SEC hosts proxy adviser debate as legislation proposed in Senate

Nov 19, 2018
Review periods for issuers and disclosure of conflicts of interest top agenda at SEC roundtable

The SEC could be open to imposing a review period for issuers to assess the accuracy of proxy advisory firms’ reports prior to publication, SEC commissioner Elad Roisman said during an event hosted by the regulator last week.

The SEC hosted a full-day event to review and assess the proxy process, looking at the way votes are administered and cast, digging into how shareholder proposals are put forward and, finally, debating whether proxy advisory firms should face regulation.

Meanwhile, a bi-partisan bill was introduced last Wednesday to the Senate Committee on Banking, Housing and Urban Affairs that would require proxy advisers to register as investment advisers under the Investment Advisers Act of 1940. This bill has a narrower focus than the Corporate Governance Reform and Transparency Act, which had progressed through the House of Representatives but had not been debated in the Senate before the mid-term elections. ISS is currently a registered investment adviser, but Glass Lewis is not.

In his closing remarks at the SEC event on Thursday, commissioner Roisman acknowledged that ‘there has been a lot of emotion’ expressed about the regulation of proxy advisory firms in the public domain. Many asset managers, represented by the Council of Institutional Investors, are against regulation of proxy advisers. But several business groups and stock exchanges – including NIRI, the Society for Corporate Governance, the US Chamber of Commerce, Nasdaq and the NYSE – have made the regulation of proxy advisory firms a priority.

REVIEW PERIODS FOR ISSUERS
One of the criticisms of proxy advisory firms is that they do not provide all public companies with a draft copy of their research to check for accuracy before publishing it. At the roundtable, ISS’ president and CEO, Gary Retelny, outlined that it provides this draft report to S&P 500 companies but not beyond that.

‘Institutional investors cover thousands of securities during proxy season and efficiency is very important,’ Retelny said. ‘Part of the reason [we] don’t want to distribute thousands of reports and wait for comment is it slows down the process significantly. We want to make sure our clients get the information they need in a timely manner.’

KT Rabin, CEO of Glass Lewis, explained that issuers can sign up to receive an issuer data report, which provides all of the data points that will go into Glass Lewis’ research prior to publication, without any of the accompanying analysis and recommendations. Rabin said this was created with input from the Society for Corporate Governance. Once a company has signed up to this service, it will receive the report every year, whether it requests it or not.

Representatives from Neuberger Berman and the Ohio Public Employees Retirement System expressed concerns that, as clients of ISS and Glass Lewis, the greater cost of implementing a review process would be passed on to them. This would ultimately hurt the members of the public whose money these asset managers are investing, they argued.

But Adam Kokas, executive vice president, general counsel and secretary at Atlas Air Worldwide, said his company is not large enough to receive an advanced copy of its report from ISS, and that can cause issues due to the number of votes that are cast quickly. ‘Within a day or so of our report coming out, 30 percent-45 percent of our shares are voted,’ he said. ‘It’s a meaningful event when the report comes out.’

According to data on 1,413 investors compiled by Proxy Insight, 75 percent of investors have their own dedicated proxy voting policy, rather than delegating their entire voting to proxy advisory firms. Irrespective, Kokas said the release of a report from a proxy advisory firm prompts significant vote-casting activity, whether it’s automatic or not.

He acknowledged that ISS and Glass Lewis are both willing to update their reports when there is a factual inaccuracy. Retelny and Rabin each said their firm would send out an update to its clients when a report had been updated. Kokas added, however, that investors have so many proxies to vote during the season that they are unlikely to go back and update a vote if they’ve already cast it.

Speaking to Corporate Secretary sister publication IR Magazine after the event, Ted Allen, vice president of communications and member engagement at NIRI, explained that small and mid-caps – where the IR teams are smaller – can be particularly challenged by inaccuracies in proxy adviser reports.

‘For a number of NIRI members at small and mid-caps – where you may have one person who is the IRO, company secretary and treasurer – they don’t have the resources to grasp the issues with an inaccuracy in a report,’ Allen said. ‘Having a day or two’s notice would really help. Companies can figure out if there’s an error. Even if there isn’t, [the report] tells them whether they’ll have a lot of work to do speaking to their investors.’

Both Roisman and Kokas suggested that if the SEC instituted a mandatory review process for issuers prior to publication, it could be a way to avoid further legislative regulation of proxy advisory firms.

CONFLICTS OF INTEREST?
Another talking point was the perceived conflicts of interest that could occur at proxy advisory firms. This is particularly an issue at ISS, which has a subsidiary business that provides corporate governance consulting services to issuers.

In a letter submitted to the SEC in advance of the event, Darla Stuckey, president and CEO of the Society for Corporate Governance, wrote: ‘Society members have reported being contacted by ISS’ corporate consulting sales force suggesting that they have a unique ability to help fix any problems the company has had with a previous vote if they hire ISS for a consulting engagement. And in these conversations with the sales force, companies are offered a tiered service level where more ISS involvement and insights come at a higher price.

‘These conflicts should be specifically and prominently disclosed to institutional investor clients in voting reports so that they may evaluate this information in the context of the proxy advisers’ voting recommendations.’

At the event, Rabin explained that in any situation where potential conflicts could arise, Glass Lewis outlines them on the cover of its reports.

John Kim, securities counsel at General Motors, praised Glass Lewis and ISS for improving disclosures around conflicts of interest, but encouraged the firms to go further. ‘It’s important our investors are confident that [proxy adviser reports] are free of conflicts,’ he said. ‘As proxy advisory firms and index funds become more important in the investment ecosystem, thinking about making these conflicts evident on these reports is something that makes sense to me.’

The event concluded with SEC chair Jay Clayton encouraging issuers, advisers and commentators to continue submitting comment letters to the SEC.

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