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Stephen Smith, founder and CEO of mortgage lender First National Financial Corp.

Margaret Mulligan /The Globe and Mail

Two major pension plans are selling U.S.-based proxy-advisory company Glass Lewis & Co. to a new set of Canadian owners.

Toronto’s Peloton Capital Management and Stephen Smith, the founder and chief executive officer of mortgage lender First National Financial Corp ., are buying Glass Lewis from Ontario Teachers’ Pension Plan and Alberta Investment Management Corp. (AIMCo).

Glass Lewis’s founders saw an opportunity in 2003, not long after the Enron/Worldcom crisis, in advising institutional shareholders on how to vote on matters in proxy statements. The field was – and arguably still is – dominated by Institutional Shareholder Services (ISS), which had a nearly 20-year head start on Glass Lewis.

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The companies’ analysts generate reports on governance matters, such as independence and performance of directors, or compensation policies. The companies also advise shareholders on how to vote in merger transactions.

Mr. Smith said Monday the buyers see opportunities in investors’ increasing interest in ESG – or environmental, social and governance – matters. Additionally, he said, Glass Lewis is largely North America-focused, and there are possibilities for international expansion.

“Proxy advisory has gone from compliance to the chief investment officer’s office, so I think there’s a demand for more than one opinion,” Mr. Smith said. “Glass Lewis under our ownership is going to be a little more focused on developing this into a major business that will rival ISS.”

“We believe our stewardship of Glass Lewis has helped contribute to the advancement of good governance practices and healthy capital markets globally … we are pleased to transfer ownership of a strong, growing Glass Lewis to new shareholders,” Teachers spokesperson Dan Madge said.

A statement from AIMCo spokesperson Dénes Németh echoed that sentiment, describing the new owners as “like-minded investors.”

The parties did not disclose terms of the deal, but Mr. Smith said he and Peloton were competing in “a robust auction” that included strategic bidders. Teachers bought Glass Lewis in 2007 for a reported US$46-million from Xinhua Finance, partly owned by China’s state-run news agency. Xinhua had owned Glass Lewis for only about a year at the time. AIMCo acquired its 20-per-cent interest in Glass Lewis from Teachers in 2013.

The Glass Lewis sale comes shortly after German stock exchange operator Deutsche Boerse acquired an 81-per-cent stake in ISS in late February for about US$1.8-billion. It was ISS’s fourth ownership change in a decade: Seller Genstar Capital bought it for US$720-million in 2017 from Vestar Capital Partners. Vestar had bought the company for US$364-million in 2014 from MSCI, which had owned ISS since 2010.

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“Notwithstanding ISS is a quite a bit larger than us, there are still barriers to entry to this business,” Mr. Smith said. “When you’re covering 20,000 meetings annually, just to try to get up to that scale is tough.”

Proxy advisers are navigating an increasingly challenging regulatory environment. During the Trump presidential administration, the U.S. Securities and Exchange Commission embraced a view from the corporate community that the advisers weren’t sufficiently transparent and companies had little redress for errors in the reports.

“I own regulated companies,” Mr. Smith said, pointing to his mortgage insurance and bank holdings. “I don’t look at regulation with trepidation – I look at regulation in many areas, particularly this one, as creating more demand.”

With a report from Reuters

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