Canadian companies that have complained about what they say is the undue influence of proxy advisers could get a boost from U.S. legislation that could rein them in.
Proxy advisers offer opinions to their clients, typically big institutional investors, on the measures companies send to their shareholders for a vote. Often, there’s not much controversy. But the firms, such as Institutional Shareholder Services (ISS), have developed their own guidelines for what constitutes effective corporate governance and appropriate executive pay − and when companies run afoul of those guidelines, the firms recommend their clients vote “no” on company proposals.
Many companies don’t like that much, at all. They argue that too many small institutional investors accept the recommendations wholesale and vote blindly − a particular problem, companies say, if the advisory firms have made an error in the analysis underlying the recommendations.
Now heavy lobbying of the U.S. Congress and the Securities and Exchange Commission has resulted in legislation that would require proxy advisers to register as investment advisers and subject them to supervision by the SEC. Those moves could push Canadian regulators to take similar steps and possibly limit the sway advisers have in this country.
Proxy firms in Canada appear to be well aware of the pressure from lobbyists in the United States.
“The firms, from what I can tell, have been sensitive to some of this criticism over the past few years, and I think they’ve made improvements to their processes,” said Matthew Fortier, vice-president, policy for Canada’s Institute of Corporate Directors said. “But if this legislation were to pass and force change … I’d suspect you’d also see changes in Canada, because the challenges that have been identified in the U.S. also exist in Canada. It doesn’t stop at the border.”
Mr. Fortier says there has long been controversy over proxy advisers' role. “Proxy advisory firms address a client need, but transparency around how they reach their opinions has always been an issue,” he said. “Their recommendations can impact the market and there seems to be enough anecdotal evidence pointing to inaccurate company or governance analysis to raise concerns.”
The unhappiness has resulted in a public-relations campaign by a corporate-backed group called the Main Street Investors Coalition and the lobbying of Congress and the SEC. And it’s yielded results: One piece of legislation, which has been passed by the country’s House of Representatives, would see proxy advisers become subject to SEC supervision. It also would require the firms to turn over the bulk of their reports to the subject companies and allow the companies to conduct a meeting with the firms to challenge their work.
The SEC, under pressure, conducted a day-long public examination of the U.S. proxy process on Nov. 15, including a panel discussion devoted to the advisory firms. A "After a day of discussion, it seems there is now a platform for the SEC staff to build on the observations of Main Street Investors and implement much needed oversight of the proxy advisory industry,” the advocacy group said in a statement.
The issue hasn’t been nearly as hot in Canada. The Canadian Securities Administrators (CSA) put out guidance in April of 2015 to address potential conflicts of interest for proxy advisers, including one that has become a hot-button issue in the United States: Institutional Shareholder Services’ practice of soliciting consulting fees from the companies they evaluate on how better to conform with ISS standards on governance. The CSA document urges the proxy firms to develop internal policies and codes of conduct to minimize the risk of a conflict of interest.
That’s something that ISS − which is already registered with the SEC as an investment adviser − says it has done. ISS chief executive Gary Retelny said in the Nov. 15 round-table that “we acknowledge there are potential conflicts of interest in what we do and we work extremely hard to mitigate those potential conflicts of interest.” He said ISS has “a very strong firewall in place” separating the analysts from the employees who work for the “corporate solutions” business, who also tell companies “there is no quid pro quo.”
Unfortunately for ISS, neither Glass Lewis & Co. − which is owned by Ontario Teachers' Pension Plan and Alberta Investment Management Corp. − nor Egan-Jones Proxy Services has a similar business model. “Since the beginning … we took the view we shouldn’t be providing consulting services to the companies we write on,” Glass Lewis CEO Katherine Rabin told the SEC panel.
For now, corporate Canada will wait and see. Specialists in proxy matters say they’re not so sure the U.S. legislation will become law in its current form, but they say that if U.S. companies are allowed advance warning of what the advisers will say about them, and a mandated chance to respond, it’s likely Canadian companies will want the same.
David Milstead