July 25, 2014
Calling it the beginning of an effort to "dismantle a dangerous bastion of Washington-aided corporate cronyism" which harms investors, a June 22 Wall Street Journal editorial praised SEC Commissioner Daniel Gallagher for leading the charge to "reform the proxy advisory racket," which led to recently published guidance on proxy advisory firms. The editorial explains that overly broad SEC staff interpretations were interpreted to mean that institutional investors were required to vote every proxy and that using proxy advisory firms to analyze the issues gave the investors a safe harbor "which made it particularly hard for fund managers to avoid using the advisers." This policy, according to the editorial, has been a boon for top advisory firms ISS and Glass Lewis to the detriment of clients of institutional investors. In a "major step toward reform," the editorial states, the guidance tells fund managers they do not have to vote in every election, should not "blindly pick a proxy advisor" without "first considering conflicts and its track record," and that firms should work with clients to craft voting policies in the best interest of the client. The markedly positive tone of the editorial demonstrates that the SEC guidance is an encouraging first step to greater accountability of proxy advisors, but the real impact can only be evaluated after investors and proxy advisors implement it. Our Center On Executive Compensation believes the guidance, and especially its focus on conflicts of interest, provides an avenue for further review and reform.