SEC round table discusses shift in who pays for proxy-voting services

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Anne Sheehan, CalSTRS' director of corporate governance, said she 'doesn't know whether to feel insulted or patronized that we blindly follow proxy adviser recommendations.'

Money managers might need to charge clients for proxy voting to help finance the expense of that service, Michelle Edkins, managing director and global head of corporate governance and responsible investment, BlackRock (BLK), said Thursday at the SEC's proxy advisory services round-table webcast.

“You can't get indexing nearly for free and expect deluxe” proxy voting from the money managers, said Ms. Edkins, one of 18 panelists, four SEC commissioners and two SEC directors participating in a four-hour discussion on potential changes to the proxy-voting advisory services industry.

Among other issues raised by panelists, Daniel M. Gallagher, SEC commissioner, and Harvey Pitt, CEO of Kalorama Partners and former SEC chairman, expressed concerns that SEC regulatory privileges have led to an entrenched concentration of proxy advisory industry into an essential duopoly of Institutional Shareholder Services Inc. and Glass Lewis & Co.

“It's almost impossible to set up a proxy advisory (firm) today” in a way to attract a meaningful market share, said Michael J. Ryan Jr., vice president, Business Roundtable, and former president and chief operation officer of Proxy Governance, a proxy advisory firm that left the business in 2010.

The expense to create a critical capacity in terms of expertise and technology to evaluate a minimum necessary 4,000 U.S. companies and 6,000 non-U.S. firms to provide coverage for clients represents a huge barrier to entry in the proxy advisory business.

Katherine Rabin, CEO, Glass Lewis, said, “There are basically 10 of us (proxy advisory firms) globally.”

Mr. Gallagher called for addressing the regulatory privilege, business concentration, lack of competition and investor overreliance on proxy advisory firms before the situation “becomes a bigger problem,” likening their positions to the status of credit-rating firms whose oversight appeared adequate before the financial crisis exposed their “bad structured finance ratings.”

Mark Chen, associate professor of finance, Georgia State University, said plenty of evidence suggests a high correlation between proxy advisory firm recommendations and voting outcomes.

Anne Sheehan, director of corporate governance of the $175.9 billion California State Teachers' Retirement System, West Sacramento, said she “doesn't know whether to fell insulted or patronized that we blindly follow proxy adviser recommendations.”

Nell Minow, co-founder and board member, GMI Ratings, pushed back at critics of proxy advisory firms and embraced the firms' role in the marketplace, rejecting the comparison with credit-rating firms and their conflicts of interests, noting proxy advisory clients pay for their corporate governance advice not the corporations. Ms. Minow rejected the idea that regulatory privilege drove clients to proxy advisory firms, saying investors aren't forced to buy the services.

Damon Silvers, director of policy and special counsel, AFL-CIO, said nothing is particularly wrong with investors following the proxy advisory firms' recommendations. On the contrary, Mr. Silvers said for fiduciaries to pay for proxy advisory services and not follow such advice should raise questions about the prudency of spending for such services.

Mr. Silvers said proxy advisory firms “enlighten obscure areas” despite the SEC's best efforts to draw out more disclosure.

Mr. Silvers said he is “unhappy” with concentration in the industry, an issue for which panelists offered no resolution.

Trevor Norwitz, partner at law firm Wachtell Lipton Rosen & Katz, worried about what he considers the outsize influence of proxy advisory firms, calling for more disclosure of conflicts by proxy advisory firms. “Should ISS, which owns no stock, have the power of a $4 trillion voter?” Mr. Norwitz asked.

But Eric Komitee, general counsel, Viking Global Investors, said, “It's an overstatement to refer to proxy advisers as a $4 trillion voter.”