Nasdaq and the U.S. Chamber of Commerce conducted a survey of public companies to gain insight into companies’ interactions with ISS and Glass Lewis, the two primary proxy advisory firms, with regard to the 2015 proxy season. Over 155 companies of all sizes and industries participated in the survey. Nasdaq characterizes the survey as part of it advocacy efforts on behalf of its listed companies: “[c]ontinuing efforts to have proxy advisory firms address errors in their analysis identified by companies and disclose their methodologies and conflicts in their business models.”
Selected Survey Results
The survey showed that, for almost all of the surveyed companies, a proxy advisory firm had made a recommendation on a matter in the companies’ proxy statements, and the vast majority (84%) of companies reported that they monitor proxy advisory firms’ reports for accuracy and reliance on outdated information. However, only a quarter of the companies “believed the proxy advisory firm carefully researched and took into account all relevant aspects of the particular issue on which it provided advice.” Surprisingly, only slightly over half the companies notified the advisory firm when the data on which the firm relied in making its recommendation was inaccurate or stale. Although 43% reported these errors to portfolio managers, none “reported bringing this issue to the attention of the SEC.”
SoapBox: While the two dominant proxy advisory firms will typically correct factual errors and alert their investor clients subsequent to publication of their reports, where recommendations involving judgment calls are based on factual errors, companies sometimes find that the firms are reluctant to change those published recommendations, even if the underlying facts have shifted.
Almost half the time, companies requested the opportunity to provide input into the recommendation, and advisory firms allowed that input slightly over half the time, allowing anywhere from an hour to a month to respond. Significantly, however, most companies do not believe they are being heard: “[o]nly 38% of companies believe that input had any impact on the final recommendation.” The survey showed that 38% of companies sought to meet and discuss issues subject to shareholder votes with proxy advisory firms, and 60% of those were able to secure a meeting with the firm. Only 20% of companies made formal requests to preview the advisory firm’s recommendation, and just under half were able to obtain a preview.
SoapBox: Notably, for ISS, only companies in the S&P 500 can, if they so elect, receive a draft report for fact-checking of “non-controversial” proposals; for other issuers, ISS will provide them without charge only after publication. However, all U.S. companies with equity plan proposals can review the data used in the ISS analysis. Glass Lewis does not provide any previews of its reports and charges companies for copies of their reports after publication. Perhaps the SEC should consider mandating that all proxy advisory firms provide advance copies of their recommendations to all issuers, free of charge, for purposes of fact-checking prior to release.
Only 13% of companies examined proxy advisory firms’ conflicts of interest, and only 6% reported finding significant conflicts. When conflicts were discovered, companies always reported the conflicts to the advisory firm, but none reported to the SEC.
Sidebar: In 2014, the SEC’s Divisions of Investment Management and Corporation Finance issued Staff Legal Bulletin No. 20, “Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms.” (See this Cooley Alert.) The SLB represented long-promised guidance intended to address, among other things, the frequently voiced criticism that proxy advisory firms are often subject to undisclosed conflicts of interest that may affect their vote recommendations. However, the guidance was pretty weak tea in comparison to the potential requirements that were floated in connection with the SEC’s proxy plumbing concept release or the 2010 report from the NYSE Commission on Corporate Governance. These bolder ideas included mandatory proxy advisory firm registration, requiring proxy advisory firms to provide more transparency regarding their policies and methodologies and the extent of research involved to formulate specific voting recommendations, requiring any conflicts of interest and the procedures to manage them to be described in filed reports and requiring proxy advisor recommendations to be filed with the SEC.