ISS President Gary Retelny
As the saying goes, “a camel is a horse designed by committee,” and when top-level execs with big personalities come to the table to discuss issues related to corporate governance practices, it’s easy to see why. As we approach this year’s proxy season, corporate governance concerns—from say-on-pay and directors’ competence to other less traditional topics—are heating up as shareholder influence in the boardroom continues to gain momentum.
As public companies in the U.S. face a plethora of complex corporate governance issues—and with annual shareholder meetings just around the corner—many are turning to proxy advisory firms for recommendations. Such firms have been granted significant influence by the Securities and Exchange Commission (SEC) in the shaping of corporate governance policies for public companies, but their grip on proxy votes has been questioned by a number of groups. In December, the SEC assembled a troupe of experts to examine the roles of the two biggest proxy advisory firms—Institutional Shareholder Services (ISS) and Glass Lewis & Co. LLC—and determine whether proxy advisers have grown so powerful in corporate elections that regulators need to impose rules to make their business more transparent.
While some groups maintain that proxy advisory firms have too much influence on institutional investors, Gary Retelny, president of ISS, dispels the theory that its clients “blindly” follow ISS’ recommendations.
In an exclusive interview with InsideCounsel, Retelny explains that ISS works on behalf of investors, reflecting their views in its benchmark voting policy and administering custom policies for many institutions, not just in the U.S., but around the world.
“ISS is really a reflection of the views that institutional investors have about governance matters. We do fairly intense outreach globally to institutional investors and many other constituencies; that plus our own thoughts guide the policies that we recommend and put in place,” Retelny says.
Proxy advisory firms have become the standard by which public companies process their big decisions, according to Thomas Quaadman, vice president of the U.S. Chamber Center for Capital Markets Competitiveness.
“Proxy advisory firms have become the defacto standard setter for corporate governance in the United States. However, we have two firms that dominate the market, they are rife with conflicts of interest and fail to correlate their advice with the fiduciary duty of their clients,” opines Quaadman. “While regulation may not be the answer, more oversight by the SEC is needed.”
Levels of engagement
In November, ISS released its updated policies on shareholder proposals relating to corporate audits, board practices, management and director compensation, shareholder rights and takeover defenses, environmental and social issues and mergers and acquisitions.
Arguably one of the most critical issues during proxy season for investors is the need for more open and frequent communication between shareholders and companies.
“As subsets of communication, direct engagement, particularly between shareholders and board members, as well as enhanced disclosure in corporate filings, are two areas where we’re seeing change due to the importance placed upon them by investors,” Retelny says. “The primary reason for the sharper focus on communication is the advent of market wide say-on-pay, which has prompted companies to take additional steps to communicate the merits of performance measures tied to variable pay, for example, or the compensation committee’s choice of certain option plan features.”
Also driving this communication trend, Retelny adds, is the result of multiple developments in recent years, ranging from SEC guidance in 2010 clarifying that directors would not run afoul of Regulation FD (Fair Disclosure) by speaking with shareholders, to the Supreme Court’s Citizen’s United decision in 2010, which has spurred increased engagement between shareholders and boards over why and how companies might enhance disclosure in this area.
This year, the U.S. Chamber Center for Capital Markets Competitiveness anticipates continued proposals on CEO/chair separation, majority voting and proxy access.
“We will also see an uptick with proposals on auditor tenure and director tenure,” Quaadman adds. “Management and directors should broaden engagement with shareholders to communicate the needs and goals of a company ensuring a dialogue that allows all parties to work on the long-term performance and profitability of a company.”
ISS expects a host of issues to play prominently in 2014.
“For one, we expect it’ll be a very busy season for institutions as we see a confluence of annual and triennial say-on-pay votes in 2014, along with such votes for smaller capital companies,” Retelny says. “Effectively, it’s the first year we’ll see such a large volume of resolutions and it’s important for corporations to be aware of their shareholders’ expanded workload.”
ISS expects to see a continuing trend toward balance-sheet activism, such as calls on companies to buy back shares, enhance dividends or otherwise return cash to shareholders.
“We’re also expecting a sharp focus on boards, with some activist shareholders picking up where they left off last year by launching vote ‘no’ campaigns that take directors to task for poor risk oversight and a lack of responsiveness to shareholders’ concerns,” he adds.
Since the financial crisis of 2008 and the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act (see page 28 for more on Dodd-Frank), Retelny says the concept of pay-for performance—which has always been present to some degree—has moved front and center.
“I believe what shareholders are now demanding is a more specific linkage between pay and performance. There is always a discretionary element of executive pay within a company…they want to see in those pay packages a much more direct link between pay and performance and by that I mean a quantitative link. They are not saying what the metric should be, but they want to see that linkage,” Retelny explains.
SEC intervention and proxy voting
Retelny shoots down the notion that ISS dispenses “one-size-fits-all” voting recommendations to its clients. At the SEC roundtable in December—contrary to what the mainstream media reported—Retelny says the meeting underscored ISS’ independent viewpoints.
“What came out is that ISS is not a one-size-fits-all-firm… It was gratifying to hear the descriptions by our clients and by many others that made it clear we are just one input, albeit an important one, into their decision making,” he explains.
In the end, it’s every camel—or company—for themselves. “It is a huge misconception to say that our clients follow us blindly,” Retelny says. “I think if you ask a number of them they would find that insulting. We certainly help them vote, which is a huge part of the value-add that we bring.”