FINANCE - PROXY VOTING
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The Power of the Proxy New SEC Rules Spur Growth in Proxy Advisory Firms by Robert Sberna |
Today’s corporate leaders are increasingly facing calls for heightened boardroom accountability and disclosure.
While addressing and enacting a wide range of corporate governance measures, company executives are focusing greater attention on their firms’ proxy practices — both in the development of proxy initiatives and also in the proxy-voting practices of their pension fund managers.
By law, the fiduciaries of corporate, public or union pension plans — as well as mutual funds and trusts — are required to vote proxies in accordance with the best interests of plan participants, shareholders and clients.
But in the wake of several high-profile corporate scandals, the SEC and other regulators have implemented new mandates that require fiduciaries to not only document and disclose their votes, but also disclose the policies and rationale that they used in determining how to vote the proxies of the securities in their portfolios.
The newly adopted SEC rules are designed to shed light on the proxy voting of investment managers. By providing a semblance of transparency to the proxy process, regulators expect that pension plan participants, investors and other stakeholders will have a greater understanding of the issues that affect longterm shareholder value.
Changing attitudes, changing times
In years past, it was not uncommon for investment managers to more or less rubber-stamp proxy issues proposed by the companies in which it held stakes. Following the proverbial “if it’s not broken, don’t fix it” philosophy, portfolio managers sometimes neglected to vote their proxies at all. Proxies that aren’t voted are automatically cast with the company’s viewpoint.
“In cases where portfolio managers felt the stock wasn’t a good investment or the CEO wasn’t doing a good job, they wouldn’t bother to vote the proxy — they would simply sell the stock,” explains Jim Melican, managing director of policy at PROXY Governance, Inc., a proxy advisory and voting service.
But now, fiduciaries are responsible for understanding proxy issues and voting them in a responsible manner. Satisfying the new SEC proxy regulations means that portfolio managers must become apprised of diverse issues ranging from electing directors and approving executive compensation plans, to selecting independent auditors and voting for or against anti-takeover measures.
Because the investment managers of large pension plans typically invest in hundreds of securities, it can be impractical for managers to become knowledgeable about the various proxy issues of each of the firms it invests in, says Melican. As a result, fiduciaries are increasingly turning to third-party firms such as PROXY Governanceand Institutional Shareholders Services (ISS) for assistance in developing proxyvoting strategies and disclosure mechanics.
“The fiduciaries hire us to analyze proxy issues and provide informed recommendations on how to vote their
“The fiduciaries hire us to analyze proxy issues and provide informed recommendations on how to vote their proxies in the best interests of their investors.” — Cheryl Gustitus, senior vice president of communications at ISS.
proxies in the best interests of their investors,” explains Cheryl Gustitus, senior vice president of communications at ISS. “Basically, we serve as the research arm for proxy issues.”
In addition to recommendations, both PROXY Governanceand ISS offer voting services in which they oversee the physical voting of ballots, including the recordkeeping and disclosure of votes, and the rationale for those votes.
Gustitus notes that investment managers who adopt sound proxy-voting strategies can influence changes that benefit pension plan sponsors, participants and investors. “Proxy voting is one of the most important rights of an investor,” she asserts. “Through their votes, shareholders are able to have a say at companies...When investors don’t like what they see in issues such as executive compensation or the election of directors, then they can use their vote to either show support or non-support.”
Ultimately, investors want a strong return from their investments. Greg Taxin, CEO of Glass-Lewis & Co., a San Francisco-based proxy advisory firm, says, “Our only goal is to help institutions vote proxies in a manner that will lead to share price appreciation.”
Different approaches to similar goal
When developing recommendations, both GlassLewis and PROXY Governanceanalyze each proxy issue within the context of individual companies, whereas ISS takes an across-the-board stance on issues. “We apply our policies consistently across all companies,” Gustitus of ISS explains. “We think that the financial institutions tend to have to rely on consistent policy.”
Taxin says that the Glass-Lewis methodology is “decidedly contextual.” He notes that the firm’s analysts evaluate financial, economic and accounting issues as well as legal and public policy issues. “The bottom line is that we take a mathematical approach when we evaluate proxy issues,” he says.
PROXY Governance’s Melican says his firm views proxy issues within the context of company-specific metrics. “We want to look at the company’s track record,” Melican says. “We also look at the specifics of each proxy resolution. For example, we want to know if the same shareholder group has filed similar proxy resolutions at 50 different companies. We may find that their resolution is relevant at only 45 of those companies and merely academic at five. We look at each proxy issue and determine if it makes sense in terms of potentially maximizing shareholder value. Or if it is an issue that only tilts at windmills and the chances of it becoming reality are nil.”
PROXY Governance gathers a broad range of data that it feeds into a software model to determine an assessment. “We have a number of algorithms that we use to look at improvement in performance, whether it’s improving or deteriorating,” Melican notes. “Our methodology looks at a company’s performance relative to its peer group in several areas, such as executive compensation or whether directors are serving on the boards of too many firms. This data is all fed into a computer, and we can make proxy recommendations based on that model.”
While Melican, Gustitus and Taxin declined to disclose specific pricing for their firms’ respective services, proxy advisory firms typically offer several price models based on the size and type of the client organization. In light of the SEC regulations and growing demands of proxy voting, the use of proxy services may see still further growth in the coming years.
Robert Sberna is a freelance writer based in Strongsville, OH.
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