American proxy report proves timely
In the wake of the mess generated by advisory firms in the proxy battle at Calgary-based Crescent Point Energy comes a timely report from Washington D.C.-based American Council for Capital Formation (ACCF).
The 29-page report, titled The Conflicted Role of Proxy Advisors, is timely for another reason: near the end of 2017, a bipartisan sponsored bill passed through the U.S. House of Representatives. The bill, now on the way to the Senate, would require the two leading advisers in the Crescent Point dispute, Institutional Shareholder Services Inc. and Glass Lewis & Co., to formally register with the SEC and within those filings “disclose their potential conflicts of interest and codes of ethics.”
If the legislation becomes law, it will be good news, said Timothy Doyle, the report’s author, vice-president of policy and general counsel at the ACCF, an entity that encourages policy “to promote investment, economic growth, and a higher standard of living for all.”
On Wednesday Doyle said his organization “supports the principles in the bill,” while reiterating the report’s two main themes: proxy advisers have emerged as quasi-regulators with unchecked powers; and these firms are not “neutral” arbiters of good governance but rather “very much for-profit enterprises.”
On the first theme, proxy advisers have become a powerhouse because institutional investors (which manage the bulk of investable assets) slavishly follow their recommendations about 80 per cent of the time. Doyle said a negative recommendation “can lead to a 25 percentage-point decrease” in voting support.
“The system has been created where the proxy advisers have the ability to change company policy based on their recommendations,” said Doyle. Accordingly, disclosure has been required “across public companies without any statutory requirements.”
But aren’t the proxy advisers reflecting the wishes of institutional investors? “That’s not their role,” said Doyle. And more important “is the transparency and how they make their decisions. It’s not clear what they do,” said Doyle, noting annually the two publish guidelines that serve as the basis for their recommendations.
In other words, “without having a transparent process, it’s hard to know who is influencing and what that influence is doing,” added Boyle. “But we know the positions (adopted by the proxy advisers) on what they support has been changing and that (those changes) means a cost on companies.”
What bothers Doyle is that power has been transferred from the board to either the advisory firms or to the shareholders. “It’s like going from a representative democracy to a true democracy. That’s not the way the system should work.”
Maybe, but most large issuers (including Crescent Point) now have an outreach program with their shareholders. That outreach may have played a key role in the vote for its director nominees.
On the second theme, Doyle’s concern is the advisers “are making recommendations and then offering services that would change those recommendations or change a company’s ability to then get a positive recommendation. That’s where the oversight needs to happen.”
As well, an understanding of the methodology used to determine recommendations would be helpful. “Before you blindly follow that recommendation, you should know how it’s created, who’s supporting it and why,” added Doyle.
Doyle said the report was written to present information identifying the problem, for concepts to be agreed upon and for some solutions to be presented. “Work through the details, close the door, get it done and make the sausage. That’s how D.C. is supposed to work.”
Reached Wednesday, ISS “declined” to comment.
There is a strong Canadian angle to the advisers, since ISS is owned by Genstar Capital, which traces its roots to Montreal, while Glass Lewis is owned by Ontario Teachers and AIMCo.