If you read the Wall Street Journal article, For Proxy Advisers, Influence Wanes (May 22, 2013), you might think that both Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) are on the ropes. There’s even a quote from Glass Lewis’ VP of proxy research, David Eaton, that seems to buttress that conclusion:
“Our power is probably shrinking a little bit.”
The article discusses how some of the larger mutual funds and money managers, like BlackRock and Vanguard Group Inc., have teams that handle more of the leg work that used to be in the proxy advisors’ wheelhouse. But these large institutional shareholders still subscribe to the ISS and/or Glass Lewis proxy reports. In many cases the ISS and Glass Lewis proxy report are viewed as background research on the company, which then may be supplemented by the institutional shareholders’ staff (which are generally too small for them to handle all the research themselves in a cost efficient manner).
The article cites a 2002 study that found that a negative ISS vote recommendation on management proposals influenced from 13.6% to 20.6% of the vote. Additionally, with the passage of the Dodd-Frank Act with its say-on-pay requirements, the influence of proxy advisors has grown. According to a 2012 study by the Conference Board, about 70% of 110 large and midsize companies indicated that their pay practices were influenced by proxy advisory firm policies.
Glass Lewis and ISS indicated that they are recommending against fewer say-on-pay votes this year and fewer have actually failed. According to Broc Romanek’s blog today on CompensationStandards.com, there have been only 23 say on pay votes that failed so far in the 2013 proxy season.
The conclusion I reach? A bit different than the article–proxy advisors’ influence is still going strong.
Why? Because at this point many large and midsize companies are either incorporating the proxy advisors’ policies regarding pay practices into their pay designs up-front or at least considering them during the design phase. Therefore, more companies are either complying with the proxy advisors’ policies or are aware of anything done outside the lines of those policies and can then do a better job of explaining the rationale for such compensation actions to their shareholders.
So while it might appear from a pure vote perspective that the influence of the proxy advisory firms is waning (which I question a bit given what I’ve seen in the context of equity plan proposals for some time, see the white paper Reid Pearson of Alliance Advisors and I published earlier this year on the topic which shows that failed equity plan proposals have stayed at about the same level over the past five years, Equity Plan Proposal Failures: 2007-2012), I believe their influence on executive compensation at public companies is actually growing.
Equity Plan Propsal Failures: 2007-2012: https://www.exqty.com/Media/Publications/EP%20Proposal%20Failures%202007-2012_20130107.pdf