Glass Lewis Pivots, Then Doesn't

For a relatively wonky business, proxy advisors sure get a bunch of attention, in the news, at the SEC, in Congress, and of course around here. Last week they got more by evidently proposing a fundamental restructuring of their business, then walking back the proposal.

We wonder what, exactly, ISS and Glass Lewis do to deserve all the opprobrium that companies heap on them. As we thought about the about-face, we remembered they sometimes hit CEOs where they live, in exec comp. The restructuring that GL thought about would have responded directly to their role in CEO pay.

Pivot, then not

Last week Semafor reported GL "is discussing a dramatic shift to essentially scrap its “house view” on ballot measures ranging from takeover battles to complaints about gender balance, political donations, and carbon emissions...partly in response to heightened conservative backlash."

This news came out the same week as a Congressional hearing on proxy solicitors. Not surprisingly, most of the witnesses called for significantly more regulation.

A day later, The Deal reported Glass Lewis actually won't do it. A senior GL executive said it "isn’t scrapping its “house” proxy voting policies, and it will continue to produce proxy analysis and vote recommendations that follow those guidelines..."

What's the "house view"?

It's the specific voting recommendation, meaning how it wants its investor clients to vote on the range of items at a portfolio company AGM.

We can think about the context thusly:

GL appears to have considered abandoning the "advice" element of its service lineup. 

It will continue to analyze the subjects on which its clients vote. This means assembling the voluminous data and documents needed to understand those subjects, running that information through its sophisticated models, and describing how the results line up against voting policies.

It will also continue to process votes. This means handling all the arcane procedures for a client to complete proxy cards, submit votes, track results, write reports, etc. etc.

The advice segment of these services brings trouble. Here it takes a stand on which directors and proposals to support or oppose, and whether to approve exec comp. They can't possibly please enough people to mitigate the controversies that inevitably occur. Notably, the GL website doesn't mention its voting advice, or at least we couldn't find it among all the other "Investor Solutions" it provides.

Policy, not advice?

For a moment GL looked like it wanted to confine its advice to voting policies. Most institutional investors, and GL and ISS, have detailed policies that prescribe votes:

• Always vote to declassify a BoD
• Oppose pay if it falls at the top x% of peers
• Support enhanced disclosure of climate policy
• etc. etc.

These save everyone time and energy in pondering how to vote on literally thousands of matters. They also ensure consistency among votes, so similar situations get the same treatment. When companies don't like the outcome the Business Roundtable criticizes it as "one-size-fits-all" policies.

GL already does this for some clients. They can select from existing ones ("ESG", "Taft Hartley", "Catholic") or create a custom one. This likely leads to less headache for it than recommending specific votes.

Advice about ... what?

Looking at the substance of the advice helps understand why significant business lobbyists persuade Congress to hold major hearings on this obscure corner of finance.

Proxy advisors get the most attention when advising how investors should vote on a highly-controversial or contested proposition: proxy contests and M&A. There are at most 50 of these in a given year, so the likelihood of a CEO at one of the 4,000 or so US public companies facing one of these during their tenure is pretty low.

Companies do receive ESG proposals, although fewer lately than in past years, so CEOs need to at least think about them more frequently. Proxy advisors have particular experience and expertise in analyzing them, so might get sideways with one or another CEO when rendering advice. Still, other than the nuisance of dealing with a vocal but small shareholder, CEOs mostly care little about these proposals and thus the proxy advisors that assess them.

What about directors? CEOs have BoD seats, right? Sure, but these days directors, including CEOs, have little chance of losing a shareholder vote. Proxy advisors have negligible impact on a CEO's BoD seat, or really any director's BoD seat, outside of a proxy contest. Their recommendations shouldn't really trouble them, with one exception.

So, exec comp! Proxy advisors don't affect CEO pay directly, nor do shareholders, whose say-on-pay vote is strictly advisory. Still, GL can make life harder for a comp committee and thus the CEO. Their say-on-pay recommendations carry weight with shareholders, who seldom have the capability to analyze exec comp in the way they do so for ESG proposals or directors. Companies that lose a say-on-pay vote and do nothing (it's advisory, right?) will likely face a withhold vote on the comp committee members. And, unlike proxy contests or ESG proposals, every CEO deals with this, most of them every year.

Walk it back

Why retreat? We speculate GL clients pushed back. Enough want real advice, not just policies, analysis, and process. Far more pension funds, for example, are a board of six retirees, an administrator, and an investment consultant than are a big organization with a dedicated stewardship department that can handle its own policies, analysis, and process.

While GL shies away from public controversy, it also shies away from upsetting paying clients.

For further information, or to discuss a specific activist situation, please contact:

Michael R. Levin

m.levin@theactivistinvestor.com

847.830.1479