June 1, 2018
While the Senate has yet to advance the legislation passed by the House of Representatives (detailed in Proxy Advisory Firms Need Greater Regulatory Oversight), members of the Senate Banking, Housing and Urban Affairs Committee have begun to raise questions about the current practices of the proxy advisory firms. Specifically, six Senators on the committee sent letters to Institutional Shareholder Services (ISS) and Glass Lewis detailing some of the alarming findings from academic research and recent Government Accountability Office (GAO) investigations.
The Senators are looking for answers from the proxy firms on how they vote, how they ensure the accuracy of the information used in their recommendations and how they assess and disclose conflicts of interest, particularly given that these two firms alone control approximately 97 percent of the proxy industry. Currently, only companies in the S&P 500 can review the reports provided by ISS and make corrections – Glass Lewis does not give any company that option, meaning they have no recourse when one of these firms issues a report about the company with inaccurate information. The New York Stock Exchange and Nasdaq have also both raised concerns about the disproportionate influence ISS and Glass Lewis have on public companies, particularly when it comes to corporate governance and proxy contests.
As Harvard Law School’s Forum on Corporate Governance and Financial Regulation noted last week, these letters echo many of the issues raised that led the House to pass the Corporate Governance Reform and Transparency Act of 2017 last December, “which would require proxy advisory firms to register with the U.S. Securities and Exchange Commission, disclose potential conflicts of interest and codes of ethics, and publicize their methodologies for formulating proxy recommendations.” If these firms are not able to answer the questions posed by the Senators in their letters, they will likely face additional scrutiny and, eventually, oversight.
Hopefully, these letters are a sign that the Senate will soon take up its version of legislation to reform the proxy advisory industry.