SEC Announces Agenda and Panelists for Roundtable on Proxy Advisors

On November 27, 2013, the Securities and Exchange Commission (SEC) announced the agenda and panelists for its December 5, 2013 roundtable on proxy advisors. The roundtable will be broken into two sessions.

The first session will explore the current use of proxy advisory services, including the factors that may have contributed to their use, the purposes and effects of using the services, and competition in the marketplace for such services.

The second session will explore issues identified in the Commission’s 2010 concept release on the U.S. proxy voting system, including potential conflicts of interest that may exist for proxy advisory firms and users of their services, and the transparency and accuracy of recommendations by proxy advisory firms.

For more information, please see: SEC Announces Agenda, Panelists For Roundtable On Proxy Advisory Services, available at:

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540419621#.UpYo7uJ76Ds

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Equilar (Glass Lewis ) Peer Group Update

Last week, Equilar announced that it had opened up its peer group update process for companies.  Russell 3000 companies and Canadian companies in the S&P/TSX Composite Index can provide updated peer groups that will be disclosed with their next proxy covering pay decision made for this current fiscal year (i.e., calendar year companies that changed their peer group for 2013 pay decisions which will be disclosed as part of the company’s 2014 proxy).

Companies will be able to provide peer group updates until December 31, 2013. The updated peer groups will be used by Equilar in Equilar’s Pay for Performance Analysis and Glass Lewis’ (Say on Pay) pay for performance quantitative analysis. If a company does not update its peer group, Equilar will use the peer group the company disclosed in its 2013 public filing (proxy).

Companies that want to submit peer group updates can do so at the following Equilar website set up to take such submissions:

http://insight.equilar.com/app/peer_update/index.jsp

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MSCI Seeking Strategic Alternatives for ISS

This morning MSCI Inc. announced that it will be seeking strategic alternatives for its Institutional Shareholder Services, Inc. (ISS) business [you can read the press release here: http://www.issgovernance.com/pressISS103113] . This represents the start of a process that may eventually lead to a full separation of ISS from MSCI. However, as MSCI points out, it is not certain that any transaction will occur with respect to ISS.

MSCI joins a growing list of companies that controlled ISS only to find that it might not provide the right synergies with corporate-focused sales and services (since many corporate issuers have a big issue in buying anything from a company that controls ISS).

Frankly, depending on the outcome of this process, it could lead to some significant changes to ISS policies, both current and future, as well as to the policy development process.  It might be time for ISS and MSCI to consider what transpired when Glass Lewis & Co. put itself on the block a few years back and ended up being purchased by the Ontario Teachers’ Pension Plan Board (“OTPP”) and Alberta Investment Management Corp. (“AIMCo”).  It may make sense for a consortium of large institutional shareholders to acquire ISS and effectively use it as their “outsourced” research office. The research could then continue to be sold to other institutional shareholders and corporate issuers.  We’ll have to wait and see what alternatives get explored and where things come out and if it means any change for ISS.

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Proxy Advisors’ Influence Waning?

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.

WSJ article: http://online.wsj.com/article/SB10001424127887323336104578499554143793198.html#printMode

Equity Plan Propsal Failures: 2007-2012: https://www.exqty.com/Media/Publications/EP%20Proposal%20Failures%202007-2012_20130107.pdf

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