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— Safe Harbor —
On May 28, Target Corp. shareholders chose the company's slate of four directors over the candidates that William Ackman put forward and that the advisory firms backed to their clients. The day before, shareholders of Amylin Pharmaceuticals Inc. elected only two of the five dissidents Eastbourne Capital Management LLC and Carl Icahn nominated, though voters did oust Amylin chairman Joseph Cook Jr. and lead independent director James Wilson. RiskMetrics, Glass Lewis and Egan-Jones Rating Co. recommended that shareholders elect three of the upstarts, while Proxy Governance Inc. supported all five.
The Target and Amylin results accord with the conclusions of a recent study by Stephen Choi, Jill Fisch and Marcel Kahan. They find that proxy advisory firms are information aggregators rather than "independent power centers" in their paper, "Director Elections and the Influence of Proxy Advisors," now available for download at www.ssrn.com. The study expands on the trio's earlier "Director Elections and the Role of Proxy Advisors," which is also available at www.ssrn.com and will appear in the Southern California Law Review later this year. In that piece, Choi and Kahan of New York University School of Law and Fisch of the University of Pennsylvania Law School tried to reverse-engineer the factors on which the four major proxy advisers based their recommendations in uncontested director elections at S&P 1500 companies in 2005 and 2006. They extend their analysis in their current paper. The four firms differ in how much they emphasize certain factors. RiskMetrics, the former Institutional Shareholder Services, focuses on board-related issues: how many meetings a director attends, how many other boards he serves on, his age, how independent the board is, etc. Proxy Governance emphasizes compensation. "Glass, Lewis & Co. seems to be concerned with almost everything," the authors write, "but distinguishes itself from the other proxy advisers by the weight it places on audit/disclosure related factors." The authors find Egan-Jones Rating "hardest to categorize." Those different approaches, along with differences in the breadth of the firms' coverage, lead to varying levels of withhold votes. RiskMetrics issued withhold recommendations for 6.6% of the directors in the sample; Proxy Governance 3.7%; Glass Lewis, 18.8%; and Egan-Jones, 11%. The authors analyze the different ways institutional and noninstitutional shareholders vote in an "attempt to separate out the effect of the advisor's recommendation from the underlying factors" influencing it. Adviser recommendations in general, especially those of RiskMetrics, "appear to be less influential than commonly perceived," and "proxy advisors act primarily as agents or intermediaries which aggregate information that investors find important in determining how to vote in director elections rather than as independent power centers." Kahan admits the difficulty of assigning a precise value to the influence of RiskMetrics and its competitors, which fluctuates, depending on the situation. "I think RiskMetrics pays attention, and wants to pay attention, to so many of the same factors that voters value" and thus is "constrained" in its recommendations. Kahan says RiskMetrics seems more attuned to shareholders' concerns than its competitors in two ways. First, RiskMetrics responds unfavorably when a board ignores a precatory resolution that gets a majority vote. He adds that it is the only company more likely to issue a withhold recommendation for a CEO than a non-CEO, and CEOs get higher withhold votes than other board members. Even so, Kahan says, "The more high-profile the situation, the less likely that [RiskMetrics] will have an effect." Despite his close study of shareholder voting, Kahan says little in the academic literature would help predict the effect of proxy access, which the U.S. Securities and Exchange Commission seems poised to implement. "The historical data doesn't provide much of a guide because the environment has changed," he says. Kahan doubts that proxy access will drastically alter the system he, Choi and Fisch are exploring. "It puts a little more pressure on the board and gives the dissident more weapons," he says. "I don't think there will be a momentous change." David Marcus is a senior writer at Corporate Control Alert. |
How much do proxy advisers matter? Lawyers have long complained that RiskMetrics Group Inc., Glass, Lewis & Co. LLC and their competitors wield far too much influence, but in this spring's two most visible proxy contests, their advice went unheeded. 
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