A guide to proxy advisers
Egan-Jones Proxy Services
Defining characteristics: Roughly half the 6,000 companies Egan-Jones covers are based outside the US, says Kevin McManus, vice president and director of proxy services. The firm doesn’t stake out strong governance positions in a vacuum. ‘We don’t start by saying, There should be more minorities on a board – now let’s find a reason for this. Instead, we want to get the best board to maximize the returns and investments of retirement and mutual funds,’ he says.
Sample recommendation: Egan-Jones recently voted ‘for’ JPMorgan Chase’s executive compensation policies. The probability Egan-Jones will vote along with management’s recommendations, says McManus, is higher than for its competitors because ‘we are not an activist firm, and seek primarily to align our voting guidelines with a course of action that is most likely to promote long-term shareholder returns.’
How to engage: Egan-Jones is happy to correct factual errors in its research; IROs can contact customer support or McManus directly.
Defining characteristics: Glass Lewis has more than 1,000 institutional clients and covers more than 20,000 meetings at firms in 100 markets. CEO Katherine Rabin notes that while Glass Lewis provides proxy research based on ‘our own house policies’, it also supports custom policies and will generate recommendations based on a client’s unique requirements.
Sample recommendation: In its recent analysis of Exxon Mobil, Glass Lewis recommended supporting the oil giant’s executive compensation program even though it found a large gap between pay and performance, as well as a lack of performance metrics for its long-term equity awards. Glass Lewis gave the company an ‘F’ for its linking of executive pay to corporate performance, but decided this didn’t warrant a vote against the resolution given that the company’s unique compensation program has delivered ‘strong long-term operating and financial results.’
How to engage: In late 2011 Glass Lewis launched an issuer portal that features information on policies and methodologies and provides a mechanism for requesting a meeting or notifying the firm of any updates or purported factual inaccuracies in its reports. Rabin emphasizes that Glass Lewis doesn’t privately engage with companies in the solicitation period out of a belief that communications during this time should be ‘in a public forum’.
In addition, Glass Lewis doesn’t share its analysis with companies prior to publication as it doesn’t want them to negotiate for changes or to shape governance practices around its policies, because Glass Lewis believes companies should be responsive to their shareholders’ concerns. It is developing a data version of its reports that won’t include recommendations, which it plans to make available to companies to review for free. If the adviser makes a factual mistake, the firm will issue a correction notice and ‘notify every client that has downloaded the report that we have an error that we’ve addressed,’ says Rabin.
Defining characteristics: Size is one of the main differentiators for ISS, which is unquestionably the largest and mightiest of the proxy advisory firms with coverage of 39,000 public companies in 115 countries for 1,300-1,400 institutional clients. ‘We commit to clients that we will provide research on any company in their portfolio for which they have to vote in some way,’ says president and CEO Gary Retelny.
He adds that ISS does a large ‘custom policy business’ in which it works ‘with clients to develop a policy to fit their needs.’ ISS is also a registered investment adviser and works with companies on what Retelny terms ‘the plumbing’ of the proxy process, everything from recording and transmitting votes to the actual implementation of policies.
Sample recommendation: ISS recently suggested clients vote against re-electing seven of Target’s 10 directors in the wake of a headline-grabbing security breach. In the end, all 10 directors were re-elected but with materially lower votes than in the past. This, says Retelny, ‘shows shareholders don’t follow ISS blindly.’
How to engage: ISS distinguishes itself by allowing companies within the S&P 500 and ‘selected others’ to review research reports 24-48 hours before publication, says Retelny, noting that over time, ISS hopes to expand the number of companies to which it extends this courtesy. Retelny says ISS welcomes engagement with IROs, but prefers these conversations to take place outside proxy season. To talk with the firm, he advises calling the help desk, emailing the analyst who covers the company or contacting the ISS feedback review board. In the case of a factual error, ISS will issue a corrected version of the report and send a notice to all clients about the correction.
Defining characteristics: Belgium-based iVox arrived on the proxy advisory scene in 2007. It covers around 2,600 public companies globally for its clients, which are based primarily in central Europe.
Key recommendations: Unlike many of its peers, iVox has no governance guidelines of its own, but applies generally accepted guidelines, such as those of Germany’s association of institutional investors, or helps clients to develop their own guidelines, says director Alexander Juschus.
How to engage: Juschus says iVox engages with companies on a ‘case-by-case basis’.
Defining characteristics: ‘We don’t call ourselves a proxy adviser,’ says Manifest CEO Sarah Wilson. What Manifest does is provide research, analysis and vote-management services with global coverage of just under 5,000 firms. Manifest’s clients are primarily based in Europe, with some based in North America.
Sample recommendation: Manifest prides itself on issuing research reports that are ‘independent, objective and recommendations-free,’ says Wilson.
How to engage: Three years ago, Manifest stopped circulating research reports prior to publication, bringing her firm’s practices in line with the sell side. Wilson notes that sell-side analysts don’t share their research prior to publication ‘because the risk of conflicts of interest and interference are massive.’ Manifest will call companies if their public disclosures are ‘unintelligible’ but otherwise relies upon these disclosures for the firm’s recommendations.
Nordic Investor Services
Defining characteristics: Nordic Investor Services has roughly a dozen institutional clients from Sweden, Finland and Norway. Oscar Bergman, partner and manager for advisory services, explains that Nordic covers 900 companies in roughly 40 different markets.
Key recommendations: Nordic customizes its recommendations to clients’ principles. ‘It’s rarely black and white,’ says Bergman. ‘For one specific matter, we might issue three different voting recommendations because our clients have different feelings about it.’
How to engage: Because each report is customized, most of Nordic’s engagement with issuers consists of clarifying facts.
Defining characteristics: Proxinvest covers 600 public companies in Europe as well as some in Asia and North America. ‘We want to be in-depth, and that takes time,’ says president Pierre-Henri Leroy.
Sample recommendation: When EADS asked investors to buy back the shares of minority shareholder Arnaud Lagardère, Leroy voted against the proposal because ‘you can’t buy back the shares of one shareholder just to please him. A competitor didn’t understand the deal and supported it. That’s a shame.’
How to engage: Proxinvest used to allow public firms to see research reports prior to publication, but reversed this policy a few years ago. Leroy says companies frequently argued points perceived as negative, but never found fault with favorable observations.
Defining characteristics: Founded in June 2013, this Manhattan-based newcomer considers itself ‘a different flavor of adviser,’ says CEO John Shea. The firm takes a customized approach to proxy advice, concentrating on aspects of governance it deems material for performance, such as M&A, the expertise of the board and compensation plans. In its first year, it covered 1,000 companies and expects to be covering 5,000 or more in year two.
Sample recommendation: Proxy Mosaic distinguishes itself from other proxy advisers, which ‘came down hard on the board’ of Target, by not recommending the ouster of most of its directors after the data breach last December, says Shea. He argues that Target had a good information systems policy in place, and that the right people made their exits (Target’s CIO resigned, as did CEO Gregg Steinhafel). ‘A data breach can happen to any firm; you don’t want to punish companies that fall victim,’ says Shea.
How to engage: While Shea says he’d always prefer companies ‘to speak directly with his clients’, Proxy Mosaic will confer with any IRO if Shea’s firm has got its facts wrong. Currently, the firm doesn’t give issuers an opportunity to respond to its research reports, but this might change. ‘In the future, we want to include company comments verbatim,’ Shea concludes.