SEC Guidance on Proxy Advisors Imminent

Proxy Advisory Firms

Confirming widespread expectations, the Wall Street Journal this week reported that the SEC is close to releasing guidance addressing conflicts of interest in the services provided by proxy advisory firms, referencing the advocacy efforts by the Association's Center On Executive Compensation on the issue.  The Center's objective has been to encourage, at a minimum, greater disclosure and oversight of conflicts in the services proxy advisory firms provide to investors as well as in the firms' ownership structures.  The Center has focused on conflicts of interest at Institutional Shareholder Services, Inc., which makes recommendations on proposals sponsored by its investor clients and has a prominent division named ISS Corporate Services that provides consulting services to the same companies on which ISS makes voting recommendations to institutional investors.  The Journal story notes that the forthcoming SEC guidance "is expected to push for better disclosure among proxy advisers that also sell corporate-governance consulting services to the same companies subject to their voting recommendations. SEC staff is likely to say they don't believe the current practice of requiring investors to contact an advisory firm for more information about potential conflicts conforms with the agency's interpretation of an existing SEC rule."  Without knowing what the SEC guidance will say, we do believe it has the potential to make the proxy advisory firms, and especially ISS, pay closer attention to the impact of actual and perceived conflicts in their business models, similar to the way in which the negative publicity on peer groups in the wake of say on pay helped drive changes at ISS and its primary competitor, Glass Lewis.