Stay current on changes and developments in corporate law with a wide variety of resources and tools.
By Michael Greene
Jan. 7 — The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness Jan. 7 released a corporate governance update that describes several actions that public companies can take in light of the SEC's 2014 staff guidance on proxy advisory firms.
In the June guidance, the Securities and Exchange Commission clarified that proxy advisers must affirmatively disclose “significant relationships” or “material interests” that may pose a conflict of interest when they advise clients.
The chamber's update highlights three issues that public companies should focus on to ensure that the guidance is best implemented for shareholders: “communication with proxy advisory firms, managing proxy advisory firm conflicts of interest, and communication with institutional investors.”
During a chamber event in Washington, Harvey Pitt, the former SEC chairman and current chief executive officer of Kalorama Parners who also authored the update, and David Hirschmann, president and CEO of the CCMC, spoke about proxy advisory firms and the impact of the SEC's guidance.
The goal is not to eliminate proxy advisory firms, Pitt said, but to have them conform to reasonable standards of behavior that take into account all of the interests in shareholder proposals.
According to Pitt, who has been a persistent critic of two staff no-action letters that he says entrenched the outsized influence of Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC, the staff guidance was a tremendous step forward and just the beginning of the analysis on this issue. He noted, however, that he did not believe a lot of government regulation was needed and that this is an area where the private sector should be motivated to do something.
Hirschmann, who echoed the same criticisms of ISS and Glass-Lewis, added that he was encouraged by the SEC guidance and believes that it provides greater clarity for everyone, which can help create a more effective system.
According to Hirschmann, proxy advisory firms have become the de facto standard setter for corporate governance despite their lack of transparency on how they create these standards.
Pitt noted that the two firms, which control about 97 percent of the proxy advisory services market, have done an effective job of keeping themselves as the arbiters of corporate governance in the U.S. despite not owning a single share in companies in which they issue opinions about.
Pitt noted that the SEC's guidance effectively established that one of the crucial principles everyone should remember is that the purpose of rendering advice is to enhance shareholder value. He said this principle is crucial because it is what makes an economy run.
Although he noted that it was appropriate for individual shareholders to have their own views and agendas, he said there is a lot of activity that does nothing to enhance shareholder value.
According to Pitt, proxy advisory firms obtain an exemption from the proxy solicitation requirements on the assumption that they are trying to help shareholders enhance the value of their investments. Pitt found difficulty in this assumption, however, because there is lack of transparency in how proxy advisors come up with their recommendations and there may be uncertainty on whether they are based on current and accurate data.
He noted that in the end, the proxy advisory process should be a collaborative process between investors, proxy advisors and issuers.
In discussing the three takeaways from the SEC's update, Pitt said there is no substitute for public companies “doing their homework.”
Part of this process is that public companies should have a continuous dialogue with proxy advisors and institutional investors to ensure that their views are heard and that they have correct information.
He also noted that it's absolutely essential to know what is on the mind of shareholders and to present when the air is clear.
If the first time a company is talking to institutional investors is when it needs them, it is already too late, he said.
To contact the reporter on this story: Michael Greene in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Ryan Tuck at email@example.com
The corporate governance update is available at http://www.centerforcapitalmarkets.com/wp-content/uploads/2015/01/021874_ProxyAdvisory_final.pdf.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)