Tags: proxy | service | vote | mutual fund

AEI Looks at Role of Proxy Advisory Services

By    |   Wednesday, 25 June 2014 07:40 AM

The American Enterprise Institute (AEI) held a conference June 18 titled "Outsourcing the Vote?" to examine the role of the two advisory services, Institutional Shareholder Services (ISS) and Glass, Lewis & Co., an affiliate of the Ontario Teachers Pension Plan board and Alberta Investment Management Corp., that institutional investors consult in order to decide whether and how to vote proxies of companies whose stock they own.

The program began with a speech by Rep. Patrick McHenry, R-N.C., followed by panels addressing the role of mutual funds and other institutional investors in corporate governance and how to fix the proxy advisory system.

McHenry analogized the duopoly of proxy advisors with the rating agency duopoly and theorized that the result of both is an over-reliance on these firms by market participants. He also criticized the industry for a lack of competition and perceived conflicts of interest. He questioned whether, when the Securities and Exchange Commission (SEC) adopted proxy rules in 2003, the intent was to outsource the process to firms that, analogous to credit rating agencies, owe no duty to investors, and he called these "unintended consequences." McHenry concluded by offering a prescription for fixing the problem, beginning, ironically, with outsourcing it to the SEC, and he expressed hope that the SEC would act in the right direction.

Specifically, McHenry called on the SEC to do remove existing "no-action" letters, in order to "send the right signal to the marketplace." Second, the SEC should identify transparency, efficiency and accountability measures to inject competition, and he said he wants to "know how the sauce is made." Third, he called on the SEC to encourage mutual funds to determine, through cost/benefit analysis, whether they are affected enough to cast a ballot, so that they can act appropriately, without liability, if the best course is to abstain. Finally, McHenry proclaimed that if the SEC does not act, Congress would take up this issue in the interest of good corporate governance, investor protection and market returns.

As moderator of the second panel, AEI's Peter Wallison blamed the SEC for creating the issue of whether the proxy process creates a conflict of interest for mutual funds that could give rise to litigation or regulatory problems, so the SEC allows them to "cleanse themselves" by outsourcing the task of deciding how to vote to an independent third party.

In response to a question from Wallison, Harvey Pitt, who was chairman of the SEC at the time the rule was developed, explained that he favored it, because there was a lack of policies and procedures to govern how funds would determine how to vote proxies. He said the rule was supposed simply to require a policy and then disclosure of how shares were voted, 60 to 90 days afterward. He explained that the staff used two no-action letters, to Egan-Jones and ISS as proxy advisors, not to give guidance as to how to comply, but rather to revise the rule itself.

Glenn Booraem, a principal of The Vanguard Group, stated that his firm, which receives 3,800 proxy statements annually from U.S. companies, abstains on a range of social and environmental shareholder proposals. He described Vanguard's internal process for deciding how to vote, using advisory services to digest the proxies, subjectively advise, but not determine, how to vote, and to help execute and record the votes.

Jill Fisch, a professor at the University of Pennsylvania Law School, referred to studies showing that the funds that are dependent on proxy advisory services to inform their voting account for only 3 percent of assets.

Damon Silvers, special counsel and director of policy for the AFL-CIO, stated flatly that outsourcing to proxy advisors is necessary for institutions that need expert advice and have to manage conflicts of interest. He added that a more serious issue of concentration occurs with respect to auditors than with rating agencies or proxy advisors. He then noted that ISS has a conflict of interest in that it consults for companies for whom it also provides proxy advice, and he considers this inappropriate. He contended that ISS should be registered as an investment advisor, as Glass Lewis is.

In conclusion, he warned the corporate community that since the right to vote proxies is an asset, it might be unwise for them to neglect it and to urge institutions to do the same. He disagreed that the proxy advisory system is broken and contended it works fairly well.

(Archived video can be found here.)

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The American Enterprise Institute (AEI) held a conference June 18 titled "Outsourcing the Vote?" to examine the role of the two proxy advisory services, Institutional Shareholder Services (ISS) and Glass, Lewis & Co.
proxy, service, vote, mutual fund
Wednesday, 25 June 2014 07:40 AM
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