WASHINGTON/BOSTON Investors may be relying too heavily on the voting recommendations of the largest proxy advisory firms like Institutional Shareholder Services and Glass, Lewis & Co, a top U.S. securities regulator said Thursday.
The comments from Michael Piwowar, a member of the U.S. Securities and Exchange Commission, made him the latest critic of the proxy advisers and could signal changes for the industry after a string of confrontational annual company shareholder meetings.
New rules could affect executive pay, director elections and other areas where critics say the advisers hold too much sway.
"I have become increasingly concerned proxy advisory firms may exercise outsized influence on shareholder voting," Piwowar said.
He spoke during a roundtable held at SEC headquarters on Thursday to explore whether reforms may be needed to improve transparency and reduce conflicts of interest at firms like market-leader ISS, a unit of MSCI Inc, and closely-held Glass Lewis.
Backers say the firms offer a valuable service, especially to smaller institutional investors who may not have the resources to evaluate every vote they cast. Critics worry the firms encourage shareholders to vote blindly on proxy measures, and do so without divulging potential conflicts of interest.
Studies support both sides of the debate. But even proxy adviser executives and some of their clients seemed receptive to making practices more transparent, particularly if it means avoiding new regulations.
Glass Lewis Chief Executive K.T. Rabin for instance noted her firm is working with European regulators on areas like providing more details about its dealings with public companies.
Anne Sheehan, director of corporate governance for the California State Teachers' Retirement System, said she had no problem with greater disclosure by proxy advisers.
It is just one of many pension plans, mutual funds and endowments that use the proxy advisers to help determine votes in thousands of corporate contests annually.
NO STOCK, BIG SAY
In recent years many public companies and trade groups like the U.S. Chamber of Commerce have raised concerns about the advisors' influence. "The question is whether ISS, which owns no stock, should have the power of a $4 trillion voter," said Trevor Norwitz, a partner at the corporate law firm of Wachtell, Lipton, at the hearing.
In 2010, the SEC sought comment from the public on the issues. In July Piwowar's fellow Republican SEC Commissioner Daniel Gallagher said he was concerned that the SEC's own guidance to investment advisers has allowed them to blindly follow the recommendations of proxy advisers - a fact that could conflict with advisers' legal fiduciary obligation to put their own clients' interests first.
That has had the effect, Gallagher has said, of essentially giving proxy advisory firms a privileged status in the workings of corporate elections.
So far the SEC's other three members, including Chair Mary Jo White, have had a more measured response to questions surrounding the issue.
BIG FUNDS MAKE UP OWN MINDS
Roundtable participants on Thursday also sought to address questions raised about whether big investors overly rely on proxy adviser recommendations.
The debate has put regulation-wary Republicans and the U.S. Chamber in the unusual position of looking for new government restrictions.
Several private investors said they make up their own minds regardless of the proxy advisers' views. Eric Komitee, general counsel of hedge fund manager Viking Global Investors LP, said that is especially the case in hotter elections.
"The more contested the vote is, the less likely we are to be swayed" by proxy adviser views, he said.
Michelle Edkins, the head of governance for the big New York asset manager BlackRock Inc, said her company uses research from the proxy advisory firms only as "one input" in its voting decisions, and added it is useful because BlackRock must cast votes for investors in thousands of company stocks.
"We're all under time pressure, huge time pressure," she said.
Edkins suggested some investors could do more to disclose details of their voting process. But she cautioned that public companies still need oversight.
"Every single company tells you their independent directors are all independent" and all "fabulous" at their jobs, she said.
(Editing by Richard Valdmanis and Andrew Hay)