ISS, Other Proxy Advisers Pressed to Disclose Conflicts FULL

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SEC Readies New Guidelines for Firms That Advise Shareholder

Updated June 3, 2014 9:08 a.m. ET
The Securities and Exchange Commission is readying new guidelines for firms that advise shareholders on corporate ballots, amid complaints by corporations that such advisers have too much influence.

IThe SEC guidance, which could come soon, is expected to press proxy advisers to better disclose potential conflicts of interest and may also seek to reduce investor reliance on their advice when voting in company elections, people familiar with the proposals said.

The U.S. Chamber of Commerce, the Center on Executive Compensation and the Society of Corporate Secretaries and Governance Professionals have all urged the SEC to act, arguing proxy advisers aren’t responsive enough to companies’ concerns and have too much sway over corporate governance issues, including who sits on corporate boards and how directors oversee their companies and pay top executives.

The SEC’s move may have little practical effect on the ability of firms like Institutional Shareholder Services Inc. and Glass, Lewis & Co. to weigh in on governance debates. But it highlights how contentious their role has become at a time when corporate elections have grown more competitive amid a rise in activist investing.

Proxy advisers analyze corporate proxies, make voting recommendations and offer software that lets investors cast votes at hundreds or even thousands of companies efficiently, according to policies set by the investors. A “no” recommendation from an adviser can make the difference in close votes over executive compensation or director elections, which are among the issues often pushed by activist hedge funds in contentious corporate elections.

Both ISS and Glass Lewis were at the center of a fierce debate last year about whether to split the chairman and CEO jobs at J.P. Morgan Chase JPM +0.60% & Co., a proposal the proxy advisers supported but which ultimately was rejected by shareholders. More recently, ISS recommended investors oust the majority of TargetCorp.’s TGT +0.33% board because of its handling of a customer data breach and called for Wal-Mart Stores Inc. WMT -0.14% investors to vote against two directors over their handling of disclosures concerning a foreign bribery probe.

The coming guidance is expected to push for better disclosure among proxy advisers that also sell corporate-governance consulting services to the same companies subject to their voting recommendations. SEC staff is likely to say they don’t believe the current practice of requiring investors to contact an advisory firm for more information about potential conflicts conforms with the agency’s interpretation of an existing SEC rule, these people said. An SEC spokesman declined to comment.

Such guidance would most directly impact ISS, the biggest U.S. proxy adviser in a small field. ISS has long been criticized by corporations, Republican lawmakers and others for selling corporate-governance consulting services to some of the same companies for which it offers voting recommendations.

ISS, which in March was acquired by private-equity firm Vestar Capital Partners, is the only major advisory firm to also provide consulting services. The company has said it maintains a strict separation between the two arms of its business, and discloses conflicts when asked. An ISS spokesman declined to comment.

The dual business models of ISS were felt last year by Motorola Solutions Inc.,MSI +0.73% which received a recommendation that investors vote against the company’s executive-pay practices. The nonbinding “say-on-pay” measure passed narrowly.

That fall, Motorola received a pitch from ISS’s consulting arm offering to help the company “better understand the scrutiny” that its pay practices would get from ISS ahead of the next year’s annual meeting, a spokesman for the telecom equipment maker said. The company didn’t buy the service and nonetheless received a favorable recommendation from ISS. Its say-on-pay measure passed overwhelmingly this year.

Proxy advisers have also been criticized for selling their research to activist investors, many of whom propose proxy measures subject to recommendations from the advisers. Glass Lewis, the second-largest proxy adviser, is owned by the Ontario Teachers’ Pension Plan Board, a Canadian fund that sometimes takes activist positions.

Tensions between U.S. companies and proxy advisers have run high in recent years, thanks to a confluence of regulatory and legislative changes, and newfound vigor on the part of corporate-governance advocates and activist investors. Those changes have produced a number of close votes in contested corporate elections, a sharp change from the days when the backers of measures opposed by management counted themselves lucky to win 20% of the vote.

“These are incremental but important changes,” said Brian Breheny, a partner at Skadden, Arps, Slate, Meagher & Flom LLP and former SEC staffer who worked on a 2010 “concept release” on proxy issues that set the stage for the forthcoming guidance.

Proxy advisers don’t always win. Glass Lewis, for example, recommended voting against management on say-on-pay measures about 13% to 17% of the time between 2011 and 2013, but management won 98% or more of such votes, said Glass Lewis Chief Executive Katherine Rabin.

“Clients may require more tools to assess whether we are delivering recommendations consistent with their specifications,” she said. But “clients are not just blindly following Glass Lewis’s recommendations.”

And last year, both proxy advisers recommended that shareholders support an effort to split the chairman and CEO position at J.P. Morgan. J.P. Morgan mounted a vigorous campaign to persuade shareholders to stick with the status quo, and after CEO James Dimon hinted in a private meeting that he might resign if he couldn’t retain both titles, the measure failed with support from just 32% of voted shares.

Research by Jill Fisch, a law professor and co-director of the University of Pennsylvania’s Institute for Law and Economics, suggests that ISS actually shifts about 6% to 10% of votes on uncontested directors, in part because the biggest investment managers don’t vote in lock step with the adviser, and smaller investors have less of an influence on vote outcomes.

SEC Chairman Mary Jo White has said little publicly about proxy issues but has made the issue a priority and hosted a round table on the topic in December.

At a March event hosted by the U.S. Chamber, Ms. White said she was “particularly” interested in ways to boost disclosure on possible conflicts discussed at the round table.

Write to Andrew Ackerman at, Joann S. Lublin and Theo Francis at


SS Verdicts

Some recent recommendations:

  • Target: Vote to oust 7 of 10 directors over board’s handling of customer-data breach
  • Wal-Mart: Vote ‘no’ on executive-pay practices
  • Sotheby’s: Supported election of activist investor Dan Loeb to board
  • Zale: Supported sale of jeweler to rival Signet, at a price that some investors criticized as unfair

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  1. […] [Abridged and highlighted from a June 3, 2014 Wall Street Journal Article. The full article, which is behind a paywall can be seen here:] […]

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