For Glass Lewis, more proxy clout means more heat

BOSTON (Reuters) - A Glass or a Lewis has never run proxy adviser Glass, Lewis & Co. But behind its fictitious marketing name, the firm’s genuine criticisms have helped stoke a contentious proxy season.

Now the firm is drawing serious heat.

On May 31, the U.S. Chamber of Commerce called on federal regulators to review Glass Lewis over what the business lobbying group called a potential conflict of interest, the latest salvo in a long-running argument over the influence of proxy advisers.

Glass Lewis CEO Katherine Rabin blasted back, denying any conflict and saying most clients make up their own minds in votes on touchy matters like executive pay or takeover defenses. Critics like the Chamber “really don’t have a good grasp of how we are used by investors,” she said in an interview.

The debate shows the growing clout of the San Francisco-based firm in a year when big shareholders have handed high-profile defeats to the management of the likes of Citigroup Inc, Nabors Industries Ltd and Chesapeake Energy Corp.

At each company, Glass Lewis recommended votes against management.

In just nine years, the firm with the concocted name has gone from start-up to the chief rival of ISS, the largest proxy adviser. ISS has been the U.S. Chamber’s favored target, but lately Glass Lewis has drawn more fire.

Where ISS of Rockville, Maryland, has held steady with around 1,700 clients and 550 workers in recent years, Glass Lewis has doubled to 1,000 clients from 500 in 2007, and increased its workforce by 50 percent to 300 people over roughly the same period.

Glass Lewis’ CEO attributed the firm’s growth to rising demand from investment managers paying more attention to proxy questions. A joint venture with Broadridge Financial Solutions Inc to supply research to smaller investors, typically with $3 billion or less under management, also helped, she said.

The growth has given Glass Lewis a higher profile among outsiders.

“They are No. 2 and trying harder,” said Kenneth Bertsch, president and CEO of a trade group for corporate secretaries.

The mind-numbing complexity of some questions on corporate proxy ballots has also helped boost Glass Lewis’ profile, as even large shareholders seek more voting advice.

Karla Bos, vice president of proxy voting for ING Funds, is considering hiring Glass Lewis to supplement reports her firm gets from ISS.

“They both do a terrific job, but they have some different viewpoints,” Bos said.


Glass Lewis was founded in 2003 by former Goldman Sachs investment banker Gregory Taxin and attorney Kevin Cameron.

Taxin said they chose the name Glass Lewis to invoke the influential U.S. Supreme Court Justices William O. Douglas, who once headed the SEC, and Louis Brandeis, a fan of transparency.

“We wanted to make it sound like a venerable long-standing place,” Taxin said. He called the name “a marketing thing.”

Corporate governance failures leading to debacles like Enron and WorldCom motivated the pair to start the proxy adviser firm, Taxin said. They signed up Rabin, once the business editor of The San Francisco Examiner.

Xinhua Finance Ltd., part of China’s state-run news agency, bought the firm in 2007. The founders stepped down, and Xinhua soon sold Glass Lewis for $46 million to the Ontario Teachers Pension Plan. ISS, meanwhile, is now owned by MSCI Inc.

Despite the criticism from corporate America, neither adviser would be mistaken for a member of Occupy Wall Street. Last year, Glass Lewis urged votes “against” management on pay at 17 percent of the U.S. companies it evaluated. ISS urged votes against management on pay 14 percent of the time. Less than 2 percent of U.S. companies failed to get a majority of support on their pay plans last year.

Glass Lewis CEO Rabin said the gap between the recommendations and the results shows big shareholders make up their own minds, a point many critics miss.

“There is an outdated view of the role of proxy advisers,” she said.

Still, corporate shareholders proved more active than usual this year, and many companies struck deals to avoid messy proxy fights. For instance, in March, Goldman Sachs Group agreed to name an independent lead director.

At JPMorgan Chase’s annual meeting in May, a measure to strip Chief Executive Jamie Dimon of the chairman’s title won 40 percent backing - up from 34 percent in 2010. In notes to their clients, both Glass Lewis and ISS urged separating the jobs.

Stances like those especially influence smaller institutional shareholders with less time to spend on voting, said James Copland, a researcher at the Manhattan Institute, a free-market think tank. The trend toward more frequent director elections also has increased the proxy advisers’ clout, he said.

Both advisers “can make matters very difficult for directors,” he said.


Some companies pushed back this year with outreach of their own. When Glass Lewis criticized pay at Sempra Energy, the San Diego utility disputed various points in a letter to shareholders. Sempra said the Glass Lewis analysis “lacks transparency, is conceptually flawed and inaccurate.”

Glass Lewis Chief Policy Officer Robert McCormick said its note to investors addressed Sempra’s objections, as clients understood. “Our clients are aware of how we model,” he said.

ISS supported Sempra’s pay. On May 10, shareholders cast 151 million votes “for” the pay and 25 million votes “against” it.

The latest dust-up for Glass Lewis came when U.S. Chamber executive Tom Quaadman asked for a review of what he called a possible conflict of interest. He cited how Glass Lewis urged investors to back dissident directors at Canadian Pacific Railway Ltd after the adviser’s owner, the Ontario pension fund, opposed the management slate of directors.

So far, the SEC has declined to comment.

Ontario Teachers Pension Plan spokeswoman Deborah Allan said Glass Lewis runs independently and disclosed its ties. In a June 1 press release, Glass Lewis said it supported seven of the company’s nominees while the Ontario plan opposed all incumbents.

Rabin said clients trust its independence.

“There’s nobody without conflict,” she said. “The test is how you manage those conflicts.”

Reporting by Ross Kerber; Editing by Aaron Pressman and Jan Paschal