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HedgeWorld

July 24, 2008

Scholar Warns Proxy Advisers Face Rising Pressures
By Christopher Faille

NEW HAVEN, Conn. (HedgeWorld.com)—An academic report has called for changes in the way U.S. corporations are governed, including a code of ethics for the proxy industry, including voting advisers and execution providers, that may assist in the management of conflicts of interest.

The report, "Voting Integrity: Practices for Investors and the Proxy Industry," is the work of Meagan Thompson-Mann, a visiting research fellow at the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

Ms. Thompson-Mann argues, "Shareholders and the proxy voting advisory services face rising pressure to safeguard the integrity of the ballots and the voting intentions behind them. Key threats include conflicts of interest, opacity, and faults in the chain by which ballots are transmitted."

Her report draws upon ideas expressed at a roundtable sponsored by the Millstein Center in February, chaired by Lynn Turner, former chief accountant to the Securities and Exchange Commission. Five proxy advisory services had representatives present at the roundtable, including RiskMetrics Group and Glass Lewis. Such services have often been targeted for criticism about conflicts, most vocally when they're providing voting advice to investor clients on upcoming board elections on the one hand while providing structural governance advice to the companies whose boards those are on the other.

"There is an argument that this model allows companies that purchase this governance to ‘game' the system, potentially tainting any voting recommendations to investors because the company in question might also be a client of the advisor," according to the report.

Glass Lewis in particular has gone through two recent changes of control that "raised eyebrows." In late 2006, it was acquired by a China-based financial information adviser Xinhua Finance Media, which was also the parent company of businesses such as Taylor Rafferty that sold services to corporate managements. In 2007, though, Xinhua sold Glass Lewis to the Ontario Teachers' Pension Plan.

That sale made critics anxious that the governance policies of OTPP might interfere with Glass Lewis' own existing policies.

Ms. Thompson-Mann acknowledged that Glass Lewis has endeavored in both cases to stress its independence from its owners and from their governance philosophies. But such situations make it clear why an industry code of conduct might prove beneficial.

Ms. Thompson-Mann was the corporate governance counsel for Railpen Investments from 2002 to 2007. That's the investment arm of the Railways Pension Trustee Co. Ltd., in London.