Dear Chairman White:
Re: Survey of Business Roundtable Member Companies Regarding Proxy Advisory Firms
On behalf of Business Roundtable, thank you again for meeting with us on June 13 to discuss your views on the future of key regulatory matters. As you will recall, the subject of proxy advisory services was very much on the mind of attendees. Accordingly, following our meeting, I asked the Business Roundtable Corporate Governance Committee to provide me with information about their experience with the proxy advisory services. In the interest of furthering the discussion on the role and regulation of proxy advisory services, we would like to take this opportunity to share the key results with you.
As an initial matter, our member companies fully support the fundamental goals of accuracy and transparency in communication with shareholders and look to support the Securities and Exchange Commission in its responsibility to create pertinent processes to advance these goals. We have been concerned for some time, however, with the practices followed by and the growing influence of the proxy advisory services, such as Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co., LLC (Glass Lewis). In this regard, we do not expect to always agree with the recommendations of the proxy advisory services, but we do believe it is in the interest of our shareholders to be able to count on a robust and transparent process by which these services develop their recommendations.
In our inquiry, almost all of the twenty companies that responded indicated that they historically have found one or more factual errors in the reports prepared by the proxy advisory services. ISS generally distributes preliminary copies of its reports to our companies, but Glass Lewis does not. ISS generally fixes the errors that are identified to them before the final reports are published, but some respondents reported that identical or similar factual errors were made in their reports across several years. Moreover, a significant number of members reported that ISS has often given them insufficient time, sometimes as little as nine hours, to review their reports before publication. The existence of these factual errors underscores issuers’ need to review preliminary reports of all the proxy advisory services with sufficient time for review. We suggest at least five business days.
Respondents also indicated that ISS was at times resistant to dialogue once comments had been provided, and that Glass Lewis does not engage with issuers before (and historically has not engaged with issuers after) reports are published. There clearly should be an opportunity for issuers to discuss factual disagreements with the proxy advisory services before their final reports are distributed to shareholders.
Members also consistently reported that neither firm communicated their methodologies or explained how those methodologies resulted in their recommendations, even in instances in which the issuer communicated to a firm that it suspected the firm had used inaccurate information. This problem is particularly acute with respect to the selection of peer companies by proxy advisory services in analyzing compensation. There clearly needs to be greater disclosure of the methodologies and assumptions that proxy advisory services use in making their recommendations.
Finally, our results indicate that greater attention should be paid to whether institutional investors are appropriately exercising their fiduciary duties in making voting decisions. For example, one respondent stated, “[i]nstitutions are effectively shirking their fiduciary duties and appear to be relying on the proxy advisory firm’s determination before casting their vote.” While investors may choose to use the services of proxy advisory firms and the information they provide, they retain ultimate responsibility as they do with respect to the hiring of any third-party. We note in this regard the Commission’s regulatory authority over investment companies and investment advisors.
We hope you will find this information useful. We appreciate the rulemaking demands that have been put on the Commission under the Dodd-Frank Act and the JOBS Act but urge the Commission to turn its attention expeditiously to the issues raised by the increasing influence and practices of proxy advisory services and in its 2010 Concept Release on the U.S. Proxy System. Please let us know if there is any additional information we can provide. Thank you again for your time.
Alexander M. Cutler
Chairman and Chief Executive Officer
Chair, Corporate Governance Committee
Keith F. Higgins, Director, Division of Corporation Finance
Norm Champ, Director, Division of Investment Management