Proxy advisers face challenge from corporate critics

  • Updated: November 30, 2013 - 2:00 PM

In shareholder votes, big investors often follow the lead of advisory firms. Do they have too much clout?

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Proposed severance deals for Nash Finch executives got a thumbs-down.

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– After an advisory firm recommended against proposed severance packages for Nash Finch Co. executives in a recent merger, nearly three-quarters of the Edina company’s stockholders voted that way.

In June, the objections of such firms preceded the near-defeat of Minneapolis-based Target Corp.’s executive compensation plan. It passed with a razor-thin 52 percent of shareholder votes.

While such votes often aren’t binding on a company, they signal the power of what are known as proxy advisory firms.

But now critics are pushing back, accusing the firms themselves of conflicts of interest and secrecy. Corporations are aiming to limit what they see as inappropriate influence.

Policies on pay and management “should not be driven by nonshareholders,” said David Strandberg, a lawyer with Nasdaq OMX, which in October petitioned the Securities and Exchange Commission to crack down on such firms.

Nasdaq OMX asked the SEC to force proxy advisers to disclose more about their decisionmaking processes and potential conflicts of interest in consulting and financial services that they offer at the same time they make proxy recommendations.

He called those things “perverse financial incentives.”

Patrick McGurn, executive director of advisory firm Institutional Shareholder Services (ISS), said his firm looks out for its clients’ interests every bit as well as company boards, which he says “are not reaching out to shareholders at all.”

“The idea that something nefarious is going on is ridiculous,” McGurn said.

The battle continues Thursday in Washington as proxy advisers and their critics try to make their cases to the SEC.

What cannot be disputed is that proxy advisory firms play a big role in votes cast by thousands of institutional investors, who, according to the Conference Board, now hold 75 percent of shares in publicly traded U.S. companies.

The Minnesota companies Best Buy, Digital River and Regis each had pay packages rejected in recent years after opposition from proxy advisers.

Mood of skepticism

Business ethics experts say outside scrutiny of corporate management is not bad for shareholders, given the poor and sometimes criminal choices made by executives at corporations like Enron, WorldCom, AIG and Lehman Brothers. Those decisions, blessed by boards of directors, wiped out the investments of millions of stockholders.

“We’re in an environment where shareholders are more skeptical,” said Richard Painter, professor of corporate and securities law at the University of Minnesota. “They are more interested in hearing a second opinion than they were 10 years ago.”

The question is whether those second opinions carry too much clout.

“I’m concerned that directors [on company boards] now make decisions based on what they think proxy advisory firms want” and not what is best for the company, said John Stout, the Minneapolis lawyer who leads the American Bar Association’s Corporate Governance Committee.

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