By Ross Kerber
March 20 Proxy advisors should share drafts of their work with public companies and fund managers should be aware of proxy advisors' potential conflicts of interest, according to proposals offered by the U.S. Chamber of Commerce on Wednesday.
The ideas are contained in a "best practices" document the trade group issued in its latest effort to limit the influence of firms such as the Institutional Shareholder Services unit of MSCI Inc and closely held Glass, Lewis & Co.
Their proxy voting recommendations are often critical of the Chamber's corporate members, but are widely used by investment firms deciding how to cast their shareholder ballots.
The difference in interests has led to a complex debate over the role of the proxy advisors as the corporate annual meeting season gets going, especially when advisors suggest votes against company wishes. Both ISS and Glass Lewis recommended that Hewlett-Packard Co shareholders oust directors at a meeting on Wednesday, for instance.
Tom Quaadman, vice president of the Chamber's Center for Capital Markets Competitiveness, said the ideas were meant to be voluntary, in lieu of formal rules from an agency such as the U.S. Securities and Exchange Commission.
"We don't think that regulation is the answer here," Quaadman said in an interview. "We think this can be done by a collaborative effort by all the parties."
The group, which represents 3 million businesses, cited complaints from members on issues such as how the proxy advisors compare pay among peer companies.
On Wednesday, it offered ideas such as having proxy advisors provide public companies with drafts of their research reports in time to identify "any factual inaccuracies or other concerns." It also suggested that asset managers consider if a proxy advisor discloses potential conflicts of interest such as offering consulting services on corporate governance while evaluating governance practices.
The proxy advisors have defended their work and gained some support from investment firms that rely on their research, however.
In a statement in response to the Chamber's comments, ISS stressed how its client base overlaps with the Chamber's own constituency.
"We take exception with the Chamber's misinformed characterization of the proxy advisory industry and with their disrespect for the financial institutions that are our clients and, ironically, some of the Chamber's own members," the statement read.
"We are accountable to our clients who place their confidence in our service, to the companies we analyze and to the regulators that set the real guidelines for fiduciary responsibility."
Robert McCormick, chief policy officer for Glass Lewis, said in an interview that some points raised by the Chamber could be acceptable, such as agreeing on how to disclose potential conflicts of interest. But others would be "non-starters," such as sharing research with companies before it is published. That would open the door to lobbying on a particular issue by the company being evaluated, which would not serve paying clients of the advisory firm, he added.
The chamber received a cool reception from some fund firms for an earlier version of the guidelines. On Wednesday, a spokesman for mutual fund firm trade group The Investment Company Institute sent a statement that noted how funds already face controls over their proxy activity.
The statement said fund managers "must vote proxies consistent with their fiduciary duty to funds and their shareholders. Their proxy voting process is subject to SEC oversight, including a requirement that funds have and disclose the policies and procedures that govern their proxy voting."
Aaron Bernstein, editor of corporate governance newsletter Global Proxy Watch, said the Chamber's detailed recommendations would be hard for many firms to adopt.
"That kind of new burden is ironically very much what the Chamber always opposes for other businesses," he said.
In any case, the proxy advisors are working on their own standards in response to requests from European regulators, which could take momentum away from the Chamber's efforts, Bernstein added.