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(Photo illustration by Marcelle Faucher)
(Photo illustration by Marcelle Faucher)

Regulation

Board Games: Proxy advisory firms flexing some serious muscle Add to ...

Corporate giant International Business Machines Corp. says its experience shows ISS has considerable sway over its shareholders.

IBM analyzed shareholder voting patterns in 2009 and 2010 before the company's annual meeting, and found 13.5 per cent and 11.9 per cent of its total shares voted came in on the day after ISS reported its recommendation, compared with 0.2 and 0.27 per cent in the previous five business days before that.

"The IBM voting block essentially controlled by ISS has more influence on the voting results than IBM's largest shareholder," IBM vice-president and assistant general counsel Andrew Bonzani told the SEC.

"And this voting block is controlled by a proxy advisory firm that has no economic stake in the company and has not made meaningful public disclosures about its voting power, conflicts of interest or controls."

In a somewhat unusual move, Canadian companies and organizations have also submitted comments to the SEC because the same U.S.-based proxy firms also hold a dominant position in both countries.

The Canadian Society of Corporate Secretaries told the SEC its members report frequently finding errors in voting reports of proxy firms, but there is no consistent process to have them corrected.

"Given that data may be incorrect at a significant number of companies (100 per cent in our sample) almost every year, the recommendations being made by proxy advisers are at least based on false assumptions and at worst may be frustrating the underlying objective of long-term shareholder growth," CSCS past chair Sylvia Groves told the commission.

The CSCS recommended creating a formal correction and appeal process.

Another submission came from Kinross. Its victory in the Red Back vote did not put an end to its concerns, and the company later urged the SEC to impose requirements on proxy firms for greater transparency about their work.

"All we are looking for at the end of the day is increased disclosure and some form of regulation," Kinross chief legal officer Geoffrey Gold said in an interview.

But opinions are divided about how much regulators can do to fix the concerns companies have with proxy firms.

Toronto securities lawyer Carol Hansell, who recently completed a sweeping 229-page report analyzing concerns about the proxy voting system in Canada, says she isn't sure regulation can fix the things companies complain about most, and has concluded the best way to deal with complaints about advisory firms is to get major institutional shareholders - the clients of the proxy firms - to insist on higher standards.

Ms. Hansell says an organization like the Toronto Stock Exchange or the Canadian Coalition for Good Governance (CCGG) should create a forum for companies to express their concerns to shareholders.

"My question is how can we solve this without throwing it over to the regulators," she said.

But securities lawyer Lara Nathans said a basic level of regulation of proxy firms - including a requirement they be registered as investment advisers - would allow officials to impose standards for disclosure and transparency.

"The concern a lot of people have is that these firms have garnered more influence without being regulated," she said. "There's no oversight over them and no one really knows anything about them."

Big investors who are clients of the advisory firms are not keen to press for major reforms at proxy firms.

David Denison, chief executive officer of the Canada Pension Plan Investment Board, says the CPPIB uses two proxy advisory firms - ISS and Glass Lewis - for analysis, but ultimately controls its own voting decisions and has voted contrary to recommendations on a number of occasions.

"From our perspective, we hire them to provide input to us, not to tell us what to do," Mr. Denison said. "We make the decisions ourselves. They are just a resource."

Stephen Griggs, executive director of the CCGG, which represents most of Canada's largest investors, says the coalition often hears complaints from companies about proxy firms, but said big investors need the service because they have thousands of companies to vote on each spring. ( Ask Mr. Griggs your questions in a live discussion Wednesday.)

Mr. Griggs said the most useful regulatory reform would be more detailed disclosure about conflicts of interest, such as when an advisory firm has done paid consulting work for a company.

"I think there is a certain element of cynicism when there is a potential for a conflict of interest, so I think it would be helpful for investors to know whether or not there is a conflict."

ISS, however, told the SEC it believes conflicts are not a concern because they are carefully managed by the company. The company says it has strict ethical guidelines and personal trading restrictions for staff, as well as internal controls and "firewalls" so that people making voting recommendations have no idea which companies have hired ISS to also do consulting work.

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