Directors and Shareholders Discuss the Future of the Proxy Industry

Plenary Session

Monday, October 20, 1:45 PM

Moderator:
David B.H. Martin Partner, Covington & Burling LLP
Panelists:
Ethan Berman CEO, RiskMetrics Group
James T. Hale Director Tennant Company; Former General Counsel & Corporate Secretary, Target Corporation
Michele J. Hooper Director, PPG Industries, Inc., Astra-Zeneca PLC, and UnitedHealth Group

Digested from the panel discussion:

David Martin:
With the voting for president close to over, we would like to focus on a different type of voting: The voting by public company shareholders. More particularly, we're going to look at the proxy advisory firms-which advise those shareholders on how to vote. Every year, around 20,000 corporations have annual elections-and there are also some 250,000 issues shareholders must vote on.

There are two critical issues:

At one level, the advisory business has been very successful-in terms of volume and substance. Nonetheless, questions to abound-about recommendations; about conflicts of interest (providing ancillary services and potential "arm twisting"); about competency; about policies and "check the box" procedures; and about the lack of industry regulation.

Many of the questions about proxy advisory firms mirror the questions going on right now about ratings agencies.

Michele J. Hooper

Michele J. Hooper

Michele Hooper:
It appears to me-as a board member-that yes, advice is a wonderful thing. Seeking advice should be one source of input. Unfortunately, RiskMetrics Group is a very large voice to a lot of firms. It is a very loud voice. Looking at it from the outside in, that voice-in some instances-is the sole voice that some firms listen to, and that's a problem: They are doing themselves a disservice.

James Hale:
If there are going to be 20,000 proxy statements, there have to be proxy services. It's an 800-pound gorilla. I can't count the number of times we've gone out to talk to someone-we've said, "Here's our position." People would say: "We think you're well-managed, and we agree with you, but we've outsourced our fiduciary responsibilities and there's nothing we can do."

Ethan Berman:
If you look at our business, our fastest growing business is "custom voting"-where the individual firms set the policies. We're seeing that and we think you'll see that.

I think it's also an easier conversation to say "someone else disagrees with you" than to say "we disagree with you." No firm has a fiduciary responsibility to vote the RiskMetrics way. No firm has that-nor do we recommend that.

Michele Hooper:
I'd like to ask: As we move to more transparent and direct communication between the board and shareholders-where does that fit in with the proxy advisory firms?

Ethan Berman

Ethan Berman

Ethan Berman:
If all we do is talk to institutional investors-instead of corporations-we will not do as good a job. The more you talk directly with your shareholders, the more valuable we will become.

It's our goal to be a facilitator for board and shareholder communications. We're an 800 pound gorilla because we bring together 50, 1% shareholders and suddenly represent a majority of shares. We can help bring previously underrepresented groups to the table.

Audience Question: When you give a recommendation, do you give the pros, cons, and analysis as to how you arrived at the recommendation?

Ethan Berman:
It's something we try to adhere to. While the numbers are large, in terms of the numbers of meetings and issues, it's a very small percentage of them that are actually controversial.

I encourage you to have a conversation with an analyst before you send out the proxy. You probably know what's controversial on your proxy. Instead of us recommending against, and you giving us 48-hours to review the situation, talk to us ahead of time.

Michele Hooper:
Will you ever come out and say "we have no opinion, but here are the pros and cons."

Ethan Berman:
We shouldn't pressure anyone to follow our recommendation. But having an opinion at a company with a large group of qualified governance analysts-as individuals and as a collective-I believe we are in a position to make those judgments.

In situations where we have an opinion, we shouldn't say "we're right, end of story"-but we should say, "It's a complicated issue, here's our recommendation, and here are the pros and cons."

James T. Hale

James T. Hale

James Hale:
I'd like to go back to the earlier point: If you know you've got something coming down the pike, talk to analysts ahead of time. Years ago, Target put its shareholder rights plan up to vote. No one had done this before-no one had talked to ISS about this before. We took 6 months working on this to make sure we could get it through.

Also, on the other hand, no one is infallible. Sometimes analysts can get the facts wrong, and it's important to be able to talk to them to make sure things are correct.

David Martin:
Is there a linkage between ratings and your recommendations?

Ethan Berman:
Ratings are a completely different business from our recommendations. What you are rating has no direct implication on the recommendation. They are linked in the sense that, in general, issues that affect ratings may have similar affects as the issues in the proxy.

Michele Hooper:
I'll talk a bit about ratings-I find the blind following of a check-the-box mentality to be very frustrating. One size does not fit all-it's a catch phrase we hear all the time, but it really does apply to ratings. I'll hear on boards, "If we do X, we'll get a couple of points with ISS." It has nothing to do with what we think is best; it's a matter of brownie points. As a board member, I think that is wrong.

Ethan Berman:
There is no institutional investor who wants you to do the "wrong thing" for four additional RiskMetrics points. What's important is that the discussion happens on the board. Think about the issues.

James Hale:
Ann Yerger, of the Council of Institutional Investors, said that ratings are only one piece of a mosaic. But you'd be surprised how many conversations in boards across America involve talk about how to get their ratings up.

Looking at how to react to poor ratings, I think you have three options: Stay the course, fold the tents, or negotiate. I think you gotta know when to hold, and know when to fold. I'd say: Hold when you must-fold when there's no alternative-but I think that negotiation is the best alternative.

Audience Question: Recently there was a report through Stanford talking about the correlation of ratings and financial performance. The result was: There is no correlation.So what is the value of ratings?

Ethan Berman:
I think that having information about how companies are governed is a good thing. I don't believe all institutional investors have access to that information. Clearly, getting it right is important.

Audience Question: Having information to shareholders is important. But if you want them to have the information, you need to present more than a yes/no recommendation. I was surprised by an analyst report-but it was quite frustrating to get the analyst to return phone calls and explain what they did. There is an inherent conflict: how much discussion can the analyst have when the other side of the house is selling services?

Ethan Berman:
Your first point on the difficulty getting the analyst to return calls: shame on us.

To your second point: I don't want to sound naive-but the industries we are all in are rife with conflict. We've done our best to mitigate these conflicts-and we try to ensure our businesses do not interact in a way that creates conflict and that our culture encourages a conflict-free world.

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