The two firms that dominate the shareholder advisory industry were accused by Republican lawmakers and the U.S. Chamber of Commerce of pushing activist proposals without sufficient oversight.
Institutional Shareholder Services Inc. and Glass, Lewis & Co., the leading companies advising large investors how to cast their votes, were criticized by Republican lawmakers at a hearing today for advocating agendas that they said hurt company value and for advising shareholders on issues in which they have a potential financial interest.
“Proxy advisory firms and activist shareholders have increased the costs of doing business for many public companies,” said Representative Scott Garrett, the New Jersey Republican who heads the House subcommittee that oversees capital markets. The firms have “teamed up with unions, pension funds and other activist shareholders to push a variety of social, political and environmental proposals that are generally immaterial to investors.”
Last month, both Glass Lewis and ISS weighed in on a high-stakes proxy vote by recommending that shareholders of JPMorgan Chase & Co., the biggest U.S. bank, reject members of its board and split Jamie Dimon’s dual roles as chairman and chief executive officer. The bank’s shareholders rejected that advice.
“The discussion at the hearing would have benefited from the presence of proxy advisers including Glass Lewis,” said Robert McCormick, chief policy officer for the firm, in an e-mail. His company, which is owned by the Ontario Teachers’ Pension Plan Board, has addressed and resolved conflict-management points, he said, and it’s working with other advisory firms on an industry code of practice.
“If Glass Lewis were seen as acting in the interests of our owner or a particular client or group of clients, we would be out of business tomorrow,” McCormick said.
Harvey Pitt, a former Securities and Exchange Commission chairman who testified on behalf of the Chamber of Commerce, said the advisory firms had “extensive but unfettered influence” while “serious conflicts permeate their activities.” He pointed to the firms’ issuing voting advice affecting entities with which they have business relationships.
Lynn Turner, a former SEC chief accountant who was a former head of research at Glass Lewis, said such firms provide a necessary service to advise institutional investors who can’t examine every corporate contest in the annual proxy season.
“Clearly the mutual funds and pension funds don’t have the staff to go through all of those,” Turner said. He argued that most funds are using advisory recommendations as only one factor in their decisions, and he said that taking those recommendations away could increase fees and costs to investors.
SEC Commissioner Daniel Gallagher said in a speech last month that the advisory industry should be examined to determine whether the firms are excessively relied on in corporate elections and whether their work benefits shareholders financially.
The witness list for today’s hearing didn’t include officials from either of the advisory firms. Most of the witnesses and other Republican members of the subcommittee were critical of ISS and Glass Lewis, which Garrett said controlled 97 percent of the shareholder advisory market.
“The special-interest groups that testified against proxy advisers today are attempting to attack and discredit the messenger rather than focus on the issue of what makes good corporate governance and who ultimately is responsible for the vote,” Cheryl Gustitus, an ISS spokeswoman, said in an e-mail. She said ISS provides independent analysis in a “transparent manner with significant input from many constituencies.”
On May 23, ISS -- a unit of New York-based MSCI Inc. -- agreed to pay $300,000 to resolve SEC claims that an employee traded confidential client voting information for meals and concert tickets while ISS failed to set up proper safeguards.