Bruce Goldfarb quoted in Agenda Week on Boards Efforts to Influence Proxy Advisors
Boards Boost Efforts to Influence Proxy Firms
By Lindsay Frost, Dec. 7, 2015
Directors are spending more time trying to influence proxy advisors’ recommendations on their companies — both inside and outside the proxy season — according to a survey and observations by proxy firms.
The two largest proxy advisors, ISS and Glass Lewis, each released their 2016 proxy voting guidelines in November. Boards are sifting through them to determine whether they should contact proxy advisors ahead of 2016 annual meetings to provide company-specific information that may help sway their voting recommendations. Directors are also keen to learn more about how voting policies and guidelines are determined.
Companies typically contact proxy advisory firms during a proxy context or M&A transaction, but experts say more companies are contacting firms prior to the proxy season about other governance issues. A study from Nasdaq and the Chamber of Commerce’s Center for Capital Markets Competitiveness shows that almost half (47%) of the 155 companies surveyed contacted ISS and Glass Lewis this year to provide input on their voting recommendations.
The survey was conducted between May 28 and August 25 at U.S. public companies of various industries and sizes.
“Once a proxy firm’s report comes out, there is a limited window and almost no time to react,” says Bruce Goldfarb, founder, president and CEO of Okapi Partners, a proxy solicitation firm. “Companies and willing board members need to take that off-season time to expand on their views, while recognizing that [proxy firms] have policies and guidelines and may not [give them] their recommendation right away. But this leaves room for getting it in the future.”
Companies often call proxy firms shortly after a voting recommendation is released involving a proxy contest or M&A transaction.
Sometimes a proxy firm will change its recommendation, but usually only if it included a factual error, says Taylor Simonton, board director on six public company boards, including Escalera Resources and Advanced Emissions Solutions, and former chairman of the Colorado chapter of the National Association of Corporate Directors.
“Private approaches work best [in these cases]. But a company will need to consider adding further support for its positions if they file additional proxy materials, even if an error was corrected,” Simonton says.
For example, David Whissel, director of research at Proxy Mosaic, a proxy advisory firm that covers only M&A and proxy contests, says the firm will correct an error on a merger price, but will stay with its recommendation unless there were major errors. He adds that presentations and white papers catered to the firm explaining a company’s stance behind a merger or acquisition are more effective in influencing a recommendation.
“If they disagree [after an error is corrected], we would not change the recommendation; we stand behind everything we do,” Whissel says. “But we may issue an addendum if they raise the price [on an M&A deal] or better explain their position.”
Kevin McManus, vice president and director of proxy services at Egan-Jones, says companies often call the firm citing errors in its compensation analysis. The firm has a mathematical model to determine its recommendation, but errors from typos on financial statements or manually entered data can occur.
Disagreements over old or inaccurate data are another common reason for companies to contact proxy firms, several sources said.
The Nasdaq and CMCC survey shows that just 25% of companies believe proxy advisory firms carefully researched and took into account all relevant aspects in their voting recommendation, while 53% of companies notified a proxy firm when they thought the advisor relied on inaccurate or stale data to make the recommendation.
A large majority (84%) of the surveyed companies report that they monitor proxy advisory firms’ reports for accuracy and reliance on outdated information. Both ISS and Glass Lewis say they have sections of their respective websites with detailed forms to fill out and contact information if companies believe there has been a mistake in the data they cite, though Goldfarb says some issues such as compensation are tougher factual errors for companies to argue because of mitigating circumstances.
“Proxy firms base their recommendations for say on pay on relative share price performance, so you are looking at some sort of trailing indicator and the company may be in the middle of a turnaround or working on something significant that may not be reflected in pay for performance,” Goldfarb says. “In this case, it’s not inaccurate data, but data that is outside the company’s control.”
Boards that provide input to proxy advisors on governance issues prior to the proxy season have a greater chance of influencing future voting recommendations and improving the advisor’s overall view of the company, says Patrick McGurn, special counsel and head of strategic research and analysis at ISS.
“We have a lot of contact between analysts and issuers to get additional information from the proxy statement to round out the issues, and [companies] reach out in the off-season as a more prospective approach,” McGurn says. “Companies will talk about the response of a previous vote or another issue that may have flowed out of last year’s annual meeting.”
McGurn says most contact with companies occurs during ISS’s research process, where the firm gathers information on issues in the proxy statement. He says companies at that point have already contacted large shareholders and are able to provide examples of the shareholders’ view on a particular issue.
Almost 40% of the companies surveyed by Nasdaq and CMCC contacted proxy firms between January and May this year to discuss the issues up for vote during the annual meeting. Of those, 60% ended up having meetings with advisors.
Robert McCormick, chief policy officer at Glass Lewis, says he meets with companies every day to learn more about their view on proxy access, board tenure, diversity and other governance issues. Several companies approached the firm this year to explain their restrictive proxy access terms.
The proxy firms interviewed noted that directors are getting more involved in the process, though McCormick says that often the timing between the release of the report and the vote leaves little room for changes in the recommendation.
“We are getting a lot of outreach; companies are pretty wise. They recognize that the opportunity to engage is better through the fall instead of waiting until March when the proxy is filed and it’s too late for us to be responsive,” McCormick says. “Smart directors realize the benefits of engaging well outside the season and in advance of annual meetings.”
Issues such as compensation typically call for a compensation committee member to be involved, but lead and independent directors increasingly attend meetings with proxy firms, Okapi’s Goldfarb says.
“More frequently, there will be someone from the board involved, especially when talking about compensation,” Goldfarb says. “We are seeing more involvement, and board members are well-versed and capable of having these discussions.”