Stark battle lines are forming between institutional shareholders and Canada's corporate community over whether securities commissions should begin regulating the powerful proxy advisory industry.
The Canadian Securities Administrators – an umbrella group for provincial securities commissions – issued a call for comments in June asking whether it should begin regulating proxy firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co. The companies are hired by large shareholders to provide research and advice on how to vote at annual meetings or on special issues such as takeover bids.
The response has exposed a clear gulf between large investors, who support the proxy firms, and the companies that are the subjects of the recommendations, which complain the proxy industry has become too powerful and needs far more oversight.
Several of Canada's largest shareholders, including the giant Canada Pension Plan Investment Board, say the research they get from proxy firms is generally high quality, their services are critical for shareholders, and they do not appear to suffer from serious conflicts of interest.
CPPIB, which manages $160-billion of Canada Pension Plan assets, said it disagrees with the premise that proxy advisory firms are adversely affecting the markets.
"On the contrary, we believe that proxy advisory firms benefit the market by providing clients with an efficient and cost-effective way to obtain proxy voting research, analysis and vote-processing services, thereby assisting institutional investors to fulfill their active ownership responsibilities," CPPIB analyst Michael Ma said in a written submission to regulators.
British Columbia Investment Management Corp., which invests $92-billion of assets for B.C. pension plans and other public bodies, said proxy firms provide essential research. BCIMC owns shares in 1,800 companies, and said it would be too difficult and costly to independently research all voting issues each year.
"These are generally not areas that we would think require regulation, as it is the users of the research that demand a quality product that meets their needs," said BCIMC chief executive officer Doug Pearce.
Companies, on the other hand, argue the proxy industry has become extremely powerful in shaping shareholder voting but operates with virtually no oversight.
In a commentary sent to regulators last week, the Institute of Corporate Directors, which represents directors who sit on the boards of major corporations, urged securities commissions to rein in the unfettered power of proxy advisory firms to influence key voting issues.
Individual companies – including Canadian Tire Corp. and George Weston Ltd. – have also made submissions, complaining about inaccuracies and conflicts of interest, and especially about their inability to communicate with the proxy advisers.
Pacific Rubiales Energy Corp. said it was frustrated by the quality of work by Glass Lewis in assessing a friendly takeover bid in 2011 by Gran Colombia Gold Corp. for Medoro Resources Ltd., complaining an analyst made a "counterintuitive" recommendation, telling Medoro investors they were being paid too little, while telling Gran Colombia investors their company was overpaying.
"In many ways, these proxy advisory firms have usurped the role of securities regulators, but with no discernible checks and balances," said Pacific Rubiales general counsel Peter Volk.
Many other companies have complained publicly in the past about proxy recommendations. Kinross Gold Corp., for example, launched a public campaign in 2010 to dispute an ISS recommendation to vote against Kinross's $7.7-billion (U.S.) merger with Red Back Mining Inc., arguing ISS lacked the mining and geology expertise to assess the deal. The deal was later approved by investors.
In its own submission to regulators, ISS said it is already doing many of the things companies are urging should be mandated by regulation. For example, ISS said it has created strict internal walls to ensure its consulting services are separate from its voting advisory services. It has also undertaken "extensive efforts" to improve its public transparency, deal with complaints about factual errors and solicit input from investors.
It also said it has introduced an ISS feedback review board to give companies a way to communicate with ISS and influence policy.
Editor's note: An earlier online version of this story and the original newspaper version of this story incorrectly described Pacific Rubiales and Gran Colombia as sister companies. This online version has been corrected.