BOSTON/WASHINGTON Dec 3 Are proxy advisory firms
giving mutual funds too much help with their homework?
That question is due for airing at a event in Washington on
Thursday focused on the role of proxy advisers like
Institutional Shareholder Services and Glass, Lewis & Co. that
help funds decide how to vote at corporate annual meetings.
The U.S. Securities and Exchange Commission could ultimately
use points raised by industry critics and other participants at
the session to set new rules - such as disclosure requirements -
on the proxy advisers. The agency is hosting the session,
billing it as a roundtable discussion with leaders of the
advisers, fund firms, companies and academics.
With contentious proxy battles becoming more common,
skeptics have zeroed in on the role of mutual funds and other
clients of the proxy advisers. Critics, some aligned with
business groups like the U.S. Chamber of Commerce, say they
worry that big investors have effectively outsourced their
voting to the advisers to save money without concern for
companies' best interests.
It is a sore point for mutual fund firms, especially smaller
ones with less staff to evaluate voting at the thousands of
companies whose stocks they own.
The funds' costs could rise, depending on what new rules
emerge, said Jill Fisch, a University of Pennsylvania law
professor. The current system, she said, "is an incredibly
low-cost way of collecting a huge amount of information for many
large institutional investors. The alternatives are likely to be
less efficient and more expensive."
One debate is how many strings the proxy advisers pull. Fund
companies such as Dimensional Fund Advisors, Invesco Ltd
and Wells Fargo & Co's asset management arm voted as
much as 99 percent of the time with the proxy advisers on
executive pay questions, a study led by Stanford University
professor David Larcker recently found.
But another recent paper, published in the Harvard Business
Law Review by Penn's Fisch and others, found voting by big fund
firms like Fidelity differed "substantially" from ISS on
director elections. The authors wrote that "more funds seem to
blindly follow management recommendations than blindly follow
Representatives for Dimensional, Wells Fargo, Fidelity and
other fund firms did not make executives available to comment.
Invesco said in a statement that its investment teams treat
proxy adviser research "as one of many research tools in
determining how to vote a proxy."
The focus on funds marks a new twist after years of
complaints about proxy advisers, often from businesses that are
the target of negative vote recommendations, such as on
executive pay or director elections.
SEC Commissioner Daniel Gallagher warned in July that the
SEC had created a regulatory environment that has allowed
investment advisers to adopt a mindset in which they blindly
vote in line with proxy adviser recommendations.
Gallagher, a Republican, said in the speech that he has
"grave concerns as to whether investment advisers are indeed
truly fulfilling their fiduciary duties when they rely on and
follow recommendations from proxy advisory firms."
Speaking at a corporate-governance conference on Tuesday,
Gallagher also acknowledged differences between larger and
smaller fund firms when it comes to proxy voting. One solution
might be to revise rules that now compel smaller firms to cast
"Why are we making everyone vote on every vote?" he asked.
Another critic has been Nasdaq OMX Group General
Counsel Edward Knight. He said this fall that the proxy advisers
"exert outsized influence from the shadows."
Speakers at Thursday's SEC event will include executives
from BlackRock Inc., and Charles Schwab Corp.
The SEC has done little in the area since a report in 2010
that noted how proxy advisers face potential conflicts such as
when they provide both voting recommendations and consulting
services to corporations seeking help with proposals. Another
complaint is that the firms say too little on how they decide
their voting recommendations.
The SEC sought public opinions on solutions it outlined -
but did not act upon - in the 2010 report, such as regulating
proxy advisers like credit-rating agencies, or having them
disclose more about how they handle complaints.
It is not clear if the five-member SEC will take any action.
Speaking to reporters on Tuesday at the conference where
Gallagher appeared, SEC Chair Mary Jo White did not take a
position on the proxy advisers and said Thursday's event will
help in "identifying what the problems are and whether further
market or regulatory responses are needed and if so, what the
responses should be."
The advisers have defended their records. K.T. Rabin, chief
executive of closely held Glass Lewis, said similarities between
how investors vote and her company's recommendations only show
their similar concerns. Top asset managers, "despite what some
misguided academics suggest, are not shirking their fiduciary
responsibilities," she said via e-mail.
In an e-mailed statement, ISS said it helps clients make
sense of governance issues that are "voluminous and complex, and
ISS works hard to ensure that clients have all the tools they
need to make informed voting decisions." ISS of Rockville,
Maryland, is a unit of MSCI Inc but is up for sale
Proxy adviser clients also include hedge funds and
endowments, but mutual fund firms get the most heat because
their voting records are public.
Jack Zwingli, CEO of Incentive Lab LLC, a Scottsdale,
Arizona, compensation analysis firm, said one outcome could be
that big investors would have to buy research from multiple
proxy advisers - expenses that would hit smaller firms harder.
"It would be painful for them," Zwingli said.