Rules urged for proxy advisory firms

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Canadian corporate directors are calling on regulators to introduce rules for the proxy advisory industry, arguing the sector has enormous but unregulated power over the votes of major institutional investors.

The Institute of Corporate Directors (ICD), which represents 6,200 corporate directors in Canada, has sent a comment letter to provincial securities commissions urging them to draft rules to minimize conflicts of interest in the proxy advisory sector. It also wants companies to have the right to offer feedback to the proxy advisors before negative voting recommendations are issued.

Proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co. advise institutional investors on how to vote their shares at annual meetings and on special issues such as takeovers. Many public companies have criticized the advisers as being prone to conflicts of interest and difficult to deal with when there are complaints about their work.

ICD chief executive officer Stan Magidson said proxy firms play an influential role in the voting process, so "they should be subject to greater transparency and accountability."

Canada's securities regulators said in June that they are considering regulations to govern the proxy advisory sector because of its growing power and influence, and have asked for public comment on potential reforms. No specific proposals have been announced yet, and regulators have not determined whether they will regulate the sector.

A key complaint from companies has been that when the proxy firms' staff make errors in the preparation of their voting recommendations or misunderstand key facts about a firm, it is difficult for companies to contact the analysts to correct the information or persuade them to reverse a negative voting recommendation.

To address that concern, the ICD has proposed requiring the proxy firms to consult with companies when they are issuing a negative voting recommendation. If the negative recommendation stands, the advisory firms should also be required to include a response from the company in their materials to shareholders, the ICD said.

The ICD says such a reform would be an effective and pragmatic way to reduce errors.

"It is imperative that a solution be found for this problem as the status quo is unacceptable," the ICD submission argues.

The ICD also wants proxy firms to be required to expressly identify in their voting reports any conflicts, such as having acted as consultants to the companies whose votes are being analyzed. They should also have to set up internal "walls" to protect against bias in their advice, the ICD said.