The report landed with a thud on a Tuesday evening at the beginning of September.
In a much-anticipated review, proxy advisory firm Institutional Shareholder Services Inc. told its clients they should vote against Kinross Gold Corp.'s $7.7-billion (U.S.) proposal to merge with smaller gold producer Red Back Mining Inc.
It was a blow for executives at Toronto-based Kinross , who were touting the deal as "potentially transformational" for the company. Already, the merger was up against critics on Bay Street and in the press; Kinross was accused of offering too much to get its hands on Red Back's properties in West Africa.
But the ISS report was the most serious threat yet. The gold miner estimated that about one-third of its shareholders were clients of ISS, which is North America's dominant shareholder voting advisory firm, and it knew many of them would automatically vote in accordance with ISS's views.
Kinross executives quickly mobilized to counteract the ISS analysis. They issued three press releases to neutralize ISS's conclusions that Kinross was overpaying for Red Back. Kinross chief executive officer Tye Burt offered a rare public critique of the power wielded by a single advisory firm that itself owns no shares, raising questions about the firm's review process and about the credentials of analysts who reviewed the takeover deal.
"It was clear to us in the transaction with Red Back that ISS lacked particular mining and geology expertise, which was critical in assessing the nature of the deal," Mr. Burt said in a recent interview. Kinross got its deal, but not without a fight: Fully one-third of shareholders who voted were opposed.
Mr. Burt's comments touched a nerve in Corporate Canada, tapping into a deep vein of discontent with the power wielded by proxy advisory firms, which are hired by almost all major institutional shareholders to give them advice on how to vote their holdings.
Companies and their lawyers have complained privately for years of their frustrations with proxy advisory firms, citing what they see as poor-quality analysis, unclear voting decisions and perceived conflicts of interest when the advisory firms also sell consulting services to the companies they assess.
But that quietly bubbling discontent is now boiling over.
The U.S. Securities and Exchange Commission issued a call for comments on ways to reform the shareholder voting system, and received a flood of submissions from companies and other organizations this fall - over 250 so far - with many of them focused on proxy firms. (See the letters on the SEC's website here.) Broader questions posed by the SEC about the flawed mechanics for voting shares have attracted far less attention and passion in the public submissions.
The outcry stems from the growing clout of the firms, especially market leader ISS, a division of RiskMetrics Group, which controls a large majority of the market share in the proxy voting area - far more than the other four main players combined - and thus has enormous influence over shareholder votes.
While ISS and others were small players in the voting system two decades ago, their power increased significantly with the expansion of institutional share ownership - and because of new regulations that require many institutions, such as mutual fund companies, to publicly disclose how they vote their shares.
The scrutiny has compelled more institutional investors to vote, and many, in turn, have hired proxy advisers to help them ensure consistency across holdings that can span thousands of different companies' shares.
"It's deeply ironic to me that the whole motion toward shareholder responsibility has ended up in the hands basically of one firm whom people accept advice from," says corporate director David Beatty, who chairs the board of Inmet Mining Corp. and also acts as an adviser to ISS competitor Glass Lewis & Co. LLC.
"By and large, the votes of $10-trillion of assets under management are determined in the first instance by one company. ... It's too much power in one place, and a total abrogation of power by everyone else."
ISS, however, disputes that it has as much clout over corporate votes as companies suggest. ISS business head Stephen Harvey told the SEC the perception that "votes are controlled" by ISS are wrong, but said the idea has taken on a life of its own as it gets repeated.
ISS said many big investors have their own research teams, so ISS is not their primary decision-maker. The company cited a study by a University of Pennsylvania law professor who estimated an ISS recommendation shifts six to 10 per cent of shareholder votes on average in uncontested director elections.
The firm also countered criticism that it lacks expertise, saying it has to make its work as accurate as possible because "competition is fierce" in the proxy advisory industry.
"Anyone with a computer, an ISP and an e-mail account/blog/website can make and deliver their own vote recommendations," Mr. Harvey told the SEC in a submission.