Chamber Releases Update Detailing Approaches to SEC Proxy Firm Guidance

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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 Partners 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.

Step Forward

According to Pitt, who has been a persistent critic of two SEC 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.

Lack of Transparency

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 opine.

Crucial Principle

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 said he finds 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.

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 advisers 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.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The corporate governance update is available at http://www.centerforcapitalmarkets.com/wp-content/uploads/2015/01/021874_ProxyAdvisory_final.pdf.