“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.
A faceoff at a recent ABA business law forum offered a snapshot of the tension between corporate boards and groups with the ability to defy them.
ISS’ McGurn and Nasdaq’s Strandberg traded verbal jabs about whether corporate boards or for-profit advisory firms best represent shareholder interests.
In its SEC petition, Nasdaq OMX accused proxy advisers of hiding specific information about how they make recommendations in order to drum up business for their consulting operations. The company also charged conflicts of interest because financial management businesses associated with advisory firms may be buying and selling shares in companies at the same time they are making recommendations on their proxies.
On its website, ISS publishes the general guidelines it uses for judging executive compensation and other corporate issues. It does not, however, provide precise details.
“Are you going to require Pepsi and Coke to put their formulas out there?” McGurn asked. “I find it strange that the business community says there should be no intellectual property protected.”
McGurn also says a “firewall” separates ISS’ research arm from its consulting business, which sells clients advice on how to structure proxy requests that can gain the support of institutional investors. The company makes available on its website explanations of its policies regarding potential conflicts of interest.
That has not been enough to silence critics who believe ISS and the other big proxy advisory firm, Glass Lewis & Co., have too much sway and face too few regulations. Together the pair control roughly 97 percent of the proxy advisory market.
Glass Lewis, owned in part by a pension fund and an investment company, joined ISS in blasting Target’s executive compensation plan this year. It did not respond to a request for comment.
A 2012 Stanford University study showed that proxy advisory firm objections to management-sponsored pay proposals increase no votes by as much as 20 percent.
The Stanford study also showed that 59 percent of businesses now seek guidance or input from proxy advisory firms in formulating pay packages.
Current and former members of the SEC have recently lambasted the power of proxy advisers in public speeches and Congressional hearings for forcing advisory votes on executive compensation more often than federal law requires and for being owned by companies that invest in the corporations that proxy advisers review.
The firms’ recommendations, however, do not always carry the day.
Best Buy, like Target, found itself at odds with ISS on executive compensation this year, with ISS arguing that more of CEO Hubert Joly’s pay should be tied to the company’s performance. The company’s plan still got 83 percent of the vote.
The U’s Painter served as the chief ethics lawyer to the George W. Bush administration from 2005 to 2007. He says shareholders are better off hearing a debate between management and outside proxy advisers than they are hearing a single point of view.
“I would not prohibit potential conflicts of interest,” Painter said. “But it has to be disclosed that you have a dog in the hunt.”