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Jan 11, 2016

Improving communication with proxy advisers

Letting firms fact-check their proxy data will be helpful but won't provide assurance they have told their stories well 

As companies prepare for the upcoming proxy season, there is little that triggers anxiety like anticipation of the voting recommendations from proxy advisory firms. In Corporate Secretary’s governance practices research survey two years ago, a combined 44 percent of respondents said that in the year leading up to the survey they had communicated with either ISS or Glass Lewis, seeking to either have a mistake corrected or a voting recommendation changed.
Yesterday Glass Lewis opened enrollment for a second year for its Issuer Data Report (IDR) program, which gives public companies free access to a data-only version of the Glass Lewis proxy paper report before the advisory firm completes its analysis and recommendations for the annual shareholders meeting. The IDR features significant data points used in Glass Lewis’ corporate governance analysis, including information on directors, auditors and their fees, summary compensation data and equity plans. Glass Lewis launched the program last year for the US and this year is expanding it to cover 800 companies in the US, Canada, the UK, France, Germany, Italy, the Netherlands, Spain and Switzerland whose annual meetings are between March 1 and June 30.
Enrollment is on a first-come, first-served basis because participation is limited to a specified number of issuers in each market, and it ends on January 31 or as soon as the annual limit for each country is reached. IDRs will be issued only for companies that have released all proxy materials no later than 30 days before the shareholder meeting date. Issuers will have 48 hours to review their IDR and submit any suggested corrections to Glass Lewis, along with public documentation supporting the proposed corrections. Glass Lewis will review responses and update relevant information before publishing the completed proxy papers.

Glass Lewis’ competitor, ISS, has allowed companies in the S&P 500 Index to review the factual accuracy of the data included in its pending proxy analyses for more than a decade. On its website, ISS says it ‘believes this review process helps improve the accuracy and quality of its analyses, an outcome that is in the best interests of both the institutional investors for [which] the analyses are prepared [and] for the companies that are the subject of these reports.’
Unlike Glass Lewis’ IDRs, ISS’ draft review process lets issuers review not only data but also information related to its voting recommendations. In 2015 more than 90 percent of S&P 500 companies participated in this review process, according to an ISS spokesperson. Glass Lewis’ program may be more akin to another ISS report, the QuickScore governance profile, which ISS uses to track more than 5,000 companies worldwide and which doesn’t include proxy recommendations. 
‘It’s a step in the right direction for Glass Lewis to allow clients to review data prior to publication,’ says Bruce Goldfarb, president and CEO of proxy solicitation firm Okapi Partners. ‘I think the engagement process and the dialogue that companies and other investors have with the proxy voting adviser is critical to helping shape and inform decisions from proxy advisers, and I applaud Glass Lewis for taking steps to enhance the ability to have a dialogue. But I think it’s an evolving process and we’ll see how it works out this year.’

Some of the 250 US companies that participated last year were disappointed that the IDR didn’t provide any hint about what the recommendations in Glass Lewis’ final report would be, according to Rhonda Brauer, senior managing director of corporate governance at Georgeson. ‘But that was never promised,’ she says. ‘If [Glass Lewis] missed your story and how you tied the data together because it didn’t understand it or you didn’t tell it well, you’re not likely to find that out from the IDR.’
Glass Lewis does make itself available outside proxy season for engagement with companies and 'can be extremely helpful in letting you know what’s not clear in your story,’ Brauer adds.  
Although it will be helpful for companies to be able to fact-check the data Glass Lewis is basing its recommendations on, the bigger issue is interpretation of data, says Goldfarb. ‘I’m not sure a process that just checks the data fully gets there in terms of interpretation issues,’ he says. ‘That’s going to remain an area of contention. The area over which the proxy voting advisers and companies always have the biggest disagreement is say on pay and that’s going to continue because part of the process of arriving at the voting recommendation is a black box in determining how [a company] receives its score.’
Because say on pay is a performance-based measure that also takes into account companies’ peer groups, it’s a challenge to predict the vote recommendation prior to the report, Goldfarb adds. ‘I don’t think any of that is going to go away, and ultimately it becomes something for the issuers to address when they reach out to their investors,’ he says.

At a governance conference last year, proxy advisers said they welcome communication from companies only after the latter have held discussions with their shareholders about any concerns they may have. That’s likely to remain a rule of thumb no matter what new review options proxy advisers may offer.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary