By Cydney Posner
Poor ISS. First, a censure from the SEC and then, an article from the WSJ concluding that ISS is not very relevant anymore. Not a good hair day for ISS.
This Wall Street Journal article, For Proxy Advisers, Influence Wanes, (courtesy of Cooley Partner Brent Fassett), argues that proxy advisors are losing influence because companies are more engaged in direct shareholder outreach and because more big investors handle their own voting analytics.
In the recent past, the article notes, proxy advisory firms "carried considerable clout. According to a 2002 study published in the journal Financial Management, a negative recommendation on management proposals from ISS influenced between 13.6% and 20.6% of the vote." With the introduction of mandatory say on pay, their influence increased. According to the article, "[a]bout 70% of 110 large and midsize companies said their executive-pay practices are influenced by proxy-advisory firms, according to a 2012 study co-led by the Conference Board, a New York research group." The article cites the Hewlett-Packard Co. say-on-pay vote as a typical example. After ISS had opposed H-P's pay practices this year, H-P modified its compensation plan right before the annual meeting, leading ISS to drop its negative recommendation. The say-on-pay vote passed.
Recently, however, the article contends, companies eager to avoid negative votes are "more aggressively dispatching top executives and board members to court investors and argue against ISS's and Glass Lewis's recommendations. The outreach is having an effect." As the poster child for this argument, the authors cite the vote on the shareholder proposal to split the CEO/Chair roles at Chase: although ISS and Glass Lewis both recommended that shareholders support the proposal, the company "mounted an unusually intense shareholder lobbying effort to defeat it. And at Tuesday's annual meeting, the proposal won just 32.2% of the vote. ‘Our power is probably shrinking a little bit,' said [the] vice president of proxy research for Glass Lewis." The president of ISS, however, contends that its "corporate-election recommendations ‘matter more now than they have ever mattered,….Ninety-four percent of our clients renew every year.'" A Glass Lewis executive acknowledged that they "have seen less failed say-on-pay votes this year than either of the previous two years." In addition, both Glass Lewis and ISS said they are making proportionately fewer negative recommendations on pay votes this year.
With respect to big investors, the authors suggest that, while "mutual funds and asset managers traditionally had rubber-stamped" the recommendations of proxy advisory firms, now, those investment firms "are doing more of the work themselves. BlackRock Inc., the world's largest money manager by assets, relied more on proxy advisory firms until it bought Barclays Global Investors in 2009. Barclays had its own team of corporate governance specialists, which now handles research on companies across the world for the entire company, a spokesman said. BlackRock has become more vocal on corporate governance issues. Last year, it mailed a letter to 600 of its biggest holdings urging the companies to meet with BlackRock before meeting with proxy advisers."
According to the article, Vanguard Group employs about a dozen analysts to research companies year-round, while ISS and Glass Lewis reports "represent only one tool for making voting decisions…'Their recommendations don't determine where we end up,'" according to a Vanguard representative. He also noted that "[i]n recent years, Vanguard has communicated more often with companies it invests in," including written communications to companies from the CEO explaining Vanguard's position on certain issues. Nevertheless, smaller "investors still rely heavily on proxy advisers, in part because they often lack the resources to fund their own analysts."
The authors note that, while Glass Lewis does not have a consulting business, ISS "has long been criticized for selling corporate governance consulting services to some of the same companies that are the subject of its voting recommendations. ISS said it has adopted policies to guard against possible conflicts of interest."