Proxy Advisers Are Not Found To Have Conflicts by the GAO
Pat McGurn, center, vice president of Institutional Shareholder Services of Rockville, said ISS clients do not "overly rely" on the firm's advice. With him are chief executive Jamie Heard, left, and U.S. research director Ram Kumar.
(By Debra G. Lindsey -- The Washington Post)
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Tuesday, July 31, 2007; Page D02
NEW YORK, July 30 -- Federal regulators have found no major conflicts of interest among proxy advisory firms making recommendations to institutional investors about how to vote on corporate mergers and director elections, according to a government report released Monday after a nine-month investigation.
The report by the Government Accountability Office, the investigative arm of Congress, acknowledged that such conflicts could arise because of the ties that some advisory firms have to the companies they review. The report also said the Securities and Exchange Commission has found no major violations and that the advisory firms' ability to influence votes is limited, contrary to concerns about the growing proxy advisory industry.
The 28-page report, which largely focused on Institutional Shareholder Services of Rockville, the oldest and largest company in the field, was requested by Rep. Richard H. Baker (R-La.), a member of the House Financial Services Committee.
Critics say advisory firms are conflicted and wield undue influence over the outcome of these votes because of a lack of competition. For example, the report notes that ISS not only advises institutional investors on how to vote but also provides companies with consulting on corporate governance issues.
"Critics contend that corporations could feel obligated to retain ISS's consulting services in order to obtain favorable vote recommendations," the report said.
The report said that ISS discloses potential conflicts on its Web site and in its recommendations, and maintains separate staff in different buildings for the two businesses. All of the investors that use ISS, the report added, are satisfied with the firm's procedures.
Many institutional investors pay ISS and other advisory firms to make recommendations each year on how to vote on myriad shareholder- and management-backed proposals presented at shareholder meetings. They range from director elections, corporate mergers and corporate governance matters such as executive compensation.
Patrick McGurn, ISS's executive vice president, called the GAO report "fair and balanced."
McGurn said the report echoed what his firm had been saying for years, that "our clients do not overly rely on our research and our advice."
Of the 20 large institutional investors surveyed by the GAO, only one said it relied heavily on the recommendations of an advisory firm. Fifteen said they use advisory firms to supplement in-house research, while eight said they subscribe to more than one service.
Because large institutional investors' votes make up a majority of votes cast by institutional investors, "the results of our work suggest that the overall influence of advisory firms . . . may be limited."
The GAO report said it could not reach a definitive conclusion because the institutional investors it surveyed are a relatively small sample and may not be representative of all such investors.
