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The Globe and Mail

Regulators put spotlight on proxy advisers, ask for public feedback

Howard Wetston, new chairman of Ontario Securities Commission (OSC) photographed at the commission offices on Queen St., Toronto.

Fernando Morales/The Globe and Mail

Looking for recommendations on how to better govern Canada's powerful proxy advisers, the country's securities regulators are reaching out to solicit the public's opinion.

Proxy advisory firms such as Institutional Shareholder Services and Glass Lewis & Co. have raised eyebrows in recent years as their influence in proxy fights and big mergers and acquisitions grows. Large institutional investors such as Ontario Teachers' Pension Plan don't have the time to assess the merits of every single takeover proposal or board of directors shuffle, so they often relay on what ISS or Glass Lewis recommends.

Despite this influence, proxy advisers still aren't regulated by the country's securities commissions.

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Because the regulators have heard so many complaints, they have decided to launch a formal review, analyzing how these proxy advisers are governed in the U.S. and elsewhere, as well as asking the people who have frustrations to weigh in with public proposals for change.

Based on what it has already heard, the regulators have organized the common complaints into a few different groups, without assigning any specific weightings. These are: potential conflicts of interest, perceived lack of transparency, potential inaccuracies, a need for corporate governance standards and a over-dependence on the proxy adviser's recommendations.

All of these are important, but based on what is commonly relayed from Bay Street, the two most common frustrations are what many people believe is a lack of transparency, and the heavy dependence on proxy recommendations.

With regard to transparency, though the advisers release lengthy reports when they make a decision, but there is very little described as to how the decision was reached -- as in, who they met with, what models they ran. As for the dependence on proxy recommendations, many people fear that too much influence is in the hands of such a small group -- in Canada, just two major proxy adviser firms -- even though major companies will have many opinions from research analysts employed by the investment banks.

On this front, the OSC noted that in the U.S., studies have suggested 15 to 20 per cent of ISS clients authorized ISS to automatically vote their proxies however it sees fit. And in the case of Teachers, they actually own Glass Lewis, so clearly they value the firm's recommendations.

To deal with the complaints, the regulators have proposed some fixes, which are outlined in the public document. These include: possible disclosure of methodologies and analytical models and limiting conflicts of interest through "adequate organizational structures." But before they makes any decisions, the regulators want public feedback.

The regulators are also trying to determine exactly how proxy advisers should be governed in general. In the U.S., a 2010 review by the Securities and Exchange Commission didn't propose a particular regulatory framework, but the SEC has left open the possibility for governing them as investment advisers and proxy solicitors.

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For now, the regulators feel differently, arguing that these firms don't fall under either category. For that reason, there may be a need to create a new securities framework.

Still, none of this suggests that the regulators think proxy advisors are a problem. "There are good business reasons and capital market benefits for the existence of proxy advisory firms and the services they provide to their clients," says the report. "They serve a market need and we anticipate increased demand for their services."

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