Why a proposal to rein in proxy advisers isn’t good enough: ICD

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Canada's corporate directors aren't fully satisfied with the guidelines provincial securities regulators proposed to oversee the actions of influential proxy advisers.

After spending roughly two years analyzing firms such as Institutional Shareholder Services Inc. and Glass, Lewis & Co, which help institutional investors vote on annual board elections and major takeover bids, Canada's patchwork quilt of provincial regulators released draft guidelines to govern their behaviour in April, leaving them open to a 60-day comment period.

Canada's Institute of Corporate Directors, which represents board members across the country, weighed in at the very last minute, and the prominent group made it clear they believe some major issues still need to be addressed.

While the regulators target "appropriate issues," the ICD still thinks there are big holes when it comes to the training of those who work for proxy advisers and around the issue of proxy advisers' dialogue with the companies they cover.

"A significant source of tension between issuers and proxy advisory firms is the quality of analysis informing vote recommendations," ICD wrote – a very nice way of saying they fear proxy-adviser staffers' qualifications aren't always up to snuff. "Concerns have been raised about the inexperience of proxy advisory firm staff who are required to analyze complex subject matter."

To address the issue, the ICD argues in favour of minimum levels of training for analysts whose work informs these firms' vote recommendations.

ICD doesn't stop there. The group goes so far as to ask proxy advisers to "reconsider their practice of issuing vote recommendations on intricate M&A transactions," because they believe such deals are too complex for the advisers to evaluate.

The second issue: dialogue, or lack thereof. Right now there isn't much of it between proxy advisers and the companies they cover, and the ICD worries this can lead to major mistakes. Because proxy advisers typically counter with the argument that they need to be independent and free of influence, the ICD is seeking some middle ground, recommending proxy advisers be required to meet with companies whenever they intend to issue a "contrary" opinion – in other words, if they suggest voting against a proposed takeover.

These thoughts are those of just one organization. The regulators have compiled all the public responses on ther individual websites, such as this one from the Ontario Securities Commission, and many support keeping the proposed guidelines as they are. But the very fact that prominent groups are arguing for stronger proposals proves this tug of war won't die down anytime soon.