have a business model where the conflicts are inherent doesn’t make sense to us.’
Gary Retelny, CEO of ISS, points out that consulting is ‘a small part’ of his firm’s overall business, and its governance consulting service is run separately from the institutional effort. ‘There is an information barrier between the corporate side and the institutional side. The researchers are prevented from knowing whether a company is a client or not,’ he explains.
Although IROs question aspects of the proxy advisory model, the critiques tend to hinge on scale. In Sweden, explains Oscar Bergman, partner and manager for advisory services at Nordic Investor Services in Stockholm, ‘owners are closer to companies.’ To illustrate, he explains that Swedish nominating committees generally comprise three or four owners plus the chair of the board. ‘It’s a very collaborative atmosphere,’ he says. So Nordic Investor Services doesn’t recommend policy but instead helps institutions understand how their own principles will translate into a particular vote.
Signs of improvement
A decade ago, proxy advisers were feared for wielding enormous power over public firms; this worry is now less acute. Institutional investors frequently hire more than one proxy adviser as they’re seeking a varied perspective. What’s more, many proxy advisers offer custom recommendations, or recommendations tailored to the particular guidelines or principles of a given investor.
Some proxy advisers even hope their clients will hire their competitors. ‘Ideally, shareholders would get multiple inputs and compare them,’ says Kevin McManus, vice president and director of proxy services at Egan-Jones Proxy Services. ‘I don’t see how you can do something as important as proxy voting without multiple opinions.’
Retelny agrees, noting that each year ISS sends out a detailed survey to institutional investors so the firm can craft its policies to reflect the sentiment of the broader investment community. Other IROs have also noticed positive changes gaining ground: Carey praises ISS, the proxy adviser with which he’s had most direct contact, for fact-checking its reports more carefully, communicating more frequently with firms, and putting in place mechanisms for issuers to engage.
Wilburne also perceives small improvements at proxy firms but he remains opposed to their practices on philosophical grounds. ‘Yes, proxy firms have become more responsive,’ he concludes. ‘But I still think the model is flawed.’
Read our guide to proxy advisers here.
Regulatory moves afootOn June 30 the SEC issued long-awaited guidance on proxy advisory firms. The guidance warns that those asset managers using proxy advisers for making voting decisions need to periodically review the advisory firms’ policies to make sure the asset managers are acting in clients’ best interests. The SEC guidance also lays out steps for proxy advisers to follow – including disclosing potential conflicts of interest.
‘It’s a step in the right direction,’ says Doug Wilburne, vice president of IR at Textron. ‘Certainly, I’m encouraged the SEC has acknowledged this issue. But I think we need a solution where investment firms would be able to demonstrate diligence through a mechanism different from hiring a third party.’
The European Securities and Markets Authority, the European Commission and regulators in Canada are focusing on similar issues. On April 24 the Canadian Securities Administrators published for comment National Policy 25-201, which proposes guidelines for proxy firms, including how they identify and manage actual or potential conflicts of interest. The proposal suggests proxy firms should expect to correct any factual errors or inaccuracies in a timely manner – and to inform their clients of all corrections.
Sarah Wilson, CEO at Manifest, welcomes these regulatory developments. ‘Where there’s new clarity is the focus on asset management behavior. They can’t just tick the box and walk away,’ she says. ‘Voting is a fiduciary act. You cannot outsource a fiduciary act – you have to take responsibility for it. [These regulatory actions are] very, very welcome.’