Corporate Directors Forum 2012 – Part 5: Proxy Advisors; Fashion Police?

These are some relatively quick notes that I’m sharing from the Corporate Directors Forum 2012, held on the beautiful campus of the University of San Diego, January 22-24, 2012. Since I am busy with no-action requests, this post may be a cryptic… not complete sentences bt hopefully mor intelligible thN txt msgN.

The program was subject to the Chatham House Rule, so there is little in the way of attribution below but I hope to provide some sense of the discussion. There may have been changes in panel members not reflected here. I throw in a lot of opinions. Many are mine. Some are those of panelists. Some were from the audience. Some are just what I’ve heard that I hope is related. Confusing? Attend next year and you’ll get a more complete picture.

Who Shall Govern the Proxy Governance Organizations?

  • Moderator Charles M. Elson, chair & director, Weinberg Center for Corporate Governance, University of Delaware; director, HealthSouth Corporation
  • Todd Hartman, senior vice president, deputy general counsel, Best Buy
  • Philip S. Garon, of counsel, Faegre & Benson
  • Lydia I. Beebe, corporate secretary and chief governance officer, Chevron Corporation
  • Robert McCormick, chief policy officer, Glass Lewis & Co.
  • Patrick S. McGurn, special counsel, Institutional Shareholder Services (ISS)


There seem to be few governance issues, even if not aligned, when company stock is rising. When performance flattened, there is more attention on governance. Many are concerned with fact that those who work on governance are overworked and can’t focus better on how it is reflected in reports by proxy advisors.

The ultimate regulators are your clients. In many cases there never would be a contest without proxy advisors. The problem is that when ISS is a client of those involved in contests but doesn’t clearly disclose, it contributes to feeling that ISS is not evenly handed. ISS sided with a dissident 65% of the time vs 45% at Glass Lewis.

Proxy advisors are largely unregulated and unsupervised. (see Shareholder Communications Coalition letter to SEC) During the most recent votes on say on pay, ISS recommended against 300 companies. Of those, the vote against was 25% higher. That measures proxy advisor influence. They are moving a substantial part of the market. The balance of power has been given to proxy access firms.

Pay $15,000 to ISS to get information as to who your peers are likely to be for pay peer groups, maybe you’ll do better. There is a need for more transparency on consulting. Ironic that the groups that are pushing regulations are the groups that usually don’t want to be regulated.

To the extent they have or look like they have power, it is because clients have paid for service. Of course, they are going to wait until recommendations come before voting. That doesn’t mean they changed their vote. In many cases, many hire both services. Evidence is often coincidental. The services are often more of a record keeper.

If the problem is big, the solution must be big. Say on pay. Recommended against 17% but only 1.5% failed of those they recommended in favor of. Investors aren’t robots. They try to do vote in a cost effective manner. Clients choose the resources they want. More than half of policies are cast under custom voting — apply data in line with our guidelines. Others choose semi-custom that may reflect CII or ICGN policies.

Ultimate vote determination is frequently by a fund’s own guidelines. Why follow? Starts with building blocks to the policies. Starts with roundtables and surveys, draft policies and comments. The process is transparent.

Counter: Vast majority of clients are shut out of the process because they aren’t in the top 10-20 top shareowners. (I contributed to the process and I sure am not in the top 20. I’m not even an ISS client.)

Vast majority of policies are case-by-case. Analysis is not replete with inaccuracies. If inaccurate, we send out corrections to alert client. Things are often said to be inaccurate but it is often disagreements not of facts but of interpretation. There are inaccuracies but will regulations solve it.

Are we critiquing the messager or the message?  Is government regulation really going to get you a change? Regulation could guarantee the right to get inaccuracies corrected.

Companies always have the ability to speak to shareowners but not every company has those resources. If I’m in a 4-5% margin business, how much can I devote to speaking to shareowners. Addressing unfairness must be cost-effective.

To allow roadblocks in timely information isn’t a solution. Credit rating as a model isn’t going to resolve the issues. Corporate community has asked for more transparency of process and disclosure of conflicts of interests. On the other hand, ISS is trying to keep firewall.

Best practice as defined by proxy advisors is no more than “fashion police.” Is there a correlation between “fashion” and profitability? It creates a floor below which you don’t fall, rather than 100% equal good value.

It is argued that ISS moved away from CGQ… but it still does not use an evidence based system. Why no advanced report? Wall Street analysts don’t give recommendations in advance. When writing tens of thousands of reports there is too little time to offer a three day window for comment. Advisors would get bogged down in interpretation, not facts. We don’t want to slow down delivery to our clients. ISS got research out 3 days earlier this year. Delivering research… not soliciting proxies. Putting the APA in front of them is a delay process like the Chamber’s attack on proxy access.

Independence of directors vs independence of ISS? $10,000 or $15,000 to ISS means you might not be thrown off a board. Not disqualified. How is ISS or Glass Lewis qualified to give business advice?  Seems like American Idol! Client’s choose us. We hire people with legal, financial, and accounting backgrounds. For ISS, keeping the same team for each industry sector came as a result of suggestions from clients.

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