Emily Chasan
Senior Editor

The Securities and Exchange Commission is planning to issue guidance concerning how investors should use proxy advisory services in casting their annual votes following a slew of complaints from companies that such services are presenting inaccurate or misleading information when making recommendations.

The addition of advisory say-on-pay votes to proxies over the past two years has increased both investor and corporate focus on how proxy advisers like Institutional Shareholder Services and Glass Lewis & Co influence investor votes.

In response, after this proxy season, the SEC staff will look at issuing fresh “interpretive guidance” about the fiduciary duties investors have in assessing the information they get from proxy advisers and how those services handle conflicts of interest, Meredith Cross, director of the SEC’s Division of Corporation Finance, said this week.

“I will clearly acknowledge that there is frustration in the corporate community around proxy advisors,” Cross said in comments to the National Investor Relations Institute in Seattle this week. “We think there are some things people need to be reminded about now.”

Cross said the SEC is unlikely to address complaints that there is a perceived lack of competition among proxy advisers, or to do anything that would limit investors’ ability to use proxy advisory firms. But the agency aims to provide more guidance based on already existing rules about investor fiduciary duty and conflicts of interest, she said.

“In order [for investors] to rely on the advice of proxy advisory firms, it has to be reasonably reliable advice,” Cross said.

She told the conference she wants companies to provide more information about real inaccuracies in proxy advisory reports that go beyond basic disagreements. She also said she would like to hear more from companies that say the proxy advisory firms are comparing them to illogical peer groups and would look at how the proxy advisory firms disclose conflicts of interest.

Corporate advisors at the conference said companies are most concerned that investors are getting inaccurate information from proxy advisory firms.

“We feel there’s some unfairness in [the proxy firm recommendations], particularly in the area of making sure they get the facts straight in their analysis,” Jeff Morgan, CEO of NIRI said.

Some corporate groups said they would like the SEC to require proxy advisers to provide drafts of reports to companies ahead of their final distribution to investors so the companies can verify their accuracy.

“We would very much like to see a practice of providing drafts to companies in advance,” Kenneth Bertsch, chairman and CEO of the Society of Corporate Secretaries and Governance Professionals, said at the conference. Right now, ISS provides drafts of its reports to about 500 companies, but other proxy advisers do not have that practice, Bertsch said.

The proxy advisory firms have been more open in the past few years about communicating their recommendation methodologies. ISS publishes its policies each year ahead of proxy season. Glass Lewis has an “issuer engagement portal” where it tries to field corporate complaints and provide more information about the methodology the firm uses to come up with its recommendations, Robert McCormick, chief policy officer at Glass Lewis, said at the conference.

He said the proxy firms were open to new regulation or guidance from the SEC, but that they have already done a lot of work to disclose conflicts of interests and quality control issues.

“We’ve done basically everything that could be asked of us,” McCormick said, saying the firm doesn’t do other work for public companies, like the corporate governance advisory work its rival ISS does. He also said the firm discloses conflicts prominently if its parent, Ontario Teachers’ Pension Plan, has a stake in a company where Glass Lewis is making a recommendation. ISS is owned by MSCI Inc.

Glass Lewis spends a lot of time talking to companies both during and outside of the proxy season, but it’s not always productive, McCormick said. .

“It can be a little uncomfortable if some of the concerns we raise are about the CEO’s compensation and he or she is sitting across the table from you,” McCormick said.

However, more work could be done to open lines of communications with corporate directors, he said.

He also said that requiring firms to provide drafts of recommendations to companies in advance wouldn’t be “the right thing at this point,” since doing so would add an additional burden to an already short timeframe for the firms to come up with thousands of recommendations.

“It seems a bit cleaner in theory than in practice,” McCormick said. He noted the advisory firm’s main role is to provide information to investors and not to negotiate on compensation practices with companies on behalf of investors.

 

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