Powerful institutions in Washington are taking a renewed look at the way proxy advisory firms conduct business.
A bipartisan group of senators introduced a bill Nov. 14 that would "hold proxy advisory firms accountable" by requiring the Securities and Exchange Commission to regulate major proxy advisory firms under the Investment Advisers Act. The following day, the SEC hosted a roundtable discussion seeking industry input on improving the proxy voting system, including an examination of how proxy advisory firms should be regulated.
Laura D. Richman, counsel at Mayer Brown LLP in Chicago, said there's a good chance changes are coming to the proxy advisory market. The interest from Washington "could easily result in some additional regulation. But it also, I think, has the impact of making ISS and Glass Lewis think about what they're doing, and they may become more transparent on their own."
There have been calls to make proxy advisory firms more transparent about the way they formulate reports and further disclose conflicts of interests.
Executives at the two proxy advisory firms that control approximately 97% of the market — Institutional Shareholder Services Inc. and Glass Lewis & Co. — said at the SEC roundtable that they're working diligently to diminish and disclose any conflicts.
Katherine Rabin, San Francisco-based CEO of Glass Lewis, which is owned by the Ontario Teachers' Pension Plan and the Alberta Investment Management Corp., said her firm always discloses conflicts on the front page of a given report. At ISS, Gary Retelny, New York-based president and CEO, said his firm has "a strict firewall in place" between its consulting and research businesses. "If a company buys a product it won't help with a recommendation," he said, adding ISS already is a registered investment adviser.
Sean Egan, president and founding partner of Egan-Jones Proxy Services, Haverford, Pa., said his company does not have a consulting business, but there are "conflicts that arise from consulting when you're also in the proxy advisory business."
Mr. Retelny acknowledged "there are potential conflicts of interests in what we do and we work extremely hard to mitigate those conflicts of interest."