February 3, 2011 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Attn: Definition of Fiduciary Proposed Rule 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

RE: Comments on Definition of Fiduciary Proposed Rule 

Dear Sir or Madam: 

The Center On Executive Compensation (the "Center") is pleased to submit comments 

regarding the Department of Labor's (the "Department") proposed regulation ("Proposed 

Regulation") under the Employee Retirement Income Security Act of 1974, as amended 

("ERISA") that will redefine the term fiduciary under section 3(21) of ERISA and section 

4975(e) of the Internal Revenue Code of 1986, as amended (the "Code"). We appreciate the 

opportunity to provide comments. 

The Center is a research and advocacy organization that seeks to provide a principles-based 

approach to executive compensation policy from the perspective of the senior human resource 

officers of leading companies. The Center is a division of HR Policy Association, which 

represents the chief human resource officers of over 300 large companies, and the Center’s more 

than 70 Subscribing Companies are HR Policy members that represent a broad cross-section of 

industries. Because senior human resource officers play a unique role in serving on or 

supporting ERISA plan committees and also in advising compensation committees on 

compensation and related governance issues, we believe the Center's views can be particularly 

helpful in understanding the implications of the Proposed Regulations on the proxy voting 

process for ERISA plans and other institutional investors. 

This comment letter narrowly focuses on the issues raised in the Department's Proposed 

Regulation with respect to the fiduciary status of proxy advisory firms. The Center does not 

endorse the broad definition of fiduciary in the Proposed Regulation. While the Center supports 

the intent behind the Proposed Regulation to protect ERISA plan participants, we believe that the 

far-reaching effects of the Proposed Regulation would have unintended consequences, including 

increasing plan costs. At the same time, the Center is very concerned that proxy advisory firms 

are insufficiently regulated and that the current lack of oversight of proxy advisory firms has 

permitted alarming conflicts of interest and material inaccuracies in the reports provided to 

institutional investors, including ERISA plans, and that these practices also harm plans and 

participants. 
EBSA Office of Regulations and Interpretations 

February 3, 2011 

Page 2 

The Center therefore urges the Department not to broadly expand the definition of fiduciary 

in the Proposed Regulation, and instead undertake a comprehensive review of proxy advisory 

firms, as outlined in our comments below. 

Our detailed comments on these issues and request to testify at the hearing on the Proposed 

Regulation follow. We would also be pleased to meet with the Department separately to discuss 

the proxy voting process as it affects employee benefit plans. 

I. Proxy Advisory Firms 

A. Background 

Proxy voting recommendations were introduced by proxy advisory firms in the mid-1980s to 

satisfy a demand that had grown in response to dramatic changes in the nature of share 

ownership. Institutional investors now own 76.4 percent of the 1,000 largest American 

corporations, a dramatic increase from 1987, when they held less than 47 percent, while over this 

period retail share ownership has declined. At the same time, the volume of proxy votes has 

grown tremendously as the Securities and Exchange Commission (the "SEC") has expanded the 

categories of subjects that shareholder proposals could address. Together, these factors have 

meant that institutional investors, including many ERISA plans, which hold thousands of equity 

securities in their portfolios, are required to vote exponentially more proxy votes. 

Retirement plan fiduciaries, bound by ERISA's fiduciary duties, must vote proxies solely in 

the best interests of their plan participants and beneficiaries. To properly exercise their duties, 

institutional investors must have conducted due diligence and become informed on the topics on 

which they are voting. In order to discharge their responsibilities, institutional investors have 

sought outside assistance in researching and analyzing the proxy statements of the companies in 

which they have a stake and, as a result, have purchased analyses and voting recommendations 

from proxy advisory firms. 

Given the dramatic increase in the volume of proxy votes, institutional investors have 

increasingly relied on the recommendations of proxy advisors in determining their proxy votes. 

Most industry observers agree that proxy advisors have a significant influence on vote outcomes. 

Delaware Court of Chancery Vice Chancellor Leo E. Strine, Jr. commented that "[t]he influence 

of ISS and its competitors over institutional investor voting behavior is so considerable that 

traditionalists will be concerned that any initiative to increase stockholder power will simply 

shift more clout to firms of this kind."1

 Academic research has shown that if ISS, the dominant 

proxy advisory firm, issues a negative recommendation on a management proposal, it can reduce 

 

1

 Leo E. Strine, Jr., Toward a True Corporate Republic: A Traditional Response to Lucian’s Solutions for Improving 

Corporate America, Harvard Law School John M. Olin Center for Law, Economics and Business, Discussion Paper 

Series, No. 541, 11 (2006), http://lsr.nellco.org/harvard_olin/541. 
EBSA Office of Regulations and Interpretations 

February 3, 2011 

Page 3 

the support of institutional investors by up to 20 percent thereby setting up ISS as the de facto 

pay and governance police for American corporations.2 

B. Current Regulatory Environment

Given the tremendous influence that proxy advisory firms wield, one would think that they 

are a heavily regulated industry. In fact, however, proxy advisory firms are overseen by a 

patchwork of regulation and, where regulation exists, it is unclear that it is effective. 

The Investment Advisers Act of 1940 (the "Act") is the principal regulatory scheme that 

would apply to proxy advisory firms. The SEC has stated that it considers proxy advisory firms 

to be investment advisers "because they, for compensation, engage in the business of issuing 

reports or analyses concerning securities and providing advice to others as to the value of 

securities."3 Although the SEC has asserted that proxy advisory firms meet the definition of 

advisers under the Act, proxy advisory firms may elect whether to register under the Act. 

Additionally, the Act contains a prohibition against registering if the firm has less than $25 

million in assets under management.4 This prohibition applies to proxy advisory firms since they 

do not manage client assets. Moreover, the prohibition is subject to several exemptions, 

including one that allows firms to register if they serve as consultants to pension plan clients with 

a minimum of $50 million in assets. Currently only one of the two predominant proxy advisory 

firms, ISS, is registered with the SEC as an investment adviser using the pension consultant 

exemption.5 

There are some provisions of the Act that apply to proxy advisory firms regardless of 

whether they are registered with the SEC as an investment adviser. The provision of greatest 

importance prohibits a proxy advisory firm from engaging in "any transaction, practice or course 

of business which operates as a fraud or deceit on any client or prospective client."6

This prohibition against fraud or deceit governing the proxy advisory industry is one relating 

to fiduciary duties. The SEC has stated that a proxy advisory firm owes fiduciary duties to its 

clients, which entails a "duty of care requiring [the proxy advisory firm] to make a reasonable 

investigation to determine that it is not basing its recommendations on materially inaccurate or 

incomplete information."7

 The impact of this regulation has led many to question whether these 

duties serve as any real restraint on the behavior of the proxy advisory industry. As outlined 

below, the business model and ownership structure of the proxy advisory industry are riddled 

 

2

 Jennifer E. Bethel & Stuart L. Gillan, The Impact of the Institutional and Regulatory Environment on Shareholder 

Voting, FINANCIAL MANAGEMENT 29, 34 (Winter 2002). 3

 Sec. Exch. Comm’n, Concept Release on the U.S. Proxy System, Release No. 34-62493, 110 (July 14, 2010). 

4

 National Securities Markets Improvements Act of 1996, Pub. L. 104-290, 110 Stat. 3416 (1996). 5

 A third proxy advisory firm, Proxy Governance, Inc., ceased operations as of December 31, 2010, and the second 

largest proxy advisory firm, Glass Lewis, which is not registered with the SEC, assumed the contracts of the firm’s 

clients. 

6

 Investment Advisers Act of 1940 § 206-2, 15 U.S.C. § 80b-6(2). 

7

 Sec. Exch. Comm’n , Concept Release on the U.S. Proxy System, Release No. 34-62493, 119 (July 14, 2010). 
EBSA Office of Regulations and Interpretations 

February 3, 2011 

Page 4 

with conflicts of interest. There are conflicts between the clients that proxy advisory firms serve 

and there is seemingly no obligation to ensure the accuracy of the analyses and voting 

recommendations that those firms offer to their clients. 

C. Problems with Current Practices 

The current practices of proxy advisory firms are riddled with several problems. These 

include conflicts of with respect to clients and ownership, and material inaccuracies that could 

impact the outcome of proxy votes. 

 i. Conflicts of Interest

The most pressing problem with the proxy advisory industry is the existence of significant 

conflicts of interest. Proxy advisors are afforded considerable deference by the SEC because 

they are considered to be providing "independent" opinions and voting recommendations to their 

institutional clients. Yet, this independence is only superficial since there are conflicts of interest 

in the services that are provided and how these firms are structured. These conflicts of interest 

affect the integrity of the proxy advisors’ analyses and voting recommendations. 

Proxy advisory firms research and review the required proxy disclosures filed by public 

companies in order to make recommendations to their clients on how to vote. This service, 

which is intended to be "independent," allows institutional investors to more efficiently 

discharge their voting responsibilities as it is extremely difficult for institutional investors to 

adequately conduct the research necessary to make educated decisions to vote proxies for the 

hundreds of companies contained in their portfolios. 

ISS, the largest and most influential proxy advisory firm, engages in the worst form of 

conflict by providing so-called independent analyses of company practices while also offering 

consulting services to the same companies. The U.S. Government Accountability Office 

(“GAO”) has studied this issue and has noted that "corporations could feel obligated to subscribe 

to ISS’s consulting services in order to obtain favorable proxy vote recommendations on their 

proposals and favorable corporate governance ratings."8

 This vicious cycle is routinely criticized 

by both institutional investors and corporations, because ISS determinations and their related 

consulting shapes what is considered to be best practice, even if that practice may not be in the 

best interest of the companies or their shareholders. Graef Crystal, a former prominent 

compensation consultant turned author and compensation critic, has noted: "[ISS has] a severe 

conflict when they work both sides of the street. It’s like the Middle Ages when the Pope was 

selling indulgences. ISS is selling advice to corporations on how to avoid getting on their list of 

bad companies. There’s a veiled sense of intimidation."9

 The Center believes it is impossible 

 

8

 U.S. GOV’T ACCOUNTABILITY OFFICE, CORPORATE SHAREHOLDER MEETINGS: ISSUES RELATING TO FIRMS THAT 

ADVISE INSTITUTIONAL INVESTORS ON PROXY VOTING, GAO-07-765, 10 (2007). 9

 Wayne Leslie, Have Shareholder Activists Lost Their Edge?, N.Y. TIMES, Jan. 30 1994, at C7. 
EBSA Office of Regulations and Interpretations 

February 3, 2011 

Page 5 

for a proxy advisory firm to offer both of these services and meet their fiduciary obligations 

under the Act to institutional investors. 

 ii. Ownership Structure Conflicts of Interest

There are conflicts of interest in the ownership structures at all proxy advisory firms. For 

example, the second largest proxy advisory firm, Glass, Lewis & Co., is owned by the Ontario 

Teachers’ Pension Plan, which invests in companies on which Glass Lewis provides proxy 

voting recommendations. ISS is owned by MSCI, Inc., which provides other financial services 

to both corporate issuers and institutional investors. 

These ownership structures certainly present situations where the interests of the parent 

company’s clients diverge from that of the proxy advisory firm’s clients. Moreover, when a 

parent company owns a significant stake in or has an ongoing business relationship with the 

companies on which the firm is making proxy voting recommendations, there is a cause for 

concern that the recommendations cannot truly be independent. It is reasonable to assume that 

the parent company would favor or lean on the proxy advisory firm to favor the public 

companies that they own or with whom they have a business relationship. Proxy advisory firms 

are not currently required to disclose these conflicts of interest; therefore, institutional investors 

are incapable of making informed decisions whether there is an impermissible conflict of interest 

or if the proxy advisor’s recommendation or analysis has been compromised. 

iii. Material Inaccuracies

The SEC has asserted that a proxy advisory firm owes fiduciary duties to its clients, holding 

a proxy advisory firm to a "duty of care requiring it to make a reasonable investigation to 

determine that it is not basing its recommendations on materially inaccurate or incomplete 

information."10 In a 2010 survey of HR Policy Association members and Center On Executive 

Compensation Subscribers, 53 percent of respondents said that a proxy advisory firm had made 

one or more mistakes in a final, published report on the company’s compensation programs in 

2009 or 2010. The most common inaccuracies related to improper use of peer groups or peer 

group data in determining whether executive compensation levels were appropriate, erroneous 

analysis of long-term incentive plans and discussions of provisions that were no longer in effect. 

Companies are extremely concerned that these inaccuracies lead to voting decisions by 

institutional investors that will adversely impact the company and ultimately shareholders. 

Industry cost pressures are most likely the cause of the material inaccuracy problem. The 

size of proxy disclosures and the volume of data and information that must be analyzed have 

grown exponentially in recent years as a result of changes in SEC proxy disclosure rules. Under 

pressure to increase profitability, some proxy advisory firms have resorted to outsourcing "data 

 

10 Sec. Exch. Comm’n , Concept Release on the U.S. Proxy System, Release No. 34-62493, 119 (July 14, 2010). 
EBSA Office of Regulations and Interpretations 

February 3, 2011 

Page 6 

mining" and research functions to low cost labor countries. ISS, for example, has established a 

branch in the Philippines. Other proxy advisory firms hire third-party contract firms to procure 

and extract proxy statement information. For in-house work, a considerable amount of data 

collection is handled by seasonal, temporary employees. The fact that a substantial share of 

proxy analysis and voting recommendations is being done by foreign outsourced labor and 

temporary employees with limited business or proxy experience is extremely troubling and may 

serve as a partial explanation of why material inaccuracies have become such a problem. 

Moreover, proxy advisory firms generally do not give most companies an opportunity to 

review their draft reports prior to the issuance of a final report. When a proxy advisory firm does 

allow a company to review a draft report, the company is given an unreasonably short period of 

time for review – typically, one to two days – to point out inaccuracies and suggest corrections 

before the final report is issued. Even then, there is no established process for making those 

corrections and no opportunity for an institutional investor to know of a disagreement between 

the proxy advisory firm and the company. 

Inaccurate information in proxy advisor reports is capable of causing significant harm to 

companies and their investors. The recommendations of proxy advisors, which are heavily relied 

upon by institutional investors, can result in the failure of a compensation plan to be approved or 

votes against boards of directors. When these recommendations are made based on inaccurate 

information, both companies and shareholders alike are damaged. Moreover, companies often 

adjust their policies based on the actions of proxy advisory firms in order to ensure approval of 

plans and directors. Because these analyses and voting recommendations carry such significant 

influence, it is critical that they be based on accurate information. Additional regulation and 

oversight is necessary to ensure significant inaccuracies do not occur. 

II. ERISA Fiduciary Analysis 

A. Background 

Section 3(21) of ERISA provides that a person is a fiduciary with respect to a plan to the 

extent (i) he exercises any discretionary authority or discretionary control respecting 

management of such plan or exercises any authority or control respecting management or 

disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct 

or indirect, with respect to any moneys or other property of such plan, or has any authority or 

responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility 

in the administration of such plan. 

The Department has historically taken the view that the fiduciary act of managing plan assets 

includes exercising the legal rights that accompany ownership of securities and other property. 

Under ERISA, those rights may be exercised by the plan’s trustee (including at the direction of a 

named fiduciary), or by an "investment manager" who has been properly appointed by the plan’s 

named fiduciary. Specifically, section 402(c)(3) of ERISA provides that a named fiduciary may 

appoint an investment manager to manage plan assets. Section 3(38) of ERISA defines an 
EBSA Office of Regulations and Interpretations 

February 3, 2011 

Page 7 

"investment manager" as (A) any fiduciary who has the power to manage, acquire or dispose of 

any plan asset, (B) who is (i) a registered investment advisor under the Investment Advisers Act 

of 1940 (or a state law in certain circumstances), (ii) a bank, or (iii) an insurance company; and 

(C) who has acknowledged in writing that he is a fiduciary with respect to the plan. In 

connection with proxy voting responsibilities, the Department has opined that an investment 

manager is not relieved of its own responsibilities and related liabilities merely because it 

followed the direction of some other person, or delegated its voting responsibility to some other 

person.

11 

The Center believes that a proxy advisory firm may properly be viewed as a fiduciary to the 

extent that the proxy advisor effectively exercises discretion over the proxy decision.12 This 

would include, for instance, where the proxy advisor is acting as an "investment manager" and 

where a properly appointed investment manager has delegated its proxy voting responsibilities to 

the proxy advisor. In this regard, the Center also believes that an investment manager who 

merely follows the direction of such adviser would continue to be liable for the proxy voting 

decision.13 

Although the Center agrees that proxy advisors may, in some circumstances properly be 

viewed as fiduciaries, the Center does not endorse the broad redefinition of fiduciary in the 

Proposed Regulation. The Center is concerned that the Proposed Regulation could significantly 

expand the circumstances under which numerous persons supporting the management of plan 

assets, but not exercising discretion over fiduciary decisions, would be deemed to be fiduciaries,

and thus significantly increase plan costs and harm plan participants, fiduciaries, and sponsors. 

B. Proposed Regulation

Under the Proposed Regulation, a person who "provides advice or makes recommendations 

as to the management of securities or other property" of an ERISA plan may be an ERISA 

fiduciary. The Preamble to the Proposed Rule provides that "[t]his would include, for instance, 

advice and recommendations as to the exercise of rights appurtenant to shares of stock (e.g., 

voting proxies)."14 

 

11 Department of Labor's letter to the Chairman of the Retirement Board of Avon Products, Inc. (February 23, 1988); 

Department of Labor's letter to Robert A.G. Monks of Institutional Shareholder Services, Inc. (January 23, 1990); 

DOL Interpretive Bulletins 94-2 and 2008-2. 

12 "While the ordinary functions of consultants or advisers to employee benefit plans (other than investment 

advisers) may not be considered as fiduciary functions, it must be recognized that there will be situations where such 

consultants and advisers may because of their special expertise, in effect, be exercising discretionary authority or 

control with respect to the management or administration of such plan or some authority or control regarding its 

assets." H.R. Rep. No. 93-1280, at 323 (1974) (Conf. Rep.). 

13 Department of Labor's letter to the Chairman of the Retirement Board of Avon Products, Inc. (February 23, 1988); 

Department of Labor's letter to Robert A.G. Monks of Institutional Shareholder Services, Inc. (January 23, 1990); 

DOL Interpretive Bulletins 94-2 and 2008-2. 

14 Dep’t of Labor, Preamble to Definition of the Term “Fiduciary,” 75 Fed. Reg. 65.263 (proposed Oct. 22, 2010) (to 

be codified at 29 C.F.R. § 2510). 
EBSA Office of Regulations and Interpretations 

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The Center agrees with the Department's longstanding view that voting of proxies is an 

important fiduciary activity. Moreover, the Center strongly believes that retirement plans and 

other institutional investors responsible for voting proxies need to have access to accurate, 

unbiased information, provided free from conflicts of interest. 

The Center is, however, concerned that the Proposed Regulation could potentially brand as 

fiduciaries numerous individuals and entities that provide basic services to plans that have not 

traditionally been considered fiduciary in nature. In particular, by expanding the category of 

investment advice to include any "advice or . . . recommendations as to the management of 

securities or other property," the Proposed Regulation could conceivably sweep in as a fiduciary 

any person who provides input to a plan, a plan fiduciary, or a plan participant or beneficiary 

regarding plan investments or plan assets. 

It is the view of the Center that a person who merely provides information that supports a 

fiduciary decision relating to the management of plan assets should not, without more, be 

deemed a fiduciary adviser. Otherwise, we fear that a multitude of other activities undertaken to 

support plan investment activities could also be deemed fiduciary advice. For example, plan 

sponsor employees supporting a fiduciary investment committee's investment decision could, 

under the Proposed Regulation, be deemed to be providing investment advice. We do not think 

that this result will benefit plans, participants, fiduciaries, or plan sponsors. 

In the case of proxy advisory firms, the Proposed Regulation fails to recognize that such 

firms offer a variety of services and play a number of different roles with respect to ERISA plans 

and other institutional investors. For example, a proxy advisory firm may provide services based 

on the firm's base proxy voting policy or based on a customized policy provided by the 

institutional investor. A proxy advisory firm also may simply provide specific information with 

respect to a particular vote. Moreover, one of the two predominant proxy advisory firms, ISS, is 

registered with the SEC as an investment adviser while the other, Glass Lewis, is not. Due to the 

variety of roles and services offered by proxy advisory firms, the Center believes that the 

Department's approach in the Proposed Regulation unevenly impacts proxy advisory firms. 

In sum, the Center is concerned that the Proposed Regulation could significantly increase 

plan costs and harm plans, participants, fiduciaries, and plan sponsors, and would not provide an 

even playing field for proxy advisors. Instead, as discussed in greater detail below, the Center 

requests that the Department carefully review the activities of proxy advisory firms to determine 

the appropriate course of action and oversight as well as provide much needed guidance to plan 

fiduciaries with respect to how to evaluate the information provided by proxy firms. 

C. Need for Comprehensive Review

Ideally, institutional investors, consistent with their fiduciary obligation to vote proxies, 

would have adequate information to ensure that the recommendations made by proxy advisors 

and the votes that are based on those recommendations are consistent with the creation of longterm shareholder value. As a consequence of many institutions having a very large number of 
EBSA Office of Regulations and Interpretations 

February 3, 2011 

Page 9 

security holdings, however, coupled with the ever-larger volume of material that issuers are 

required to disclose in proxy statements, it is perhaps somewhat naïve to expect that institutional 

investors will rely less heavily on proxy advisory firms. 

The Center believes that any proxy advisory firm that effectively exercises discretion over a 

proxy decision should be deemed a fiduciary. Further, we believe that there are circumstances in 

which proxy advisory firms currently are exercising discretion over proxy decisions. In this 

regard, the Center requests that the Department investigate whether the practices of proxy 

advisory firms should be deemed, under existing regulations, to constitute discretion over proxy 

voting decisions. 

In cases where a proxy advisory firm is not exercising discretion, the Center believes that 

such firms play an important role that can help institutional investors fulfill their fiduciary duty 

to vote their proxies in their clients’ best interest, provided the information provided by the proxy 

advisors is reliable. However, without a more rigorous regulatory and oversight process, we are 

concerned that the integrity of the proxy system may be undermined by growing evidence of 

material inaccuracies and conflicts of interest by proxy advisors that could seriously impact the 

proxy voting process. 

III. Recommendations for Greater Regulation of the Proxy Advisory Industry 

The Center believes that the influence of the proxy advisory firm industry requires greater 

oversight by the Federal regulatory agencies having authority over them. This includes 

regulation by the SEC under the Act and oversight and investigation by the Department. 

A. A Call for Greater Regulation/ Oversight

The current regulatory framework is largely responsible for the influence that proxy advisors 

wield over institutional investor voting. The Center believes that the most effective approach for 

mitigating and addressing the issues surrounding the conflicts of interest and inaccuracies with 

the proxy advisory industry, among other issues, requires a series of regulatory and market 

reforms. 

The Center has asked the SEC to impose greater and more consistent regulations across 

proxy advisory firms – and will continue to advocate to the SEC that such regulations not be 

optional. The proxy advisory industry needs uniform standards that address conflicts of interest 

and inaccuracies that undermine the very services they provide. The Center believes that 

enlisting the Department in this regulatory effort can only help in ridding this service industry to 

ERISA plans of serious problems, which will ultimately benefit plan participants. 
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Page 10 

B. Request for Department of Labor Investigation into Proxy Advisory Firm Practices

In order to ensure that plan fiduciaries have accurate and reliable information upon which to 

base proxy voting decisions, the Center requests that the Department undertake a comprehensive 

review and investigation of proxy advisory firm practices. 

The most serious issue facing the proxy advisory firm industry is at the largest, most 

influential proxy advisory firm, ISS. ISS currently provides consulting services to corporate 

issuers while simultaneously providing "independent" analyses to institutional investors on those 

same companies. The Center believes it would be impossible to provide both of these services 

and still meet their fiduciary obligations to the institutional investors. For this reason, there 

should be a ban on proxy advisory firms, or their affiliates from this practice. Until the change is 

effective, the Department should mandate disclosure of the fees paid and services obtained from 

proxy advisors in the proxy statement, similar to the disclosures currently required for 

compensation consultants. 

Proxy advisory firms should also be required to make the financial relationships that 

underpin the most controversial aspects of the proxy advisory industry transparent to institutional 

investors. Specifically, the Center recommends that proxy advisory firms be required to disclose, 

in any report containing voting recommendations about a specific issuer, whether the firm has 

received consulting fees from either the issuer, or the proponent of a shareholder resolution on 

the ballot at that issuer, in the previous year and the amount of those fees. This disclosure should 

be located where it is easily accessible to any investor who is relying on the recommendation in 

the report. 

Furthermore, proxy advisory firms should be required to disclose their analytic processes, 

methodologies and models utilized to derive their voting recommendations. Although ISS 

currently provides some of this disclosure, it is still not sufficiently transparent. Glass, Lewis & 

Co., its major competitor, provides virtually no disclosure as to processes and methodologies. 

Additional disclosure would allow issuers and institutional investors to effectively assess the 

merits and weaknesses of such models and to provide feedback to proxy advisory firms on these 

models. 

C. Additional Information

For further information on this topic, we have attached a copy of the Center’s white paper, A 

Call for Change in the Proxy Advisory Industry Status Quo, as well as policy briefs that 

summarize the major issues with the proxy advisory industry. We hope to utilize this 

opportunity to start a dialogue on how best to regulate an industry that wields tremendous power 

but is currently operating without sufficient oversight. 
EBSA Office of Regulations and Interpretations 

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Page 11 

IV. Conclusion

Rather than finalize the Proposed Regulation, the Center strongly urges the Department to 

undertake a comprehensive review of proxy advisory firms and work with the SEC and other 

agencies that also are investigating the regulation of proxy advisory firms, to identify areas 

where focused and comprehensive regulation will provide real benefits to the users of proxy 

advisory services, including ERISA plans. The Center would be happy to meet with the 

Department and to provide information on our concerns regarding the significant influence over 

institutional investors that proxy advisory firms exercise, and the fact that there are serious 

conflicts of interest issues in the proxy advisory industry. 

V. Request to Testify at Hearing

The Center requests the opportunity to testify at the hearing on the Proposed Regulation and 

expects to file a separate outline of testimony in the near future. 

* * * * 

The Center On Executive Compensation appreciates this opportunity to provide comments 

on the Definition of Fiduciary Proposed Rule and the specific role of proxy advisory firms. If 

you have any questions about these comments, please contact me at tbartl@execcomp.org. 

Sincerely, 

Timothy J. Bartl 

Senior Vice President and General Counsel 

Attachment 

c11-21 
A Call for Change in the 

Proxy Advisory Industry Status Quo 

The Case for Greater Accountability and Oversight 

January 2011 

c11-07b 

1100 THIRTEENTH STREET | SUITE 850 

WASHINGTON DC 20005 

202.408.8181 | FAX 202.789.0064 | WWW.EXECCOMP.ORG
i 

About the Center On Executive Compensation

The Center On Executive Compensation is a research and 

advocacy organization dedicated to developing and promoting 

principled pay and governance practices and advocating 

compensation policies that serve the best interests of shareholders 

and other corporate stakeholders. The Center is a Division of the 

HR Policy Association, which represents the chief human resource 

officers of more than 300 of the largest corporations in the United 

States. 

Acknowledgements 

The Center On Executive Compensation would like to thank 

Scott Fenn for his considerable work as the primary researcher, 

writer and editor of this paper. His experience and expertise were 

invaluable in helping the Center staff to understand and articulate 

how the proxy advisory industry operates. That said, all 

conclusions and recommendations in the paper are the Center’s 

and should not be attributable to Scott or any other individual or 

organization. 

 
ii 

Contents 

I. Introduction ................................................................................................................ 1 

II. Executive Summary .................................................................................................. 2 

III. The Rise of the Proxy Advisory Industry ............................................................. 14 

A. Origins of Shareholder Activism and the Proxy Advisory Industry ................... 14 

B. Increases in Institutional Stock Ownership ....................................................... 15 

C. Increases in the Volume of Proxy Votes ......................................................... 17 

D. Investors’ Fiduciary Duty to Vote Proxies ........................................................ 17 

E. Academic Research Shows Proxy Advisors Have a Significant 

Impact on Voting Outcomes ............................................................................. 19 

F. Regulatory Changes Will Increase Further the Number 

and Influence of Proxy Votes ........................................................................... 21 

IV. The Proxy Advisory Firms and Their Services ................................................... 28 

A. Institutional Shareholder Services ................................................................... 28 

B. Glass, Lewis & Co. .......................................................................................... 33 

C. Proxy Governance, Inc. ................................................................................... 36 

D. Egan-Jones Proxy Services ............................................................................. 38 

E. Other Proxy Advisors ...................................................................................... 40 

F. Conclusion ....................................................................................................... 41 

V. Conflicts of Interest in the Proxy Advisory Industry ........................................... 42 

A. Institutional Shareholder Services Inc. (ISS) .................................................... 43 

B. Glass, Lewis & Co. .......................................................................................... 47 

C. Proxy Governance, Inc. ................................................................................... 49 

D. Egan-Jones Proxy Services ............................................................................. 51 

E. Union-Affiliated Proxy Advisors ....................................................................... 52 

F. Parallels to Identified Conflicts at Credit Ratings Firms .................................. 52 

VI. Impact of Significant Inaccuracies and Lack of 

Transparency in Proxy Analyses ........................................................................... 55 

A. Potential Reasons for Inaccuracies .................................................................. 55 

B. Center On Executive Compensation Research on Inaccuracies .................... 58 

C. Lack of Transparency in Proxy Analyses and Recommendations .................. 60 

D. Impact of Inaccuracies and Lack of Transparency on Voting Outcomes ........ 60 

E. Conclusion ....................................................................................................... 61 
iii 

VII. The Existing Regulatory and Legal Framework for Proxy Advisors .................. 62 

A. The Investment Advisers Act of 1940 .............................................................. 62

B. Rules Governing Proxy Solicitation .................................................................. 64 

C. Fiduciary Duty Only to Clients ......................................................................... 65 

VIII. Proposals Addressing Proxy Advisor Conflicts and 

Lack of Transparency ............................................................................................. 67 

A. The Proxy Advisory Industry Should be Regulated by the SEC ...................... 68 

B. Proposals Contained in 2010 SEC Concept Release ...................................... 68 

C. Other Regulatory Proposals ............................................................................. 70

D. Potential for Unintended Consequences from Enhanced 

Regulation of Proxy Advisors ........................................................................... 74 

E. The Need for Effective Enforcement ................................................................ 75 

IX. Potential for Addressing the Market Power of Proxy Advisors 

Through Increased Competition ............................................................................. 76 

A. The Case for Greater Competition in the Proxy Advisory Industry ................... 76 

B. A Non-Profit Utility Model for Proxy Services ................................................... 78

C. Mechanisms to Promote Greater Participation 

in Proxy Voting by Retail Investors .................................................................. 80 

X. The Center On Executive Compensation’s Recommendations for 

Reform of the Proxy Advisory Industry .................................................................. 85 

XI. Endnotes .................................................................................................................. 87
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 1 

I. Introduction 

Each year, institutional investors cast billions of votes that 

determine corporate directors, executive compensation and 

corporate governance policies at more than 8,000 publicly traded 

U.S. companies. By law, the institutions have a fiduciary duty to 

vote in the best interests of their clients. However, with the gaggle 

of votes they are required to make, many institutions essentially 

outsource the analysis and process of developing voting 

recommendations to a handful of third parties called proxy 

advisory firms and some firms delegate the actual proxy voting to 

such firms. With the exponential increase in institutional assets 

over the past 20 years, the proxy advisory industry has quietly 

grown extremely powerful. It exercises a considerable degree of 

influence and control over corporate governance and executive 

compensation standards and its power is concentrated with one 

firm dominating the industry. Despite its considerable clout, the 

proxy advisory industry is scarcely regulated. As a result, the 

characteristics of the industry bear an uncanny resemblance to the 

credit ratings industry before the financial crisis: 

• advisory firms have considerable conflicts of interest in how 

they are structured; 

• the lack of transparency of the advisory firms’ analytical 

models makes it extremely difficult for investors or companies 

to determine why a proxy advisor has made certain 

determinations or to correct factual inaccuracies before a vote 

is held; and 

• concerns have mounted that inaccurate information is being 

transmitted to investors and all this is happening just as the 

influence of the industry is poised to increase as a result of 

changes in the just-passed financial reform bill. 

The purpose of this paper is to provide essential background 

information on the development of the proxy advisory industry, 

expose the conflicts of interest and procedural lapses that could 

result in inaccurate proxy votes, review regulatory approaches to 

date, and suggest a workable approach to regulation of the 

industry. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 2 

II. Executive Summary 

Over the last quarter century, a confluence of developments has 

served to aggregate tremendous power among a small group of 

proxy advisory firms. These factors include: 

• An increase in institutional stock ownership of the 1,000 

largest corporations from 47 percent in 1987 to 76 percent in 

2007, thus concentrating voting power in institutions, rather 

than retail investors. 

• With this increase in institutional investor ownership has come 

an increase in ownership by state pension funds, which tend to 

be more progressive in their activism and frequently rely more 

heavily on the recommendations of proxy advisors. 

• Increases in the volume of proxy votes, as the SEC expanded 

the subjects on which it permitted shareholder proposals and 

the growth of equity indexing. These changes required 

institutions to develop a voting position on more issues. 

Reflecting this growth, Broadridge Financial Solutions 

reported a 14 percent increase in the number of shares it 

processed between 2009 and 2010, from 309 billion shares to 

350 billion shares processed. 

• Regulatory mandates that pension funds and other institutional 

investors have a fiduciary duty to vote their proxies in the best 

interest of their clients. A 1988 Department of Labor 

interpretive letter reinforced this requirement with respect to 

pension funds, and a 2003 SEC rulemaking reinforced the 

requirement with mutual funds and investment advisors. 

• A 2003 SEC interpretation that indicated that investment 

advisors could discharge their duty to vote their proxies and 

demonstrate that their vote was not a product of a conflict of 

interest if they voted client securities in accordance with a predetermined policy and based on the recommendations of an 

independent third party (e.g., a proxy advisory firm). 

The expansion of proxy voting, along with the regulatory 

interpretations, have caused the vast majority of institutional 

investors to separate the individuals making investment decisions 

from those making proxy voting decisions. As a whole, this has 

increased the influence of proxy advisory firms since institutional 

investors rely to a much greater extent on proxy advisors’ analyses 

and voting recommendations. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 3 

Academic Research Shows Proxy Advisors Wield 

Exceptional Clout 

The market for proxy advisory services has developed in such a 

way that one firm, Institutional Shareholder Services (ISS), largely 

controls the market, with a 61% market share,1

 and a second, 

Glass, Lewis & Co. controls approximately 37% of the market.2

 

This concentration has allowed the firms to have a significant 

impact on pay and governance policy. For example, with regard to 

ISS, the dominant proxy advisory firm, academic research has 

shown that: 

• a negative recommendation on a management proposal can 

reduce the support of institutional investors by up to 20 

percent,3

 causing ISS to be the de facto pay and governance 

police and 

• ISS’s vote recommendations in contested director elections are 

“good statistical predictors of contest outcomes,” in part 

because they influence investors to revise their assessment of 

board nominees.4

 

The academic research on the influence of proxy advisors is 

bolstered by evidence from firms that closely monitor institutional 

voting. 

Recent statistics from the proxy solicitation firm Innisfree 

M&A, for instance, found that ISS clients typically control 20 to 

30 percent of a midcap or largecap company’s outstanding shares, 

while Glass Lewis clients typically control 5 to 10 percent.5 The 

primary reason for the influence of these firms is simple: under 

SEC interpretations the advisory firms are considered independent 

experts, and if institutional investors rely on the recommendations 

made by them, they are held to have discharged their fiduciary 

duties to vote in the investors’ best interests. Reflecting this point, 

the Honorable Leo E. Strine, Jr., Vice Chancellor of the Delaware 

Court of Chancery, commented that “the influence of ISS and its 

competitors over institutional investors’ voting behavior is so 

considerable that traditionalists will be concerned that any 

initiative to increase stockholder power will simply shift more 

clout to firms of this kind.” 

The level of influence wielded by proxy advisors on 

compensation issues was highlighted by a recent survey of 251 

companies by consulting firm Towers Watson, which found that 59 

percent of respondents believed that proxy advisors have 

significant influence on executive pay decision-making processes 

at U.S. companies. Similar results were obtained in a 2010 survey 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 4 

by the Center On Executive Compensation, where 54 percent of 

survey respondents said they had changed or adopted a 

compensation plan, policy or practice in the past three years 

primarily to meet the standards of a proxy advisory firm. 

Influence of Proxy Advisors Will Increase With the 

Adoption of Say on Pay and Other Policy Changes 

The executive compensation and corporate governance 

provisions in the Dodd-Frank Act, the new financial reform law, 

will have the unintended consequence of further increasing the 

power and influence of proxy advisory firms. This is particularly 

the case with “say on pay” -- the new requirement that 

shareholders have a periodic nonbinding vote on executive 

compensation at least once every three years. This requirement 

will substantially increase the number of proxy votes on ballots 

annually and cause many institutional investors to defer to the 

proxy advisory firms’ analysis as to whether a company’s 

executive compensation program should be supported or opposed. 

Although institutional investors may have custom proxy voting 

policies, the basis for many, if not most, of these policies is the 

advisory firms’ base policies. Without a viable alternative in the 

marketplace, the advisors’ recommendations will determine 

whether a say on pay vote obtains substantial support. 

This concern has been echoed by many different 

commentators, including: 

• Former TIAA-CREF General Counsel and Current Governance 

for Owners U.S. Chairman, Peter Clapman, who indicated “the 

inevitable consequence [of adopting say on pay] would be to 

transfer considerable discretionary power over individual 

company compensation practices to the proxy advisory firms. I 

question that such an approach will serve the long-term best 

interests of shareholders.” 

• Edward Durkin, Director of Corporate Affairs for the 

Carpenters Union: “If you have an annual say on pay vote and 

you exercise your voting responsibility as we do ... it’d be 

overwhelming,” said Durkin, whose union owns stakes in 

3,500 companies.6

 

• Columbia Law Professor Jeffrey Gordon, who indicated that 

“the burden of annual voting would lead investors, particularly 

institutional investors, to farm out evaluation of most pay plans 

to a handful of proxy advisory firms who themselves will seek 

to economize on proxy review costs.”7 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 5 

In addition, because Dodd-Frank also requires shareholders to 

vote on how frequently a say on pay vote will occur – every one, 

two or three years – proxy advisors have a built-in preference to 

hold advisory votes every year because of the reliance that 

institutional investors will place on their analyses. Prior to the 

adoption of Dodd-Frank, the ISS methodology expressed a 

preference for an annual say on pay vote, and if a company’s 

compensation plan conflicted with its policies, ISS indicated that it 

would recommend against the pay plan. It also stated “if there is 

no MSOP on the ballot, then the negative vote will apply to 

members of the compensation committee.” ISS has confirmed that 

it will use this approach in the 2011 proxy season, even though the 

law clearly allows shareholders to express their preferences for a 

biennial or triennial say on pay vote. 

The proxy advisors will also have significant influence over the 

say on pay vote required on change-in-control payments in merger 

and acquisition situations, which is required by Dodd-Frank. 

A number of other changes in the Dodd-Frank Act are likely to 

increase the influence of the proxy advisory firms. These include: 

• Elimination of Broker Discretionary Voting. Broker-dealers 

historically had the ability to vote their clients’ shares, if the 

broker did not have specific voting instructions from the client. 

Broker discretionary votes have typically been cast in favor of 

management and can comprise up to 20 percent of the votes at 

some companies. However, without a significant increase in 

retail voter participation, it is unlikely that those shares will be 

voted at all, effectively disenfranchising a significant subset of 

shareholders and increasing the influence of institutional 

shareholders and thus the proxy advisory firms. 

• Proxy Access for the Nomination of Directors. The DoddFrank Act gave the SEC authority to promulgate a rule 

allowing certain shareholders to nominate candidates to a 

company’s board of directors, and the SEC approved such a 

rule roughly one month after Dodd-Frank became law. The 

validity of the rule is being challenged in federal court, and its 

implementation has been suspended pending the court’s ruling. 

However, if the rule is ultimately upheld, the long-term impact 

will be to increase the number of contested elections on which 

institutional investors need to vote. As one organization of 

corporate pension plan sponsors commented, “these new proxy 

access standards will give [the proxy advisory firms] even 

greater power over the election of the boards of directors.”8

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 6 

Without greater oversight of the proxy advisory firms from the 

SEC and institutional investors, these changes will have a 

measurable impact on the influence the proxy advisors wield over 

the proxy process to the detriment of retail investors. 

The Impact of Majority Voting for Directors. Another 

important change that has increased the influence of proxy 

advisory firms over institutional investors is the change from 

plurality voting for directors to majority voting for directors. Since 

2004, amendments to the Model Business Corporation Act, 

Delaware General Corporation Law and shareholder campaigns 

have helped facilitate the adoption of majority voting for directors, 

with over two-thirds of companies in the S&P 500 Index using 

majority voting. Under majority voting, a candidate must receive a 

majority of votes cast in order to be elected, and thus a candidate in 

an uncontested election receiving less than a majority of votes cast 

is not considered elected. This contrasts with the historic practice 

of plurality voting for directors, in which the director to receive the 

most votes, without regard to withheld votes, won. With majority 

voting, recommendations from proxy advisory firms to withhold a 

vote or vote against a director could result in the failure to get 

elected. 

The influence of the proxy advisors under majority voting is 

considerable and, in many cases, the recommendation to vote for 

or against a director is based upon the firms’ analysis of the 

company’s compensation and governance practices. It is therefore 

important that the advisors’ policies and methodologies used for 

analyzing company practices be free from conflicts, errors, be 

transparent and be based upon sound compensation and 

governance understanding, which is regularly not the case. 

The advent of majority voting provides shareholders and proxy 

advisors with a strong tool to hold directors accountable. 

However, before they can do so in a fashion that is in the best 

interests of shareholders and the proxy voting system as a whole, 

the advisors must be held accountable for the conflicts of interest 

and inaccuracies in analysis that are all too common. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 7 

Conflicts of Interest at the Largest Advisory Firms Cast 

a Shadow on the Integrity of Research and Voting 

Recommendations 

Proxy advisors are currently afforded a considerable degree of 

deference under SEC interpretations because superficially they are 

considered “independent” of the investment advisors that use their 

services. Yet proxy advisors have significant conflicts of interest 

that raise serious questions about their independence. The largest 

proxy advisory firms have significant conflicts of interest in the 

services they provide and in how they are structured. These 

conflicts have been the subject of two reports by the federal 

government’s auditing arm, the U.S. Government Accountability 

Office (GAO), and they have been frequently criticized by 

companies and institutional investors. 

ISS Provides “Independent” Analysis of Company 

Practices While Offering Consulting Services to Those Same 

Companies. Despite frequent criticism by the government and 

others over the past 16 years, ISS, the largest and most influential 

firm, continues to provide analyses and voting recommendations of 

proxy issues to be put to a shareholder vote while also providing 

consulting services to corporations whose proposals they evaluate. 

This led the GAO to note that “corporations could feel obligated to 

subscribe to ISS’s consulting services in order to obtain favorable 

proxy vote recommendations on their proposals and favorable 

corporate governance ratings.”9

 Similarly, a report by the 

Millstein Center On Corporate Governance, stated that the many 

companies believe that “signing up for [ISS] consulting provides 

an advantage in how the firm assesses their governance” despite 

ISS disclaimers to the contrary.10 

Corporate governance expert Ira Millstein described the 

inherent conflict in the ISS model as follows: 

It provides structural “standards” for corporate governance, 

privately prepared by unidentified people, pursuant to 

unidentified processes, and asks us to take its word that it is 

all fair and balanced. I tried to dig behind the soothing 

assurances, but couldn't find enough detail to convince me 

that a devil didn't lie in the details of how this private 

standard-setting was put together. And then ISS provides 

company ratings, based on these privately-set standards, 

creating a tendency on the part of those that have received a 

poor rating to pay for a consultancy by the private standardsetter, on how to improve that rating. I see this as a vicious 

cycle. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 8 

This “vicious cycle” has been roundly criticized by both 

institutional investors and corporations because ISS determinations 

and related consulting drives what is considered best practice, even 

if the practice may not be in the best interest of the companies or 

their shareholders. Even ISS acknowledges this fact in its 2009 

10-K filing, stating “for example, when we provide corporate 

governance services to a corporate client and at the same time 

provide proxy vote recommendations to institutional clients 

regarding that corporation’s proxy items, there may be a perception 

that we may treat that corporation more favorably due to its use of 

our services, including our Compensation Advisory Services, 

provided to certain corporate clients.”11 

ISS has argued that it provides a firewall between its corporate 

consulting and its advisory businesses, but the separation can only 

go so far. For example, ISS seeks to reinforce the separation by 

telling corporate clients that when they meet with proxy analysis 

staff, they should refrain from discussing whether the client has 

received consulting services from the other side of ISS. 

Conflicts in Ownership Structures. The largest proxy 

advisory firms have potential conflicts in their ownership 

structures that could cast their independence into significant doubt, 

including: 

• ISS is owned by a larger public company, MSCI, Inc., that 

provides a wide range of services to institutional investors and 

corporations. The ownership by a larger company could result 

in MSCI putting pressure on ISS to be more favorable to 

certain companies to procure their business. Glass, Lewis & 

Co. (the second largest advisor) is owned by the Ontario 

Teachers’ Pension Plan which engages in public and private 

equity investing in corporations on which Glass Lewis makes 

recommendations. Although Glass Lewis states that it will add 

a note to the research report of any company in which the 

Ontario Teachers’ Pension Plan has a significant stake, the lack 

of transparency in the Glass Lewis model and the fact that it 

does not share draft reports with corporations has raised 

concerns about potential independence issues; 

As Julie Gozan, Director of Corporate Governance at unionowned Amalgamated Bank, commented: “The community that 

relies on Glass Lewis and ISS needs to know this is unbiased 

advice that favors long-term investors and not the interests of 

corporate executives. When these firms go public, there’s real 

potential for a conflict of interest.”12 The conflicts of interests are 

not unique to the large firms, however. For example: 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 9 

• Proxy Governance Inc., (the third largest proxy advisory firm 

until the end of 2010) was owned by a firm whose chief 

subsidiary is a registered broker-dealer, which could lead to 

divergent interests among clients of each firm; 

• Egan-Jones is owned by a firm whose primary business is a 

credit ratings agency; and 

• Marco Consulting, a proxy advisor whose clients are TaftHartley pension funds, may find itself pressured to recommend 

in favor of a shareholder proposal submitted by a client, even if 

contrary to its voting guidelines, to retain the client. 

The potential ramifications of a proxy advisory industry with 

readily recognizable conflicts of interest that wields great power 

over capital markets and the market for corporate governance and 

control, which is subject to little regulatory oversight, mirror those 

that occurred in the credit ratings agency industry before the 2008 

economic meltdown. These include: the existence of a quasiregulatory license, conflicts of interest in the business model and 

the provision of ancillary services, and insufficient regulation. 

Ultimately, this caused Congress to establish a new regulatory 

framework for the credit ratings industry in the Dodd-Frank Act. 

The Center believes that, at a minimum, the SEC should ban 

conflicts of interest in the proxy advisory firm industry in which a 

firm both provides so-called “independent” analyses of company 

practices for institutional investors while simultaneously offering 

consulting services to companies as to how to improve the 

company’s assessment by the advisor. The Center also believes 

that the SEC should require greater disclosure of other conflicts, 

especially those created by the ownership structures of proxy 

advisory firms. 

Inaccuracies in Proxy Advisory Service Reports and 

Lack of Transparent Methodologies Add to Skepticism 

Over Analytical Rigor 

In addition to conflicts of interest, anecdotal information and 

survey data raise significant questions regarding whether there are 

increasing inaccuracies among the analyses published by the proxy 

advisory firms. This is significant because inaccurate information 

could lead institutional investors to voting decisions that are not 

supported by the facts. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 10 

A 2010 survey of HR Policy Association members and Center 

On Executive Compensation Subscribers – chief human resource 

officers of large companies -- found that of those responding, 53 

percent said that a proxy advisory firm had made one or more 

mistakes in a final published report on the company’s 

compensation programs in 2009 or 2010.13 The three most 

frequent types of inaccuracies identified by companies included: 

• improper use of peer groups or peer group data in determining 

whether executive compensation levels were appropriate which 

was reported by 20 percent of respondents; 

• erroneous analysis of long-term incentive plans reported by 17 

percent of respondents; and 

• inaccurate discussion of provisions no longer in effect was 

reported by 15 percent of respondents. 

Two principal reasons for such inaccuracies appear to be the 

workload pressures caused by the tremendous growth in the length 

of proxy disclosures and inadequate quality control, as publiclyheld firms, such as ISS, seek to reduce costs by outsourcing proxy 

analysis to low labor-cost countries like the Philippines. Another 

reason for the inaccuracies is the unreasonably short time proxy 

advisors give companies to review drafts of reports and to suggest 

corrections before a final report is issued. 

The implications of these inaccuracies are alarming. ISS has 

historically recommended voting against between 30 and 40 

percent of all stock plans it reviews. It follows that if the Center 

data is representative of large companies generally, then proxy 

advisory firms are negatively impacting the compensation 

programs at a meaningful number of companies because of 

institutional investors’ reliance on the data. 

The Center believes that proxy advisory firms should ensure to 

the greatest extent possible that accurate information is transmitted 

to institutional investors. Where information is found to be 

inaccurate, the proxy advisors should be required to correct their 

analyses and send the correction to their clients. Where there is a 

disagreement between the advisor and the company, the advisor 

should include a statement from the company discussing the 

rationale for its disagreement. Additionally, institutional investors 

should be required to closely monitor the output of proxy advisory 

firms, and the SEC should be required to do periodic reviews of 

advisor reports for accuracy and clarity. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 11 

The Extent of Government Regulation Over the Proxy 

Advisory Industry Is Inadequate Given Its Influence Over 

the Proxy Voting Process 

Proxy advisory firms are currently “regulated” by the SEC 

under the Investment Advisers Act of 1940, a statute written 

principally for firms that provide investment advice to companies 

or individuals. Various exemptions under the Act mean that proxy 

advisory firms can essentially choose whether to register with the 

SEC under the Act, and while additional regulatory and procedural 

requirements apply to those that do, the statute has been lightly 

enforced with respect to proxy advisors. Institutional investors, for 

their part, have seen proxy advisors as a cost-effective and efficient 

way to discharge and essentially outsource their own duties for 

voting proxies. Therefore, they have little incentive to change the 

system by closely monitoring the decisions and pointing out 

deficiencies in the quality controls of proxy advisors. 

Proposals for Increased Oversight of the Proxy Advisory 

System Take a Step in the Right Direction 

A number of proposals have been made to tighten regulation of 

the industry – ranging from mandating greater disclosure under 

existing rules to imposing new regulatory frameworks similar to 

those that apply to credit ratings agencies or public accounting 

firms. The new regulatory frameworks include requiring greater 

transparency of methodologies and filing voting recommendations 

with the SEC on a delayed basis, much like the mutual fund 

industry must currently file its proxy votes. These proposals are 

under consideration by the SEC, which requested public comment 

on the deficiencies in the proxy advisory firm industry and 

recommendations on how to address them. The Department of 

Labor went one step further in October 2010, by proposing 

regulations that would arguably impose ERISA fiduciary status on 

SEC-registered proxy advisory firms and possibly all proxy 

advisory firms. Many of these proposals have significant merit. 

However, there are also legitimate concerns that regulation could 

have unintended consequences – serving to credential and entrench 

existing proxy firms while creating barriers to entry for new firms. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 12 

Fostering Greater Competition in the Proxy Advisory 

Industry May Address Fundamental Problems 

Proposals have been made to adopt a public utility model for 

the widespread provision of proxy recommendations or to develop 

client-directed voting platforms to enhance retail voting 

participation. If successful, such efforts have the potential to dilute 

the influence of proxy advisors by expanding the market for 

services providing expert voting recommendations. To be 

effective, such approaches would need to provide 

recommendations that institutional investors could rely on to assist 

in discharging their fiduciary duty to vote their proxies in the best 

interests of their clients. 

Center Recommends Banning Worst Conflicts and 

Requiring Better Disclosure to Promote Market Reforms 

The Center On Executive Compensation believes that the most 

effective approach for mitigating the issues surrounding the proxy 

advisory services involves the following basic reforms. 

Ban on Worst Form of Conflict. The SEC should institute a 

ban on proxy advisory firms, or their affiliates, from providing 

advisory services to institutional investors, while at the same time 

providing consulting services to corporate issuers on matters 

subject to proxy votes. Pending the change, mandate disclosure by 

companies of the fees paid and services obtained from proxy 

advisors in the proxy statement. 

Full Disclosure of Other Conflicts. The SEC should 

mandate disclosures designed to make other financial relationships 

and conflicts in the proxy advisory industry transparent to 

investors. Targeted conflicts should include significant financial 

or business relationships between proxy advisory firms, or their 

parent or affiliate firms, with public companies, institutional 

investors or shareholder activists. Such disclosure would throw 

open to public scrutiny and academic study a wealth of information 

about potential conflicts of interest in the industry. Investors and 

academic researchers could study whether corporate shareholder 

votes are being “bought and sold” and the extent to which fees paid 

to proxy advisory firms are, in fact, influencing vote 

recommendations. Such scrutiny would quickly provide concrete 

evidence whether the “Chinese walls” and other safeguards the 

industry has instituted are effective in mitigating the conflicts. 

Disclosure of Voting Methodologies. The SEC should also 

mandate that proxy advisory firms disclose the analytic processes, 

methodologies and models utilized to derive their voting 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 13 

recommendations. For instance, proxy advisory firms that utilize 

pay-for-performance compensation models to determine 

recommendations on compensation plans or advisory say on pay 

votes should be required to publicly disclose all inputs, formulas, 

weightings and methodologies used in these models. Such 

disclosure would allow issuers and investors to effectively assess 

the merits and weaknesses of such models and to provide feedback 

to proxy advisory firms on these models. 

Clarify Fiduciary Duties of Institutional Investors and Plan 

Sponsors. The SEC should provide additional guidance to 

investment advisers and plan sponsors making it clear that their 

fiduciary obligations to vote proxies in the interests of investors 

require diligent monitoring of the conflicts, practices and decision 

processes of third-party proxy advisors. The mere act of hiring a 

proxy advisor should not be seen as sufficient to allow institutions 

to meet their fiduciary obligations under ERISA. Moreover, these 

obligations should be vigorously enforced to provide a true 

incentive for institutions to take seriously their role in monitoring 

and influencing proxy advisory firm behaviors and policies. 

SEC Monitoring of Recommendations. The SEC should 

implement periodic reviews of proxy firm research reports to 

check for accurately and completeness, much the way the SEC 

currently does for company filings. 

This paper examines the above issues in depth. Chapter III

discusses the historical factors that have concentrated voting power 

in the hands of proxy advisors – leading to a near-monopoly in the 

industry – and why recent financial regulatory developments will 

increase this power further. Chapter IV provides background on 

each of the proxy advisory firms and the services they provide. 

Chapter V explains the types of conflicts of interest that proxy 

advisory firms are subject to and how those conflicts parallel those 

which have engendered so much concern at credit ratings agencies. 

Chapter VI discusses concerns about the lack of transparency and 

inaccuracies in proxy analyses and presents survey research on 

these inaccuracies as they relate to compensation issues. Chapter 

VII outlines the existing regulatory and legal framework for proxy 

advisory firms. Chapter VIII discusses proposals for addressing 

problems in the industry through increased regulation as well as 

some concerns about potential unintended consequences from this 

approach. Chapter IX examines the potential for greater 

competition and other private sector solutions as mechanisms for 

addressing problems at proxy advisors. Chapter X summarizes 

the Center’s recommendations. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 14 

III. The Rise of the Proxy Advisory 

Industry 

The proxy advisory industry is receiving considerable scrutiny 

because, over the last three decades, it has grown to play an 

increasingly influential role in the U.S. and global proxy voting 

system – the principal means by which shareholders of 

corporations participate in corporate governance. That influence is 

poised to expand considerably in 2011, when each public company 

is required to hold a nonbinding shareholder vote on executive 

compensation. 

The growing influence of the small number of firms providing 

proxy research and voting recommendations has been driven by 

tremendous growth in share ownership by institutional investors as 

well as the number of ballot items that institutions must vote on 

each year. From May 1, 2009, through April 30, 2010, for 

example, nearly 1 trillion shares were voted at more than 13,800 

U.S. corporate issuers.14 Going forward, recent important changes 

in regulations governing the financial industry, corporate 

governance and proxy voting seem destined to further increase the 

reliance of institutional investors on proxy advisors. 

To understand the effect of these changes on the growth in 

influence of proxy advisory firms, it is important to understand the 

origins of the industry and how the growth in institutional assets 

has shaped it with relatively little federal oversight. 

A. Origins of Shareholder Activism and the Proxy 

Advisory Industry 

Shareholder activism has been around for over 400 years, 

dating back to a petition lodged against the Dutch East India 

Company by investor Isaac Le Maire.15 In the United States, 

financial institutions, such as banks and mutual funds, were 

“activist” investors at many corporations in the early 1900s, with 

representatives of these financial institutions often serving on 

corporate boards and becoming involved in the strategic direction 

of the firm.16 Modern U.S. shareholder activism is often traced to 

the 1942 adoption by the Securities and Exchange Commission of 

a shareholder proposal rule, granting shareholders the right to 

submit certain types of proposals for inclusion on corporate proxy 

ballots.17

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 15 

Individual Investor Activism Predominated Until the Late 

1980s. Early U.S. shareholder activism was dominated by 

individual investors who were often labeled “gadflies.” In 1982, 

for example, nearly 30 percent of the 972 shareholder proposals 

submitted to companies were proposed by just three individuals.18 

Use of the shareholder proxy process by institutional investors 

began to grow in the mid-1980s, however, after the 1985 founding 

of the Council of Institutional Investors, originally a group of 

public and union pension funds interested in lobbying for greater 

shareholder rights. 

Proxy Research Initiated by College Endowments Then 

Spread to Institutional Investors. The need for professional 

proxy research and analysis by institutional investors first 

manifested itself in the formation of the Investor Responsibility 

Research Center (IRRC) in 1972. IRRC was founded by a group 

of college and university endowments and foundations who wanted 

impartial research on social and environmental questions raised in 

proxy proposals. Later, in the early 1980s, as activists began to 

expand their use of shareholder proposals, IRRC expanded its 

services to include research on corporate governance issues and an 

electronic voting platform and soon had hundreds of institutional 

investors subscribing to its services. IRRC was organized as a notfor-profit corporation and, while it provided research reports on 

specific ballot items, it did not make vote recommendations. 

Proxy voting recommendations were introduced to the market 

in mid-1980s with the founding of two private commercial 

companies – Proxy Monitor in 1984 and Institutional Shareholder 

Services (ISS) in 1985. These firms satisfied a demand from many 

institutional investors for proxy analyses that contained voting 

recommendations. Over time, ISS became an industry 

consolidator by buying or merging with several rival firms, 

including Proxy Monitor (in 2001) and IRRC (in 2005). Three 

other commercial proxy advisory firms soon entered the market to 

compete with ISS, with Glass, Lewis & Co. and Egan-Jones Proxy 

Services offering services in 2003, and Proxy Governance, Inc. 

launching a service in 2005. 

B. Increases in Institutional Stock Ownership 

Dramatic changes in the nature of equity ownership in the 

United States in the last half century have largely created the 

demand for proxy advisory services. Institutional investors – 

including pension funds, investment companies, mutual funds, 

insurance companies, hedge funds, banks, foundations and 

endowments – have greatly increased their ownership share of 

public companies relative to individual investors. At the end of 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 16 

2007, levels of institutional stock ownership of the 1,000 largest 

corporations in the U.S. reached an all-time high of 76.4 percent, 

according to the Conference Board, up from an average of 61.4 

percent in 2000 and 46.6 percent in 1987.19 

Meanwhile, the percentage of equity shares held by retail 

investors has fallen to new lows, accounting for less than 24 

percent of shares in the 1,000 largest corporations at the end of 

2007, compared with 94 percent of all stocks in 1950, and 63 

percent in 1980.20 The impact of this decline in retail share 

ownership on voting is amplified by declining retail investor 

voting participation. 

State and Local Pension Funds Fuel Equity Asset Growth 

and Activism. Among categories of institutional investors, the 

growth of equity assets under management by state and local 

public pension funds is important because these funds tend to be 

more progressive in their activism and frequently rely heavily on 

the recommendations of proxy advisors. According to Conference 

Board data, public pension funds increased their share of total 

equity assets from 2.9 percent in 1980 to 10 percent by the end of 

2006, while private, trusteed funds (generally corporate pension 

plans) saw their share of total equity assets decline from 15.1 

percent in 1980 to 13.6 percent in 2006.21 

The dramatic growth in U.S. institutional ownership of 

corporate equities between 1985 and 2005 is illustrated below in 

Figure 1. 

FIGURE 1: 
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©2011 Center On Executive Compensation 17 

C. Increases in the Volume of Proxy Votes 

At the same time that equity assets held by institutional 

investors were burgeoning, the volume of proxy votes that many 

institutions needed to process grew tremendously. Proxy voting 

volumes were increasing due to several factors. An increase in the 

number of shareholder activists resulted in an increase in 

shareholder proposals due in part to changes in SEC rules 

expanding subjects that proposals could address. In addition, the 

growth of equity indexing meant that by the 1980s, many 

institutions began to hold thousands of equity securities in their 

portfolios, as opposed to the few hundred typically owned by 

“active” investment managers.22

The tremendous growth in proxy voting in recent decades 

shows little evidence of slowing down. During the 2010 proxy 

season (Feb. 15 – May 1), Broadridge Financial Solutions, the 

primary proxy vote processing firm, reported that it processed over 

350 billion shares, up nearly 14 percent from over 308 billion in 

2009.23

D. Investors’ Fiduciary Duty to Vote Proxies 

After the passage of the Employee Retirement Income 

Securities Act of 1974 (ERISA), the U.S. Department of Labor 

(DOL) began requiring private pension fund fiduciaries to act 

solely in the interests of their plan participants and beneficiaries. 

Subsequently, in 1988, DOL released a letter, commonly known as 

the “Avon Letter,” stating that shareholder voting rights were 

considered valuable plan assets under ERISA, and therefore the 

fiduciary duties of loyalty and prudence applied to proxy voting. 

The Avon Letter stated: 

In general, the fiduciary act of managing plan assets which 

are shares of corporate stock would include the voting of 

proxies appurtenant to those shares of stock. For example, it 

is the Department’s position that the decision as to how 

proxies should be voted ... are fiduciary acts of plan asset 

management.24

The Avon Letter further stated that pension fund fiduciaries, 

including those that delegated proxy voting responsibilities to their 

investment managers, had a responsibility to monitor and keep 

accurate records of their proxy voting.25

The SEC further reinforced the concept of fiduciary duties 

related to proxy voting in 2003 by adopting a rule and amendments 

under the Investment Advisers Act of 1940 pertaining to mutual 

funds and investment advisers.26 The new regulations required 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 18 

mutual funds to: 1) disclose their policies and procedures related to 

proxy voting and 2) file annually with the Commission a public 

report on how they voted on each proxy issue at portfolio 

companies. 

 Similarly, investment advisers were required to: 1) adopt 

written proxy voting policies and procedures describing how the 

adviser addressed material conflicts between its interests and those 

of its clients with respect to proxy voting and how the adviser 

would resolve those conflicts in the best interests of clients; 2) 

disclose to clients how they could obtain information from the 

adviser on how it had voted proxies; and 3) describe to clients all 

proxy voting policies and procedures and, upon request, furnish a 

copy to them.27

As part of the January 2003 regulations, the SEC also 

commented on how investment advisers could deal with conflicts 

of interest related to proxy voting that might arise between advisers 

and their clients, stating that “an adviser could demonstrate that the 

vote was not a product of a conflict of interest if it voted client 

securities, in accordance with a pre-determined policy, based upon 

the recommendations of an independent third party.”28 In practice, 

this commentary provided a considerable degree of fiduciary 

“cover” to investment managers who chose to follow the voting 

recommendations of proxy advisory firms and reinforced the value 

of using such firms. In a letter to Egan-Jones Proxy Services in 

May 2004, however, the SEC articulated a duty for investment 

advisers to monitor and verify that a proxy advisor was 

independent and free of influence: 

An investment adviser that retains a third party to make 

recommendations regarding how to vote its clients' proxies 

should take reasonable steps to verify that the third party is 

in fact independent of the adviser based on all of the relevant 

facts and circumstances. A third party generally would be 

independent of an investment adviser if that person is free 

from influence or any incentive to recommend that the 

proxies should be voted in anyone's interest other than the 

adviser's clients.

29

There remain serious concerns by some observers and 

regulators whether institutional managers are meeting their 

fiduciary duties with regard to proxy voting. For example, in two 

articles published in the Latham & Watkins LLP’s Corporate 

Governance Commentary, Charles Nathan, co-chair of the firm’s 

Corporate Governance Task Force, argues that the bifurcation that 

has occurred in the market between investment decision-makers 

and those responsible for proxy voting may not meet fiduciary 

standards:30 
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©2011 Center On Executive Compensation 19 

The effectiveness of this model rests on the assumption that voting 

decisions can be delegated to specialists and third-party proxy 

advisors so as to fulfill the institution’s fiduciary duties without 

imposing undue costs on the institution. It is not clear, however, 

that the parallel voting universe that has evolved over the past 25 

years successfully discharges institutional investors’ fiduciary 

duties of due care and loyalty.31

Although historically there has been very little SEC 

enforcement regarding fiduciary duties with respect to proxy 

voting, in recent years, the SEC has begun to show interest in the 

issue. In 2008, it issued a Compliance Alert letter that described 

some of the deficiencies it found in managers’ proxy voting 

oversight and operations.32 Then, in May 2009, it settled an 

enforcement action against an investment adviser and its Chief 

Operating Officer related to that adviser’s proxy policies, 

procedures and failure to disclose to clients a material conflict of 

interest related to those policies.33 In July 2010, the SEC asked for 

public comment on a concept release asking whether rules changes 

in the U.S. proxy system should be considered to promote greater 

efficiency and transparency.34 Finally, in September 2010, the 

New York Stock Exchange Commission on Corporate Governance 

issued its final report which contained governance principles 

calling for proxy advisory firms to be held to appropriate standards 

of transparency and accountability and for institutional investors to 

vote their shares in a thoughtful manner and avoid a “‘check the 

box mentality.’”35 

E. Academic Research Shows Proxy Advisors Have a 

Significant Impact on Voting Outcomes 

As the factors discussed above have driven investment 

managers to rely more heavily on proxy advisors, most large 

institutional investors have separated the persons making 

investment decisions from the process for voting proxies – either 

by delegating voting decisions to a separate internal group or by 

outsourcing some or all of the voting process to third-party proxy 

advisors.36 Most industry observers concur that proxy advisors, 

particularly ISS, now have a significant influence on vote 

outcomes. This sentiment was summed up by Delaware Court of 

Chancery Vice Chancellor Leo E. Strine Jr., who stated, 

“[f]ollowing ISS constitutes a form of insurance against regulatory 

criticism, and results in ISS having a large sway in the affairs of 

American corporations.”37 In fact, Strine has written that “[t]he 

influence of ISS and its competitors over institutional investor 

voting behavior is so considerable that traditionalists will be 

concerned that any initiative to increase stockholder power will 

simply shift more clout to firms of this kind. . . .”38
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©2011 Center On Executive Compensation 20 

While there is little doubt that the proxy advisors influence 

voting, a lively academic debate has emerged over exactly how 

many votes they can sway. Susan E. Wolf, former Vice President 

and Corporate Secretary at Schering-Plough and the former 

Chairman of the Society of Corporate Secretaries and Governance 

Professionals, has said that some of the organization’s corporate 

members think that ISS alone controls one-third or more of their 

shareholder votes.39 According to recent statistics from Innisfree 

M&A, a proxy solicitation firm, ISS clients typically control 20 to 

30 percent of a midcap to largecap company’s outstanding shares, 

while Glass Lewis clients typically control 5 to 10 percent.40 

Academic Studies Attempt to Quantify ISS Influence. 

Several academic studies have been conducted attempting to 

quantify how much influence proxy advisors have on the outcome 

of issues brought to shareholder votes. In 2002, a study published 

in the journal, Financial Management, found that ISS 

recommendations had a substantial impact on voting results, with 

unfavorable ISS recommendations on management proposals 

linked to 13.6 percent to 20.6 percent fewer affirmative votes for 

management proposals depending on the specific proposal type.41 

Another academic study published by the European Corporate 

Governance Institute found that ISS recommendations were 

significantly related to the passage of management proposals.42

More recently, a study by three business school professors and 

a staff member of the SEC examined ISS voting recommendations 

in 198 contested elections from 1992 through 2005, where 

dissidents were seeking board seats.43 The study found that ISS 

vote recommendations in such situations “are good statistical 

predictors of contest outcomes, even after controlling for a variety 

of contest, firm, dissident, and management characteristics.”44 In 

addition, the study found that ISS proxy recommendations seemed 

to play a “certification role” in influencing investors to revise their 

assessments of the quality of dissident board nominees.45 Another 

study of the influence of four major proxy advisory firms in 

director elections concluded that, after controlling for the 

underlying factors that influenced advisory firm recommendations, 

“advisor recommendations in general, and ISS in particular, appear 

to be less influential than commonly perceived,” with ISS voting 

recommendations directly swaying 6 to 9 percent of institutional 

votes.46 Yet, even with this lower estimate, ISS’s influence over 

large companies is frequently greater than the company’s largest 

shareholder. 

 
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©2011 Center On Executive Compensation 21 

While the academic debate over exactly what percentage of 

votes each proxy advisor can influence on any given issue will no 

doubt continue, the fact that proxy advisory firms can influence or 

control a significant block of votes on corporate proxy issues is 

undeniable. Moreover, the perceived influence of proxy advisors 

by board members is just as important as the advisors’ actual 

impact. As two White & Case lawyers who studied the industry 

recently concluded: 

[L]ittle doubt exists that proxy advisors, at a minimum, 

have had a meaningful impact on some shareholder votes, 

particularly those in connection with closely fought 

proposals. Moreover, if most directors believe that ISS has 

power – as their actions indicate – boards may do what they 

believe ISS wants them to in order to keep their seats, 

whether or not their belief is justified. Similarly, if most 

institutional investors follow the same proxy advice closely, 

the impact of that advice on U.S. corporate governance 

could be very significant. For these reasons, it is incumbent 

on proxy advisors to operate with full transparency, ideally 

pursuant to self-imposed industry-wide standards that result 

in clear disclosure to institutional and retail investors alike 

in connection with voting recommendations.47

In the current environment where many proxy issues are 

increasingly being decided on very close votes, this fact reinforces 

the need to ensure the integrity of the process by which those 

advisors are making vote recommendations. Based on the conduct 

of the industry so far, self-regulation will not accomplish this goal. 

F. Regulatory Changes Will Increase Further the 

Number and Influence of Proxy Votes 

Recent significant changes in financial regulations promise to 

further increase the volume and impact of proxy votes and the 

influence of the proxy advisory firm industry. These changes 

include: 

• the proliferation of majority voting; 

• mandatory say on pay votes; 

• elimination of broker discretionary voting in uncontested 

director elections and on compensation matters; and 

• new SEC rules governing proxy access in the nomination of 

directors. 

While the impact of any one of these changes on the power and 

influence of proxy advisory firms might not be overwhelming, the 

cumulative impact of all of them – and the way that these measures 

interact – is likely to dramatically increase the power of the proxy 

advisors and cause significant unintended consequences. This is 
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©2011 Center On Executive Compensation 22 

particularly significant, because there is no effective supervision of 

the proxy advisors beyond the minimal regulatory oversight 

associated with being an investment adviser for those firms that 

have voluntarily chosen to register as investment advisers. 

The potential impact and significance of each of these key 

regulatory changes on the proxy advisory industry is discussed 

below. 

Majority Voting. A fundamental right of shareholders under 

state corporate law is the right to elect corporate directors. Until 

several years ago, virtually all U.S. companies elected their 

directors using plurality voting. Under a plurality voting system, 

the director nominees who receive the most votes are elected up to 

the maximum number of directors to be chosen in the election 

without regard to votes “withheld,” voted against or not cast. In an 

uncontested election, however, this system effectively means that a 

single vote cast “for” a nominee would be sufficient to win that 

nominee a board seat. 

Beginning in 2004, a number of shareholder groups and union 

pension funds mounted campaigns to urge companies to embody a 

majority voting standard in their bylaws, corporate charters or 

governance documents. Under majority voting, a director typically 

needs to obtain support from a majority of the shares cast in order 

to be legally elected.48 The United Brotherhood of Carpenters & 

Joiners of America (Carpenters Union) was among the early 

supporters of majority voting, submitting 12 shareholder proposals 

on the issue in 2004. In 2005, encouraged by the voting support 

for its proposals the previous year, the Carpenters Union and other 

building trade union funds submitted 89 proposals on majority 

voting of which 16 garnered majority support from shareholders.49 

Also in 2005, the Council of Institutional Investors launched a 

letter-writing campaign to 1,500 of the largest U.S. corporations 

requesting them to adopt majority voting in uncontested director 

elections.50 In 2006, the Model Business Corporation Act 

(MBCA) and the Delaware General Corporation Law were 

amended to facilitate the adoption of majority voting by company 

boards or by shareholders. 

Major public and union pension funds, such as the California 

Public Employees Retirement System (CalPERS) and American 

Federation of State, County and Municipal Employees (AFSCME), 

joined the majority voting campaign by submitting nonbinding 

shareholder proposals calling for the adoption of majority voting at 

dozens of companies, and these proposals have continued to attract 

strong support. In 2010, for instance, 19 proposals were submitted 

seeking the adoption of majority voting received majority 

shareholder support.51 
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©2011 Center On Executive Compensation 23 

Overall, the changes in Delaware law and the MBCA, as well 

as the shareholder campaigns in favor of adoption of a majority 

voting standard, have been quite effective, at least among the 

largest U.S. corporations. More than two-thirds of the companies 

in the S&P 500 Index have now adopted some form of majority 

voting – making it the de facto standard among large 

corporations.52

The impact of the widespread adoption of majority voting is to 

greatly increase the leverage that investors (and hence proxy 

advisory firms) have over corporate directors. Because most 

shareholder proposals are advisory in nature, some companies have 

chosen not to implement specific proposals with which they 

disagree, even when those proposals have been supported by a 

majority of shareholders.53 A number of proxy advisory firms and 

investors have reacted to such company decisions not to implement 

majority shareholder-supported governance measures by 

“withholding” votes from incumbent directors up for election at 

these companies. Under plurality voting elections, such “no vote” 

campaigns or recommendations were essentially symbolic. Under 

new majority voting regimes, however, they have the potential to 

unseat directors – or at a minimum put boards in the awkward 

position of explaining why they should override the wishes of a 

majority of their shareholders. 

Shareholder Say on Pay and Related Compensation 

Votes. In recent years, a relatively small number of U.S. 

companies, under pressure from shareholder campaigns, have 

voluntarily implemented nonbinding shareholder votes on 

executive compensation (commonly referred to as say on pay 

votes). Reflecting the platform of the Obama Administration, 

Congress embraced the idea, first by making annual say on pay 

votes mandatory for all U.S. companies that were recipients of 

taxpayer funds under the Troubled Asset Relief Program (TARP), 

which was signed into law in October 2008.54 It expanded say on 

pay to all U.S. public companies in the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, which was enacted on July 

21, 2010.55

Although nearly 200 shareholder proposals requesting that 

individual companies adopt an advisory say on pay vote had been 

filed since between January 2006 and October 2010, collectively, 

these resolutions received majority support from shareholders less 

than 30 percent of the time.56 What activists had difficulty 

achieving through company votes, they achieved through 

legislation. Section 951 of the Dodd-Frank Act requires 

corporations to hold a nonbinding shareholder say on pay vote at 

least once every three years to “approve” executive compensation 
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©2011 Center On Executive Compensation 24 

as disclosed in the proxy statement. In addition, the Act requires a 

separate shareholder vote at least once every six years to determine 

whether such say on pay votes should be held annually, biennially 

or triennially. The new requirements apply to shareholder 

meetings which occur after January 21, 2011, meaning virtually all 

companies will have to hold a “say on pay” and a “frequency” vote 

during the 2011 proxy season. 

The Dodd-Frank Act includes several other provisions that will 

enhance the power of proxy advisors. These include a requirement 

that executive compensation payments related to a sale, merger, 

acquisition or other disposition of assets requiring shareholder 

approval be disclosed in a more detailed manner and, in certain 

cases, subject to a nonbinding shareholder vote. The law also 

requires all institutional investors subject to reporting under the 

Securities and Exchange Act of 1934 to report annually on how 

they voted on all say on pay and golden parachute votes. 

The overall impact of these provisions will be to put many 

more compensation-related votes on corporate ballots and to make 

the voting records of many more institutions on these issues a 

matter of public record. Because many institutional investors will 

not have the time or resources to evaluate the executive 

compensation practices for their portfolio holdings of up to 10,000 

publicly held companies, they will need to rely on outside services, 

especially proxy advisors, for analysis and voting 

recommendations on compensation matters. 

A recent survey of 251 companies by Towers Watson, a global 

professional services firm, found that 59 percent of respondents 

believed that proxy advisors already have significant influence on 

executive pay decision-making processes at U.S. companies.57 

Some shareholder activists agree and predict that the advisory firm 

role will be strengthened. Edward Durkin, director of corporate 

affairs at the Carpenters Union, has noted it will be impossible for 

most institutional investors to vote on hundreds or thousands of 

compensation plans unless they rely on the advice of proxy 

advisory firms. “If you have an annual say on pay vote and you 

exercise your voting responsibility as we do ... it’d be 

overwhelming,” said Durkin, whose union owns stakes in 3,500 

companies.58 

Proxy advisory firms clearly anticipate that say on pay will 

expand their influence. Patrick McGurn, Special Counsel to ISS, 

noted this point in 2010 while admonishing corporations to provide 

executive summaries for the Compensation Discussion and 

Analysis (CD&A) sections of their proxy statements. As filings 

became more voluminous, investors would not search through long 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 25 

CD&As, McGurn said, so a failure to provide an executive 

summary means “you are giving more power to proxy advisors,” 

who would read through the whole document.59 Earlier, Peter 

Clapman, the former Senior Vice President and Chief Counsel for 

TIAA-CREF, expressed a similar sentiment, but questioned the 

wisdom of this approach: 

If applied to a universe of 10,000-plus public companies in 

the U.S. (in contrast to far fewer companies in the U.K.), 

most shareholders simply will not devote the necessary staff 

resources to vote intelligently as individual shareholders 

and will outsource the voting decision. The inevitable 

consequence would be to transfer considerable discretionary power over individual company compensation practices to the proxy advisory firms. I question that such an 

approach will serve the long-term best interests of shareholders.60

The overall effect of say on pay will be to increase the 

influence of proxy advisory firms as investors grapple with more 

than 16,000 additional proxy votes in 2011, many of which will 

require an understanding of each company’s pay philosophy and 

arrangements. 

Elimination of Broker Discretionary Voting in Uncontested 

Elections and on Key Compensation Issues. In the current 

U.S. proxy system, broker-dealers have a significant influence on 

proxy voting outcomes in their role as intermediaries between 

retail investors and corporate issuers. Public company 

shareholders can hold shares in one of two ways: directly, as 

record holders, or indirectly, in so-called “street name” accounts 

through their brokers. Under SEC and New York Stock Exchange 

(NYSE) rules, when investor shares are held with brokers in “street 

name,” the broker is required to deliver proxy materials to the 

shareholder with a request for specific voting instructions on any 

matters to be voted on at the annual meeting. 

Under NYSE Rule 452, if the broker does not receive voting 

instructions by the 10th day preceding a company’s annual 

meeting, the broker is allowed to exercise discretionary voting 

authority to vote on all matters deemed “routine” by the NYSE. 

Brokers are not allowed to vote on matters deemed “non-routine” 

by the NYSE, such as shareholder proposals, without a specific 

instruction from the shareholder. 

Until recently, votes to elect directors in uncontested elections 

were considered “routine” matters under NYSE Rule 452. On July 

1, 2009, however, the SEC approved an amendment to that rule to 

eliminate broker discretionary voting in uncontested elections.61 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 26 

The amendment applied to director elections on or after January 1, 

2010, and affects all public companies, not just those listed on the 

NYSE. The change was made by the NYSE following the 

recommendation of its Proxy Working Group. It was based 

heavily on arguments that voting in director elections is one of the 

most important ways that shareholders can influence corporate 

governance and that this right should be limited to those who hold 

an economic interest in the company. 

The rule change is potentially quite significant because broker 

discretionary votes have typically been cast in favor of 

management and can comprise up to 20 percent of proxy votes at 

some companies. With a dramatic increase in elections where 

directors receive significant numbers of “withheld” votes in recent 

years, the elimination of broker discretionary voting could result in 

more directors failing to achieve majority support from 

shareholders.62 

The NYSE’s amendment to Rule 452 has also influenced 

legislation addressing the financial crisis. The 2010 Dodd-Frank 

Act directs the SEC to issue new regulations prohibiting broker 

discretionary voting of client securities held in street name on 

executive compensation issues, including say on pay and golden 

parachute votes as well as “any other significant matter” as 

determined by the Commission.63 The legislation effectively 

extends the rationale of prohibiting uninstructed broker votes in 

director elections to compensation issues – with the inference that 

say on pay votes are important ways shareholders can influence 

executive compensation. However, many believe that the effect 

will be to disenfranchise many retail shareholders, thus further 

strengthening the dominance of institutional investors in the proxy 

voting process. 

 In sum, the elimination of broker discretionary voting in 

director elections and on important compensation matters will 

erode the impact of retail investors in proxy voting and enhance 

the influence of institutional investors. It will also further expand 

the power of the proxy advisory services over governance matters. 

Proxy Access for the Nomination of Directors. On August 

25, 2010, the SEC voted by a 3 to 2 margin to enact a rule granting 

“proxy access” to certain shareholders for the purpose of 

nominating directors on a company’s proxy ballot.64 The rule will 

allow shareholders meeting certain ownership requirements (three 

percent of a company’s shares held continuously for a minimum of 

three years) to nominate directors comprising up to 25 percent of 

the board on the company’s proxy card. The rule applies to all 

U.S. corporations, but it exempts small companies from 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 27 

compliance with the rule for a period of three years.65 The SEC 

also amended Rule 14a-8 to allow shareholder proposals seeking 

bylaw amendments relating to proxy access.66 The rule allows 

shareholders to use such proposals to alter proxy access restrictions 

at specific companies to make them less stringent – but not more 

stringent – than the requirements set in the SEC’s rule. 

The final proxy access rule was adopted after hundreds of 

public comments were filed on the SEC’s proposed rule, which 

was released in May 2009. A vote on a final rule was delayed until 

after final Congressional passage of financial reform legislation, 

with many observers speculating that the delay was due to 

concerns by the SEC about possible court challenges to its 

statutory authority to enact proxy access. The Dodd-Frank Act 

sought to address such concerns by explicitly authorizing the SEC 

to adopt rules governing proxy access. However, the validity of 

the rule is being challenged in federal court,67 and the SEC has 

suspended its implementation pending the court’s ruling. If the 

rule is ultimately upheld, the long-term impact will be to increase 

the number of contested elections on which institutional investors 

need to vote. As Judy Schub, former Managing Director of the 

Committee on Investment of Employee Benefit Assets (CIEBA), 

an association of more than 100 of the largest U.S. private sector 

pension plans, noted in a comment letter to the SEC on proxy 

access: 

CIEBA members are also concerned that the proposal, as 

drafted, will enhance the authority of the proxy advisory 

services. Currently, only three organizations control the 

business, with one of the three enjoying the dominant 

market position. There is little oversight or regulation of 

these proxy advisory services by any public entity nor is 

there any meaningful disclosure about the significant role 

they play in proxy voting decisions. They exercise 

significant power over corporate governance since the vast 

majority of institutional investors use their guidance on 

proxy voting. These new proxy access standards will give 

them even greater power over the election of boards of 

directors.68

In sum, the proxy advisory industry has greatly expanded its 

power and influence over corporate governance in the U.S. in 

recent decades. This expansion is the result of a combination of 

underlying economic factors – which have driven institutions to 

look for third-party help in dealing with ever increasing workloads 

related to proxy voting – coupled with regulatory developments 

that have both directly and indirectly encouraged the use of proxy 

advisors. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 28 

IV. The Proxy Advisory Firms and 

Their Services 

Proxy advisors play a significant and growing role in 

influencing shareholder votes in the U.S. and global proxy voting 

system. The industry in the U.S. is highly concentrated, with a 

handful of firms controlling virtually the entire market for proxy 

research and advice and one entity – Institutional Shareholder 

Services – holding a dominant market position. In theory, proxy 

advisors are subject to significant regulatory standards that govern 

their conduct. In practice, however, there have been few, if any, 

constraints on proxy advisors, and there is significant concern by 

companies, investors and others that conflicts of interests influence 

their recommendations. This section will briefly describe the 

history and services provided by each of the proxy advisory firms, 

which puts into context the conflicts and operations concerns 

discussed later in this paper. 

A. Institutional Shareholder Services 

Institutional Shareholder Services (ISS), the dominant firm in 

the proxy advisory business, is currently a division of MSCI Inc., a 

leading provider of investment decision support tools and indexes 

to investors worldwide. ISS has undergone two changes in 

ownership in recent years: in January 2007, it was purchased by 

RiskMetrics Group Inc. for $542.6 million in cash and stock.69 

RiskMetrics is a leading provider of risk assessment and wealth 

management products that was spun off from J.P Morgan Chase & 

Co. in 1998. Then, after RiskMetrics went public in January 2008, 

RiskMetrics was acquired by MSCI on June 1, 2010, in a cash and 

stock transaction valued at $1,572.4 million.70

ISS is a Delaware corporation that is also a registered 

investment adviser regulated by the SEC. ISS is headquartered in 

Rockville, Maryland, and maintains offices in New York City, 

Chicago, Illinois, Norman, Oklahoma, London and Makati City, 

Philippines. It also has affiliates in Europe, Canada, Japan and 

Australia and has between 500 and 1,000 employees worldwide.71 

History and Ownership: ISS was founded in 1985 by Robert 

A.G. Monks, a former administrator of the Office of Pension and 

Welfare Benefits Programs at the U.S. Department of Labor under 

President Reagan, who also appointed him as one of the founding 

trustees of the Federal Employees’ Retirement System. Monks 

served as President of ISS from 1985 to 1990. 
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©2011 Center On Executive Compensation 29 

ISS has a long history of acting as a consolidator within the 

proxy industry as well as being bought and sold itself at ever 

increasing valuations. A list of the major acquisitions by, and 

purchases of, ISS is shown in Table 1 below. As of 2010, it had 

made at least eight acquisitions of other firms in the proxy 

advisory, governance and corporate responsibility sectors since 

1985. 

TABLE 1: Timeline of Institutional Shareholder Services 

(ISS): The Proxy Industry Consolidator 

1985 – ISS founded by Robert A.G. Monks 

June 1995 – ISS is acquired by the CDA unit of Thomson 

Financial Services, a unit of The Thomson Corp. 

1997 – ISS acquires Proxy Voter Services, a proxy advisor to 

union funds 

August 2001 – Proxy Monitor purchases ISS from Thomson 

Financial, with major financial backing from Warburg Pincus, 

Hermes Investment Management Ltd. and others for a reported 

sale price of $45 million. The merged company retains the ISS 

name and installs Robert C.S. Monks, son of Robert A.G. Monks, 

as Chairman 

May 2005 – ISS completes acquisition of the corporate 

governance unit of Brussels-based Deminor International for $1.0 

million 

June 2005 – ISS completes acquisition of Proxy Australia Pty 

Ltd., Australia’s leading governance research firm for $0.7 million 

August 2005 – ISS completes acquisition of IRRC, a leading U.S. 

proxy research firm for $14.3 million 

January 2007 – RiskMetrics completes acquisition of ISS for 

$542.6 million in cash and stock 

July 2007 – RiskMetrics announces definitive agreement to 

acquire the Center for Financial Research and Analysis (CFRA), a 

leading financial forensic analysis firm, for $61.4 million 

January 2008 – RiskMetrics prices IPO 

February 2009 – RiskMetrics announces acquisition of Innovest 

Strategic Value Advisers, an environmental investing research firm 

for $14.3 million in cash 

November 2009 – RiskMetrics completes acquisition of KLD 

Research and Analytics, a leading ES&G research firm for $9.9 

million in cash 

June 2010 – MSCI completes acquisition of RiskMetrics Group for 

nearly $1.6 billion 
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©2011 Center On Executive Compensation 30 

ISS was sold by its founders in June 1995 to a unit of Thomson 

Financial Services (currently Thomson Reuters), a Canadian 

publishing and information services conglomerate. Six years later, 

in August 2001, Thomson sold ISS for a reported $45 million to a 

group of financial investors, including the U.S. private equity firm 

Warburg Pincus, Hermes Investment Management Ltd. (a unit of 

the Hermes Group, a wholly-owned subsidiary of the BT Pension 

Scheme – the pension fund for the U.K.’s largest 

telecommunications firm). Together, Warburg Pincus and Hermes 

owned approximately 57 percent of the equity in ISS.72 The sale 

included a reverse merger into a smaller proxy advisory firm called 

Proxy Monitor, with the merged firm retaining the ISS name. 

Interestingly, Robert C.S. Monks, the son of ISS’s founder, was 

named chairman of the merged company, a post he held until the 

company’s sale to RiskMetrics in 2007. 

Several years after the merger with Proxy Monitor, in 2005, 

ISS embarked on an acquisition strategy, purchasing in rapid 

succession three proxy research and governance businesses – the 

commercial business assets of the Investor Responsibility Research 

Center (IRRC), the governance business of Belgium-based 

Deminor International and Proxy Australia Pty Ltd. The three 

purchases augmented ISS’s already dominant worldwide market 

position at that time. After being purchased by the RiskMetrics 

Group, Inc. in 2007, several additional firms were integrated into 

ISS – notably CFRA, Innovest Strategic Value Advisers and KLD 

Research & Analytics. CFRA was a leading forensic accounting 

analysis firm and Innovest and KLD each had a long history of 

providing environmental, social and governance research to 

institutional investors. 

A comment by MSCI CEO Henry Fernandez at the time of the 

closing of MSCI’s purchase of RiskMetrics has led to speculation 

that the ISS segment of RiskMetrics could be sold again. 

Fernandez called the ISS part of RiskMetrics “non-core” in an 

investor conference call, but said the firm planned to retain it 

because of its cash generation.73 Ethan Berman, the CEO of ISS 

since 1998, later reinforced the possibility of an ISS sale, saying 

that selling ISS “is not the intent but is a possibility.”74 As of 

August 2010, persistent market rumors were circulating that ISS 

was again being shopped, with private equity firms showing 

interest. 

Current Services and Business. According to the 2009 Form 

10-K filing for RiskMetrics Group, ISS provided services to 

approximately 2,970 clients as of year-end 2009 through a network 

of 20 offices in 12 countries.75 ISS divides its services into two 

general categories: Governance Services and Financial Research 
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©2011 Center On Executive Compensation 31 

and Analysis Services. Within the Governance Services segment, 

the company further categorizes its services into three business 

areas: Proxy Research and Voting, Global Proxy Distribution 

Services and Securities Class Action Services. 

Regarding proxy research and voting, the company notes that it 

is the largest firm in the industry and says that it “offers a fullyintegrated, end-to-end proxy voting service, including policy 

creation, comprehensive research, vote recommendations, reliable 

vote execution and reporting and analytical tools.”76 It says it 

issued proxy research and recommendations for more than 37,000 

shareholder meetings in 108 countries and voted, on behalf of its 

clients, more than 7.6 million ballots representing over 1.3 trillion 

shares in 2009. 

The Global Proxy Distribution Services business offers a 

global proxy distribution solution to custodian banks for non-U.S. 

securities through a single platform. The Securities Class Action 

Services business delivers class action monitoring and claims filing 

services to institutional investors who have potential recovery 

rights in class action lawsuits. 

In its Financial Research and Analysis segment, ISS has four 

principal business lines: CFRA forensic accounting research, 

Environmental, Social & Governance Services (ES&G), M&A 

Edge and Compensation Advisory Services. The CFRA forensic 

accounting research provides risk analysis reports on earnings and 

cash flow quality, legal and regulatory risk and general business 

health for more than 10,000 companies worldwide. The ES&G 

Services include screening and modeling tools to allow 

institutional investors to apply social guidelines or restrictions to 

portfolios as well as company-specific reports, profiles and 

analytics. The M&A Edge service provides in-depth analysis on 

proposed merger and acquisition transactions and proxy contests. 

The Compensation Advisory Services provide products and 

services designed to allow compensation professionals and 

corporate board members to model, optimize and benchmark 

executive compensation plans. This segment offers both corporate 

advisory services that include access to compensation analysts or a 

web-based compensation modeling tool that measures the cost of 

equity incentive plans using ISS’s proprietary binomial option 

pricing model. This sale of consulting services to corporations at 

the same time it is advising investors how to vote on management 

and shareholder proposals on the same issues has been a highly 

criticized and controversial aspect of ISS’s business model. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 32 

Significant Share of Goodwill Written Off in Recent Years. 

ISS’s revenues and profitability for 2009 are disclosed in 

RiskMetrics’ 2009 Form 10-K filing, which shows total 2009 ISS 

revenues of $144.7 million, up 2.0 percent from $141.8 million in 

2008.77 On a product basis, Governance Services (mainly proxy 

research and voting) accounted for $92.4 million in revenues, 

while Financial Research and Analysis accounted for $52.3 

million. ISS segment income from operations in 2009 was $10.9 

million, up from a loss of $148.7 million in 2008, when results 

were negatively impacted by a $154.2 million non-cash writedown to ISS goodwill “primarily as a result of the negative equity 

market conditions which caused a material decline in industry 

market multiples in the second half of 2008” and a $5.9 million 

write-down related to an ISS product trademark.78

Consulting Services May Support Advisory Operations. 

ISS has also disclosed on its website that approximately 17 percent 

of its total revenues are generated from its ICS subsidiary, which 

provides consulting services to corporations.79 This consulting 

revenue is highly significant because it is widely believed to be 

highly profitable to ISS (because much of it results from charging 

corporations for use of elements of the ISS compensation model). 

In fact, some observers believe that without this highly profitable 

revenue source, ISS’s operations would be unprofitable or, at best, 

only marginally profitable. This may account for the firm’s 

reluctance to spin-off or otherwise separate this business – in spite 

of the tremendous amount of criticism it has engendered for 

creating conflicts of interest, as discussed in depth later in this 

paper. 

Offshoring. In recent years, ISS has made a major push to 

reduce its cost structure by locating much of its data collection and 

research activities outside the United States, particularly to the 

Philippines. The 2009 RiskMetrics Form 10-K acknowledges the 

importance of this, stating: 

ISS' clients outsource proxy voting and vote reporting to ISS. 

We have had success in meeting client requirements while 

also increasing our transactional volume through increased 

automation and by leveraging our operations center in 

Manila, Philippines. This operations center reduces the 

operational cost per transaction and has been a key 

component of our success.80 

In March 2010, ISS introduced a new scoring system designed 

to measure corporate governance practices known as Governance 

Risk Indicators (or GRId). The new indicator is based on an 

evaluation of a company’s compliance with what ISS has 

determined are “best practices” in four key governance areas: 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 33 

audit, board structure, shareholder rights and compensation. 

Scores for U.S. companies are based on answers to 63 questions in 

these areas. The GRId corporate governance indicator replaced a 

former ISS indicator known as the Corporate Governance Quotient 

(CGQ), which ISS had widely promoted for years as a useful 

indicator for assessing corporate governance. CGQ scores were 

discredited by some academic studies, however, which found that 

they did not predict future financial performance or governancerelated outcomes or provide useful information to shareholders.81

B. Glass, Lewis & Co. 

Glass, Lewis & Co. was founded in January 2003 and is the 

second largest firm in the proxy advisory industry. It is currently 

an indirect wholly-owned subsidiary of The Ontario Teachers’ 

Pension Plan Board (OTPP), one of the largest pension systems in 

Canada, which creates the potential for considerable conflicts as 

well. The firm has more than 100 employees and is headquartered 

in San Francisco, California, with offices in New York, Sydney, 

Paris and Tokyo. Glass Lewis is organized as a limited liability 

corporation, incorporated in Delaware, and is not registered as an 

investment adviser with the SEC.82 

History and Ownership. Gregory P. Taxin, Lawrence M. 

Howell, and Kevin J. Cameron, co-founded Glass, Lewis & Co. in 

2003.83 Taxin had been an investment banker at Bank of America 

Securities and Epoch Partners, as well as a Vice President in the 

investment banking division at Goldman, Sachs & Co. Howell 

also had a background as an investment banker at Goldman Sachs 

and Morgan Stanley & Co. and, since 1996, had been the 

managing partner at Howell Capital, an investment consulting and 

advisory firm. Cameron was a lawyer who had served as the 

general counsel of Moxi Digital, a technology venture, and 

Northpoint Communications, a telecommunications firm. Taxin 

became Glass Lewis’ CEO, Howell served as chairman and 

Cameron became president. 

 According to Rustic Canyon Partners, a venture capital firm 

that was an early investor in the firm, Glass Lewis was initially 

capitalized by its founders and a group of research analysts, 

accountants, publishers and bankers.84

The firm grew relatively quickly after its initial launch due in 

part to the fact that while it did not initially have an electronic 

voting platform to provide comprehensive voting services, it 

negotiated an arrangement with IRRC in late 2003 to make its 

proxy analyses and recommendations available to IRRC’s voting 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 34 

clients. The deal provided Glass Lewis with a fast and efficient 

way to reach IRRC’s hundreds of voting clients. (IRRC was 

interested because its research reports did not offer voting 

recommendations – which were increasingly demanded by many 

institutional investors.) By the time IRRC was purchased by ISS 

in 2005, many of its clients had already been exposed to Glass 

Lewis’ research and kept their services with that firm (which had 

by then developed its own voting platform). 

 The firm also diversified its offerings to include forensic 

accounting reports and alerts designed to aid investors in spotting 

companies with suspicious accounting practices – a timely service 

in the wake of accounting scandals at companies such as Enron 

and WorldCom. It also developed, in conjunction with several 

business professors, a governance-enhanced S&P 500 Index, 

dubbed the board accountability index, which was designed to 

weight companies in the index based on their governance 

characteristics. 

 In September 2005, Glass Lewis raised approximately $4 

million through the sale of preferred stock in the firm to accredited 

investors. An SEC filing for the offering at that time listed – in 

addition to the founders and Rustic Canyon – three additional 

owners: Lynn Turner, Shamrock Estate Holdings LLC (Burbank, 

Cal.) and Ojibawa Investment Partners (Chicago, Ill.)85 Turner 

was a former chief accountant at the SEC who was recruited in 

2003 to be Glass Lewis’ managing director of research. By 2006, 

Glass Lewis had about 200 clients and was rapidly expanding its 

research coverage to overseas markets. 

 In August 2006, Glass Lewis announced that Xinhua Finance 

Ltd., a leading financial information and media provider in China, 

had purchased a 19.9 percent stake in the company. Then, in 

December, it announced that Xinhua would exercise an option to 

purchase the remaining equity in the firm, with the deal expected 

to close in early 2007. The total purchase price for the Glass 

Lewis, paid partly in cash, but mostly in Xinhua Finance stock, 

was approximately $45 million. Xinhua Finance is headquartered 

in Shanghai, China, has its stock listed on the Mothers Board of the 

Tokyo Stock Exchange and is incorporated as a holding company 

in the Cayman Islands.86 In announcing the transaction, Glass 

Lewis said it planned to expand its coverage to Chinese and other 

emerging market companies, but would continue to operate as a 

separate company with its existing management, client service and 

research teams.87 

 
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©2011 Center On Executive Compensation 35 

Within months after closing its deal with Xinhua Finance 

though, there were ominous signs of trouble at the parent company. 

In March 2007, Xinhua Media, the unit of Xinhua Finance of 

which Glass Lewis was part, raised $300 million through an initial 

public stock offering in the U.S. Media reports soon emerged, 

however, that the IPO prospectus had failed to disclose that Shelly 

Singhal, the CFO of Xinhua Finance and Xinhua Media, had 

performed investment banking services for two companies that had 

been exposed as frauds and that he was being sued in California 

civil court for racketeering. 

 In April, it was announced that CEO Greg Taxin would leave 

Glass Lewis for a new position focused on business development 

at Xinhua Finance Ltd. and would be replaced by Katherine Rabin. 

Then, in May, two of Glass Lewis’ prominent senior executives 

quit. First, Jonathan Weil, a managing director who was a former 

Wall Street Journal reporter, announced he was leaving, stating 

publicly in his resignation letter that he was "uncomfortable and 

deeply disturbed by the conduct, background and activities of our 

new parent company Xinhua Finance Ltd., its senior management, 

and its directors. To protect my reputation, I no longer can be 

associated with Glass Lewis or Xinhua Finance."88 The following 

week, on May 21, 2007, Lynn Turner, the firm’s managing director 

for research, also announced he would resign from the firm, citing 

“recent changes in ownership.”89 

The disclosures left Glass, Lewis & Co., which had built its 

reputation largely on its ability to identify corporate accounting 

problems, scrambling to retain its clients, many of whom were also 

reported to be uneasy over the prospect of purchasing proxy and 

forensic accounting research from a firm now owned by an 

information and media conglomerate with close ties to the Chinese 

government. By October 2007, it was announced that Xinhua 

Finance would sell Glass Lewis to the Ontario Teachers’ Pension 

Plan for $46 million. OTPP was a client of Glass Lewis and had 

helped to create a Canadian investor group dedicated to improving 

corporate governance.90 

Current Services and Business. According to Glass 

Lewis’s website, the firm provides research and analysis on more 

than 16,000 companies around the world. The company lists six 

services it provides: Risk Alerts, Risk Monitor, Proxy Research 

and Voting Solutions, Trend Reports, Share Recall Service and 

Class Action Settlement Solutions. The firm is not registered as an 

investment adviser and hence is not directly regulated by the SEC. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 36 

Risk Alerts and Risk Monitor are web-based applications that 

enable investors to monitor public companies for signs of unusual 

risk or developments that could harm shareholders and provide 

rankings of a company’s relative risk based on more than 30 data 

patterns that Glass Lewis has identified as predictive of risk to 

shareholder value. The services provide a review of earnings 

quality and presents relative risk scores for more than 4,200 North 

American securities. 

Glass Lewis says its proxy research service, called Proxy 

Paper, covers more than 16,000 public companies in 70 countries. 

The company says Proxy Paper is available “as a standalone 

service or as part of a turnkey solution that encompasses all aspects 

of the proxy voting process - including reconciliation, vote 

execution, record keeping and reporting, Form NPX and Web 

hosting.”91 The company says its voting platform and system, 

called Viewpoint, is designed to provide accurate, transparent and 

auditable voting. 

 Glass Lewis’s Trend Reports are comprehensive studies on 

accounting issues and regulatory developments that 

disproportionately affect certain industries of companies. Its Share 

Recall Service is designed to allow institutions that lend shares to 

maximize these programs by selectively recalling shares on loan, 

for certain important proxies, based on a proprietary algorithm that 

analyzes and scores various factors such as accounting 

restatements, excessive executive compensation and prior year 

voting results. Its Class Action Settlement Solutions handles all 

aspects of class action claims, including identifying eligible claims 

and amounts, filing claims, following up on rejections and auditing 

amounts recovered against claim amounts. 

C. Proxy Governance, Inc.

Proxy Governance Inc. (PGI) was founded in June 2004 by 

Steven Wallman, who served as an SEC Commissioner from 1994 

to 1997 under President Clinton. Until December 2010, the firm 

was a wholly-owned subsidiary of FOLIOfn, Inc., a financial 

services and technology firm based in McLean, Virginia, where 

Wallman serves as CEO. Proxy Governance was incorporated in 

Virginia and the firm was registered as an investment adviser with 

the SEC. On December 20, 2010, Glass Lewis announced that it 

had “entered into an agreement with Proxy Governance, Inc. 

(‘PGI’) to provide proxy voting and advisory services to PGI’s 

clients.”92 This announcement went relatively unnoticed and 

neither Glass Lewis’s, nor Proxy Governance’s websites have yet 

to reflect this corporate change. In order to provide a complete 

understanding of the proxy advisory industry, we have included the 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 37 

history and services provided by Proxy Governance that will now 

be assumed by Glass Lewis. 

History and Ownership. According to Proxy Governance’s 

website, a proxy advisory and voting service was part of the 

original business plan for FOLIOfn, which was founded in 1998. 

That firm started to build a proxy service in 1999 and 2000, but 

those plans were put on hold after the steep market downturn 

following the Sept. 11, 2001, terrorist attacks. The PGI website 

says FOLIOfn reinitiated work on the service in 2003, following 

the development of a favorable regulatory environment that would 

expand the market for proxy advisory services. The firm 

completed work on its initial product offering in late 2004, and 

launched its advisory service for the 2005 proxy season. The 

firm’s launch was partially financed through a one-year bulk 

subscription agreement with The Business Roundtable, an 

association of CEOs of leading U.S. corporations, on behalf of its 

member companies.93

Proxy Governance’s parent firm, FOLIOfn, Inc., also owns a 

registered broker-dealer, FOLIOfn Investments, Inc., which offers 

an integrated brokerage and technology platform that allows clients 

to purchase and trade customizable portfolios of securities in a 

single transaction. The owners of the parent firm are listed in 

Proxy Governance’s 2009 Form ADV as Steven M. H. Wallman, 

MVC Capital, Inc. (a business name for the MEVC Draper Fisher 

Jurvetson Fund 1, Inc.) and FISCOP LLC.94 FISCOP LLC is, in 

turn, majority-owned by Broderick Management LLC, which is 

owned by billionaire investor, Gordon P. Getty.95 

Services and Business. Proxy Governance offered proxy 

research, vote recommendations and voting services. On its 

website, the company says that it has developed “a better approach 

to proxy analysis: providing advice with the goal of truly building 

long-term shareholder value.”96 Rather than looking at issues in 

isolation, the firm says it “evaluates proxy issues and makes voting 

recommendations on an issue-by-company basis, considering a 

company’s performance record, business environment, 

management strength, corporate governance and other factors.”97 

The firm says it offers “a comprehensive range of flexible, Webbased proxy advisory, voting and reporting services.”98 It says its 

coverage universe is based on the securities held in client 

portfolios and that coverage for some non-U.S. markets is provided 

through partnerships with other proxy advisory firms. In 

particular, Proxy Governance maintained a relationship for 

coverage of many European and Asian securities with Manifest 

Information Services, Ltd., a U.K.-based proxy research and voting 

firm. 
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©2011 Center On Executive Compensation 38 

According to its 2009 Form ADV, Proxy Governance had 

between 11 and 50 employees and less than 100 clients.99 Until 

December 20, 2010, Michael Ryan served as the President and 

COO of Proxy Governance, a position he had held since June 

2008. It is unclear whether Ryan will join Glass Lewis following 

its assumption of Proxy Governance’s proxy voting and advisory 

services. 

In early 2010, Proxy Governance began to explore a possible 

change in its business model. In a concept summary it made 

available to some industry participants in June 2010, the firm said 

it was considering a “radical change” to restructure itself into a 

non-profit entity called the Proxy Governance Institute.100 The 

concept summary stated that the “current for-profit business model 

is a barrier to serving the full range of investors, including 

individual investors” and that a superior approach would be “to 

redeploy PG’s services in a new business model supported by user 

fees and supplemented by third-party sponsorship.”101

The summary noted that investors and issuers spent hundreds 

of millions of dollars annually preparing and distributing proxies 

and soliciting votes, but said that the business opportunities for 

providing access to corporate governance and voting services were 

“substantially narrower than the wide-ranging need for these 

services. As a result, many investors – especially individual 

investors and small and medium-size institutions – are unserved or 

underserved,” the summary said.102 The proposed new entity 

would serve institutional and individual investors, not provide 

consulting services to issuers and “offer basic corporate 

governance and proxy voting services for free and reduced 

cost.”103 The new institute would have a transparent proxy voting 

policy that was subject to public comment, would provide “due 

process” to enable shareholder proponents and issuers to appeal 

recommendations, and would have a Board of Governors 

comprised of investors, issuers and directors.104

D. Egan-Jones Proxy Services

Egan-Jones Proxy Services was incorporated in 2002 to 

provide proxy advisory services. The firm is not registered as an 

investment advisor with the SEC although its parent firm is 

registered with the SEC as a Nationally Recognized Statistical 

Rating Organization (NRSRO). 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 39 

History and Ownership. Egan-Jones Proxy Services is a 

division of Egan-Jones Ratings Company, which was founded in 

1994. The firm is based in Haverford, Pennsylvania. The 

founding principals of the firm are Sean J. Egan and Bruce Jones. 

Egan is a former banker who worked at Chemical Bank (now part 

of J.P. Morgan Chase & Co.) and then with KPMG as a consultant 

to banks before starting a research firm called Red Flag Research 

in 1992. Egan hired Jones, a former Moody’s analyst, and the firm 

was renamed Egan-Jones and issued its first ratings in 1995.105 

Egan-Jones Ratings differs from the largest credit rating 

agencies, including Standard & Poor’s Corp. and Moody’s 

Investors Service, in that it is not paid by issuers to rate securities, 

but solely by institutional investors. In 2008, the firm was granted 

status as a NRSRO by the SEC.106 Egan-Jones Ratings Services 

has approximately 400 institutional investor clients, but it is not 

known how many of these utilize the firm’s proxy service.107

Current Services and Business. Egan-Jones says on its 

website that it provides proxy research, recommendations and 

voting services for both U.S. and foreign proxy proposals on an 

annual subscription basis, with prices based on the number of 

securities held. It says it offers two sets of voting guidelines so 

clients can choose whether to vote in accordance with Taft-Hartley 

concerns or whether overall shareholder value considerations 

should take precedence. The company says it provides the 

following integrated proxy services: set-up, notification of 

meetings, research and recommendations, voting guidelines and 

client override flexibility, execution of votes, and vote disclosure 

and guidelines.108

Egan-Jones indicates that unlike some of its competitors, it is 

“completely independent” and does not receive any compensation 

for proxy consultation services from corporate managers or board 

members and is therefore better able to represent shareholders and 

Taft-Hartley clients' interests.109 The company says that it has a 

“deep bench of very experienced credit risk analysts” from its 

credit ratings business and, therefore, when proxy votes involve 

corporate finance issues, its experts can “scrutinize these numbers 

with a trained eye instead of just accepting management’s 

expectations.”110 The company also says it is revolutionizing the 

proxy industry with low fees and transparent pricing, including a 

flat fee of $12.50 per company per year for all clients. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 40 

E. Other Proxy Advisors

Although the proxy advisor market is dominated by ISS and 

Glass Lewis, there are niche players that are able to carve out small 

markets for themselves. Examples include Marco Consulting 

Group, which has concentrated primarily on Taft-Hartley funds, 

and the Sustainable Investments Institute, which concentrates on 

research for academic institutions endowment funds.

Marco Consulting Group. Marco Consulting Group, Inc. 

(MCG) is an Illinois corporation, that provides consulting and 

investment advice to jointly-trusteed plan sponsors, primarily TaftHartley pension plans. The firm, which has offices in Chicago and 

Boston, was founded by Jack M. Marco in 1988. Marco, who 

continues to serve as chairman of the MCG, owns more than 50 

percent of its stock, according to the firm’s most recent SEC Form 

ADV.111 MCG has been registered as an investment adviser with 

the SEC since 1989. On its website, MCG says it is the largest 

consultant to jointly-trusteed benefit plans in the U.S. with more 

than 350 clients. 

Marco Consulting says it offers a proxy advisory service to its 

Taft-Hartley clients that “reviews each proxy issue with final 

decisions based on the merits of each case and with the best 

interest of the plan’s participants and beneficiaries in mind.”112 

The firm’s website lists six employees who work in its proxy 

voting division, which is headed by Greg Kinczewski, VP and 

General Counsel of Marco Consulting Group. Proxy advisory 

services comprise a small fraction of Marco Consulting Group’s 

revenues with approximately 4 percent of the firm’s total revenues 

attributable to proxy voting services clients.113 

Sustainable Investments Institute. The Sustainable 

Investments Institute (Si2) is a non-profit proxy research firm 

founded in 2009 to provide educational proxy research to 

subscribers. The firm is based in Washington, D.C. Si2 issues 

briefing papers and in-depth company-specific reports and has an 

on-line journal and blog. Its analyses, which focus exclusively on 

social and environmental issues, do not make voting 

recommendations.114 It issued its first reports for the 2010 proxy 

season to an initial group of subscribers comprised primarily of 

college and university endowments. Heidi Welsh and Peter 

DeSimone co-founded Si2 with Welsh serving as Executive 

Director of the firm. Both Welsh and DeSimone have previous 

experience in the proxy advisory industry with the IRRC and ISS. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 41 

F. Conclusion

The proxy advisory firm industry is concentrated primarily in 

two firms – ISS and Glass Lewis – with ISS dominating the 

market. The industry has grown through demand due to the 

increase in proxy votes, acquisition and development of new 

product ideas. However, underlying the growth, especially of ISS, 

is the existence of serious conflicts of interest that call into 

question the firm’s voting recommendations. Both ISS and Glass 

Lewis have been identified by corporate issuers as including 

material inaccuracies in some of their reports. Yet, despite these 

serious issues, other entrants and participants in the market that do 

not have such issues, at least to the same extent, have only been 

able to play a minor role. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 42 

V. Conflicts of Interest in the Proxy 

Advisory Industry 

One of the most common and long-standing concerns voiced 

about firms in the proxy advisory industry is that their business 

models suffer from conflicts of interest. Almost from the time the 

industry was created, proxy advisory firms have been criticized for 

providing product offerings or ownership structures that could 

compromise the analyses they provide. In 1994, for instance, after 

ISS announced that it would begin consulting with corporations on 

how they might respond to shareholder concerns, Graef Crystal, a 

prominent compensation consultant, put the conflict issue this way: 

They’ve got a severe conflict when they work both sides of 

the street. It’s like the Middle Ages when the Pope was 

selling indulgences. ISS is selling advice to corporations on 

how to avoid getting on their list of bad companies. There’s 

a veiled sense of intimidation.115

While concerns about conflicts of interest at proxy advisors 

date back decades, these concerns have never been resolved and 

continue to attract high-profile attention. Evidence of the 

continuing high level of concern over this issue includes the fact 

that the U.S. Government Accountability Office (GAO) has twice 

been asked by Congress to study the issue – most recently in 2007 

– and the issue plays a central role in a “concept release” on the 

U.S. proxy system issued by the U.S. Securities and Exchange 

Commission in July 2010.116 

Concerns about conflicts of interest in the industry fall into 

four general categories: 

1. Potential conflicts that arise when proxy advisors provide 

services to both institutional investors and corporate issuers on 

the same subjects; 

2. Potential conflicts related to proxy advisors providing 

recommendations on shareholder initiatives backed by their 

owners or institutional investor who are clients; 

3. Potential conflicts when the owners, executives or staff of 

proxy advisory firms have ownership interests in, or serve on 

the boards of, public companies that have proposals on which 

the proxy advisors are making voting recommendations; and 

4. Potential conflicts when proxy advisory firms are owned by 

firms that provide other financial services to various types of 

clients. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 43 

The Center believes that some of these conflicts need to be 

eliminated and others need to beat least fully disclosed, so that the 

information presented in proxy firm analyses can be placed in the 

appropriate context. The following sections will describe the 

extent to which each of these potential conflicts pertain to the 

major proxy advisory firms and how those firms describe these 

conflicts and the measures they have taken to address them. A 

chart summarizing these conflicts is shown below in Table 2. 

TABLE 2: Types of Potential Conflicts of Interest at Major 

Proxy Advisory Firms 

 ISS Glass 

Lewis 

PGI* EganJones Marco 

Consulting

Specialized Consulting Services to 

Corporations on Proxy-related Issues X 

Makes Recommendations on Proposals 

Sponsored by Institutional Clients X X X X X

Owners, Directors or Officers Serve on 

Public Company Boards X X 

Proxy Advisor or Corporate Parent Firm 

Provides Other Services to Clients X X X X X

* Proxy Governance, Inc. ceased operation on December 31, 2010 and transferred its clients to Glass Lewis 

A. Institutional Shareholder Services Inc. (ISS) 

ISS – as the largest proxy advisory firm, with the most lines of 

business, and owned by a major public company – is potentially 

subject to all of the categories of conflicts described above. In 

previous analyses of conflicts of interest among proxy advisors, the 

most commonly cited conflict involves a central aspect of ISS’s 

business model, which involves providing proxy advisory services 

to institutional investors and, at the same time, providing 

consulting services to corporate clients on how to achieve a better 

governance rating or favorable recommendation on an issue 

covered in the analysis provided to institutions. The 2007 GAO 

study of the proxy advisory industry described this conflict, which 

is a result of the influence ISS has in the market, as follows: 

Because ISS provides services to both institutional investors 

and corporate clients, there are various situations that can 

potentially lead to conflicts. For example, some industry 

professionals stated that ISS could help a corporate client 
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©2011 Center On Executive Compensation 44 

design an executive compensation proposal [company stock 

plan] to be voted on by shareholders and subsequently make 

a recommendation to investor clients to vote for this 

proposal. Some industry professionals also contend that 

corporations could feel obligated to subscribe to ISS’s 

consulting services in order to obtain favorable proxy vote 

recommendations on their proposals and favorable 

corporate governance ratings. One industry professional 

further believes that, even if corporations do not feel 

obligated to subscribe to ISS’s consulting services, they still 

could feel pressured to adopt a particular governance 

practice simply to meet ISS’s standards even though the 

corporations may not see the value of doing so.117

Similarly, a report by the Millstein Center On Corporate 

Governance, stated that the many companies believe that “signing 

up for [ISS] consulting provides an advantage in how the firm 

assesses their governance” despite ISS disclaimers to the 

contrary.118 Corporate governance expert Ira Millstein has spoken 

harshly of this conflict inherent in the heart of the ISS business 

model: 

I am the last person to knock profit-making and the 

capitalist system. I like it. But ISS is in a special position, 

and I query whether profit-making fits well with credible 

private standard-setting. I don't think it does, and this is 

why. ISS has achieved an unusual role for a private profitmaking entity. It provides structural "standards" for corporate governance, privately prepared by unidentified people, 

pursuant to unidentified processes, and asks us to take its 

word that it is all fair and balanced. I tried to dig behind the 

soothing assurances, but couldn't find enough detail to 

convince me that a devil didn't lie in the details of how this 

private standard-setting was put together. And then ISS 

provides company ratings, based on these privately-set 

standards, creating a tendency on the part of those that have 

received a poor rating to pay for a consultancy by the 

private standard-setter, on how to improve that rating. I see 

this as a vicious cycle.119

This particular conflict involving corporate consulting services 

is unique to ISS among the major proxy advisory firms. It has 

received significant attention over the years and has been widely 

criticized by both institutional investors and corporations, who are 

concerned that it drives what is considered “best practice,” even if 

the so-called best practice is not in the interest of companies or 

their shareholders. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 45 

Concerns about this conflict have also resulted in some loss of 

investor clients, particularly among public pension funds. In 2004, 

for instance, Gary Findlay, the executive director of the Missouri 

State Employees’ Retirement System, informed ISS that the 

pension fund was dropping ISS’s services over concerns about its 

corporate consulting business. In a letter to ISS quoted in The 

Washington Post, Findlay wrote: “I see no merit in further wasting 

your time or mine regarding this issue. From this point forward, 

we will . . . engage an organization that at least has the appearance 

of undivided loyalty to . . . clients.”120 Similar concerns were 

voiced after decisions to drop ISS’s proxy service by other major 

funds, including the Ohio Public Employees’ Retirement System 

and the Colorado Public Employees’ Retirement Association in 

2005 and the Ontario Teachers’ Pension Plan in 2006.121 

ISS provides considerable disclosure on its website of the 

potential conflict created by its business model and the steps it has 

taken to mitigate this conflict. In the Due Diligence Compliance 

Package document posted on its website, ISS says it “is well aware 

of the potential conflicts of interest that may exist between ISS’ 

proxy advisory service and ICS, and has therefore taken steps to 

prevent any potential conflicts from becoming actual conflicts.”122 

“ICS” is an acronym for ISS Corporate Services, Inc., a whollyowned subsidiary of ISS that provides corporate consulting 

services. ISS says that key elements of its policies and procedures 

“are designed to ensure the integrity of ISS’ institutional proxy 

advisory and advisory research services.”123 Among these 

procedures, ISS says that it “maintains a firewall which separates 

the staffs that perform proxy analyses and advisory research from 

the members of ICS” and that this firewall includes “legal, 

physical and technological separations.”124 ISS also offers a 

“Representation and Warranty” regarding conflicts of interest to its 

subscribers and has a “Code of Ethics” that applies to all 

employees that includes a policy on conflicts of interest.125

In spite of the steps it has taken to manage conflicts, 

perceptions remain that ISS’s business model is inherently 

conflicted, and ISS’s own security filings acknowledge this 

problem. In a 2009 Form 10-K filing for its then-parent 

RiskMetrics Group Inc., it explicitly acknowledges the significant 

business risk posed by this conflict and the fact that its safeguards 

may not be adequate to manage these conflicts: 

 [T]here may be a perceived conflict of interest between the 

services we provide to institutional clients and the services, 

including our Compensation Advisory Services, provided to 

certain corporate clients. For example, when we provide 
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©2011 Center On Executive Compensation 46 

corporate governance services to a corporate client and at the 

same time provide proxy vote recommendations to 

institutional clients regarding that corporation's proxy items, 

there may be a perception that we may treat that corporation 

more favorably due to its use of our services. 

The safeguards that we have implemented may not be 

adequate to manage these apparent conflicts of interest, and 

clients or competitors may question the integrity of our 

services. In the event that we fail to adequately manage 

these perceived conflicts of interest, we could incur 

reputational damage, which could have a material adverse 

effect on our business, financial condition and operating 

results.126 

The safeguards implemented by ISS as a firewall between the 

advisory and consulting businesses can only go so far. On its 

website, ISS states that when corporate clients meet with its proxy 

analysis staff, they should refrain from discussing whether the 

company has received consulting services from the other side of 

the company.

127

Aside from the primary conflict associated with providing 

advisory services to both institutions and corporations, ISS appears 

to be subject to all three of the other types of potential conflicts of 

interest. The recent acquisition of its former parent company, 

RiskMetrics Group, by MSCI Inc. may, if anything, heighten these 

concerns because of the broader range of business interests found 

under the MSCI umbrella. According to Julie Gozan, director of 

corporate governance at Amalgamated Bank, a union-owned bank 

that provides investment and trust services to Taft-Hartley pension 

plans and engages in shareholder activism, notes that by going 

public, proxy firms become part of the market itself and can no 

longer solely represent the interests of long-term investors. “The 

community that relies on Glass Lewis and ISS needs to know this 

is unbiased advice that favors long-term investors and not the 

interests of corporate executives,” Golan says.128 “When these 

firms go public, there’s real potential for a conflict of interest.”129

 
A Call for Change in the Proxy Advisory Industry Status Quo 

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B. Glass, Lewis & Co. 

While Glass, Lewis & Co. does not provide consulting to 

companies and therefore does not have conflicts between proxy 

advisory and corporate consulting work, it is subject to conflicts 

between the company and its corporate owners. 

After being formed as an independent company in 2003, Glass 

Lewis was acquired by Xinhua Finance, a Chinese company, in 

2007. The level of client and staff concerns about Xinhua’s 

governance, accounting and potential conflicts of interest were so 

severe that some of Glass Lewis’s leadership resigned. These 

conflicts included the fact that Xinhua Finance owned other 

businesses that appeared to pose direct conflicts, including its 

Taylor Rafferty subsidiary, which provided proxy solicitation 

services to corporations. 

 Glass Lewis was sold to the Ontario Teachers’ Pension Plan 

Board (OTPP) less than a year after its purchase by Xinhua and, 

while the conflicts there are not as severe, questions about the 

firm’s ownership continue. OTPP is one of the largest institutional 

investors in Canada – administering pension funds for over 

175,000 people – and is one of the most activist public pension 

funds on shareholder and corporate governance activism. On its 

website, OTPP says it promotes “good corporate governance 

standards and practices because we believe they result in better 

long-term performance.”130 It is a founding member of the 

Canadian Coalition for Good Governance, a membership 

organization of 41 Canadian institutional investors that says it 

“promotes good governance practices in Canadian public 

companies and the improvement of the regulatory environment to 

best align the interests of boards and management with those of 

their shareholders.”131 The pension system was also a founding 

educational partner in the Institute of Corporate Directors (ICR), 

which describes its mission as fostering “excellence in directors to 

strengthen the governance and performance of Canadian 

corporations.”132

One concern about Glass Lewis’ ownership by OTPP relates to 

the highly active role that OTPP plays in major corporate 

financings, restructurings and relationship investing – where an 

investor takes a major ownership stake in companies and partners 

with the management team in a long-term relationship. The 

pension plan’s private equity arm, called Teachers’ Private Capital, 

had $10 billion in invested capital at year-end 2009 and holds 

significant ownership stakes in dozens of companies. At the same 

time, the pension plan’s public equities segment has a Relationship 

Investing Team that takes stakes ranging from 5 to 30 percent in 
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©2011 Center On Executive Compensation 48 

midcap to largecap companies. “As a significant shareholder, we 

take a hands-on approach with our investments,” OTPP says. “We 

seek to develop relationships with the board and management of 

these companies, and to play a role in effecting strategies and 

changes that will improve the long-term value of our 

investment.”133 Some observers have questioned whether Glass 

Lewis will be able to make independent judgments on issues where 

OTPP has a major ownership stake. They also wonder whether 

OTPP’s internal governance and voting policies will override those 

developed by Glass Lewis. 

Glass Lewis provides a conflict of interest disclosure statement 

on its website, which highlights that the firm does not offer any 

corporate consulting services. “We are not in the business of 

advising public companies on their governance structures or 

conduct, and we refuse to use our position as trusted advisor to 

institutional investors to win consulting mandates with issuers,” it 

states.134 The firm also notes that it has formed an independent 

Research Advisory Council to insure that the firm’s research 

“continues to meet the quality standards, objectivity and 

independence criteria set by Glass Lewis' outstanding research 

team leaders and excludes involvement by the company’s owners 

in the making of Glass Lewis' proxy voting policies.”135 The

Research Advisory Council was announced shortly after the 

departure of two senior Glass Lewis executives after the 

acquisition of the firm by Xinhua Finance. 

Regarding the potential for conflicts of interest stemming from 

its ownership by OTPP, Glass, Lewis & Co. says: 

OTPP is not involved in the day-to-day management of 

Glass Lewis. Glass Lewis operates and will continue to 

operate as an independent company separate from OTPP. 

The proxy voting and related corporate governance policies 

of Glass Lewis are separate from OTPP. In instances where 

Glass Lewis provides coverage on a company in which 

OTPP holds a stake significant enough to have publicly 

announced its ownership in accordance with the local 

market's regulatory requirements or Glass Lewis becomes 

aware of OTPP's disclosure to the public of its ownership 

stake in such company, through OTPP's published annual 

report or any other publicly available information disclosed 

by OTPP, Glass Lewis will make full disclosure to its 

customers by adding a note to the relevant research report.136

In spite of the firm’s insistence that it maintains its 

independence and will disclose any conflicts, concerns about the 

relationship between Glass Lewis and OTPP persist. As one 

commenter summarized the issue: 
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©2011 Center On Executive Compensation 49 

It’s hard to believe, however, that there will be no 

connection between the two entities. ... Earlier this year, 

[OTPP] lead a private equity group that bought Montrealbased communications giant BCE Inc., the biggest corporate 

takeover in Canadian history. So how is Glass Lewis going 

to evaluate the corporate governance practices of BCE? 

Indeed, how would it rate the practices of any company 

where Teachers’ has a major investment? And what if 

Teachers’ wants to take over another company? What will 

the Glass Lewis recommendation be to shareholders? No, it 

just doesn’t wash. Either Teachers’ sells Glass Lewis to a 

company that can legitimately argue that there is no potential 

for conflicts of interest, or boards and shareholders should 

discount and even ignore anything that Glass Lewis says. In 

today’s climate of heightened sensitivity, if conflicts of 

interest are not good for chief executive officers or boards of 

directors, they’re also not good for the people who police the 

markets.137

Concerns about conflicts of interest at Glass Lewis, within 

some segments of the market, are heightened by the fact that the 

firm has been less open in sharing draft reports with corporations 

and provides less transparency regarding its models than some 

other proxy advisory firms. 

C. Proxy Governance, Inc. 

As noted earlier, on December 20, 2010, it was announced that 

Proxy Governance, Inc. (PGI) will no longer provide proxy voting 

or advisory services beginning in 2011.138 Glass Lewis has made 

an agreement with PGI to assume all of PGI’s customer contracts. 

Despite the fact that PGI’s operations recently ceased, there were 

potential conflicts of interest there as well. The discussion of these 

conflicts has been included in order to demonstrate how pervasive 

conflicts are in this industry. 

Concerns about potential conflicts of interest at PGI have 

centered on the fact that an initial bulk subscription agreement 

from a business organization helped to finance the launch of the 

firm’s proxy advisory service as well as the potential for conflicts 

involving its parent firm, FOLIOfn. 

The concern over PGI’s initial funding received prominent 

news attention in 2006, when a business columnist for The New 

York Times wrote an article mentioning that PGI’s first 

subscriptions had been from members of The Business Roundtable 

(BRT), an organization representing the CEOs of large 

corporations. The article further suggested that a PGI 

recommendation endorsing a slate of directors at Pfizer might have 
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©2011 Center On Executive Compensation 50 

been influenced by the fact that Hank McKinnell, the CEO of 

Pfizer, was serving as the chairman of The Business Roundtable, 

and that William Steere, Jr., Chairman Emeritus of Pfizer and a 

director at that firm, also served on an advisory policy council at 

Proxy Governance.139 The article also quoted from a 2004 memo 

written by McKinnell in his capacity as chairman of the BRT, 

urging its members to help Proxy Governance thrive in the 

marketplace by using its services. 

The column in The New York Times appeared after the original 

bulk subscription agreement between Proxy Governance and the 

BRT had already expired. PGI publicly refuted the argument that 

its connections to the BRT or Pfizer had any impact on its Pfizer 

vote recommendation, but the article led to lingering questions 

from some institutional investors about PGI’s ties to the business 

community and the degree of independence of its voting 

recommendations. 

While no specific concerns about the ownership of PGI by 

FOLIOfn have surfaced in news reports or the academic literature, 

the relationship appeared to hold the potential for conflicts of 

interest. The GAO study on proxy advisors, for instance, notes 

that at proxy advisory firms where the parent company offers 

financial services to various types of clients, these relationships 

“may present situations in which the interests of different sets of 

clients diverge.”140 Some observers have also speculated that, 

because FOLIOfn and its broker-dealer subsidiary provide services 

that compete with the mutual fund industry, the relationship made 

it more difficult for PGI to attract mutual fund clients, which 

comprise a large part of the market demand for proxy advisory 

services. 

At the time of the announcement that it was ceasing operations, 

Proxy Governance’s public website did not contain a public 

disclosure statement regarding its policies toward conflicts of 

interest. The website did note the original bulk subscription 

agreement with the BRT as well as the firm’s relationship with its 

parent company, FOLIOfn. As a registered investment adviser, 

Proxy Governance’s Form ADV filing also provides some 

information about the firm’s ownership and potential conflicts.141 

The company also had employee policies that addressed conflicts 

of interest. 

 
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D. Egan-Jones Proxy Services 

Egan-Jones Proxy Services is subject to potential conflicts of 

interest related to its ownership by Egan-Jones Ratings Co., a 

credit ratings agency. Egan-Jones Ratings Co. has garnered 

considerable publicity for the fact that among accredited ratings 

agencies, it is virtually alone in adopting a policy of accepting 

compensation only from the users of its services, institutional 

investor subscribers, rather than from corporate issuers seeking 

ratings. Some observers note, however, that this stance does not 

necessarily eliminate all conflicts, because subscriber-supported 

credit ratings agencies may have incentives to issue ratings that 

cater to the wishes of their largest investor clients, including hedge 

funds that utilize short-selling strategies.142 Egan-Jones Ratings 

Co. acknowledged that it has a material conflict of interest with 

subscribers in its application to become a nationally-recognized 

statistical rating organization (NRSRO), stating: 

Egan-Jones is paid by persons for subscriptions to receive or 

access the credit ratings of Egan-Jones and/or for services 

offered by Egan-Jones where such persons also may own 

investments or have entered into transactions that could be 

favorably or adversely impacted by a credit rating issued by 

Egan-Jones.143 

The firm goes on to state, however, that it does not believe this 

conflict applies to its proxy services unit: 

In addition to providing credit rating services, Egan-Jones 

may provide proxy services to certain subscribers. EganJones believes that providing these services to subscribers of 

its credit rating services does not present material conflicts 

of interest of the types contemplated in Exhibit 6, 

particularly since these subscribers are not also issuers that 

are being rated (or whose securities are being rated) by 

Egan-Jones.144

The website for Egan-Jones Proxy Services emphasizes that the 

firm is independent and does not offer corporate consulting 

services, but contains only a brief reference to conflicts of interest. 

Regarding conflicts, the website states that “[u]nlike many of our 

competitors, Egan-Jones does not receive any compensation for 

proxy consultation services from corporate managers or board 

members and is therefore better able to represent shareholders and 

Taft-Hartley clients' interests.”145 Similarly, the website for EganJones Ratings Services says that the firm has no conflicts of 

interest because it receives no compensation from issuers to rate 

their securities.146
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E. Union-Affiliated Proxy Advisors 

Concerns about conflicts of interest at union-affiliated proxy 

advisors, such as Marco Consulting Group, stem from the fact that 

these firms’ clients are Taft-Hartley pension funds that are also 

often active sponsors of shareholder proposals. This raises the 

concern that union-affiliated proxy advisors will always feel 

beholden to support proposals made by their Taft-Hartley clients. 

A study on voting integrity by the Millstein Center on Corporate 

Governance raises the issue as follows: 

Every year Marco’s union clients sponsor a number of 

shareholder proposals. Most of these are in line with 

Marco’s own proxy voting guidelines, but occasionally one 

is proposed that is contrary to their principles. Marco is then 

left in the potentially embarrassing position of 

recommending a vote against a proposal sponsored by one of 

its own clients. Marco seeks to limit the appearance of 

conflicts in such a situation by maintaining very 

comprehensive and specific proxy voting policies which 

make clear how the consultant would cast its vote under the 

circumstances. However, the possibility, though remote, that 

Marco could compromise its independence to satisfy clients 

causes concern to some.147

Regarding conflicts, Marco Consulting Group’s public website 

states that “[s]ince MCG does not render consulting services to the 

corporate or investment management communities, it has no 

conflicts of interest.”148 The firm is also registered as an 

investment adviser and files a Form ADV statement that provides 

some information about ownership and potential conflicts.149

F. Parallels to Identified Conflicts at Credit Ratings 

Firms 

Conflicts of interest at proxy advisory firms – while decades 

old – have recently become the subject of renewed scrutiny as part 

of an overall effort to increase transparency and restore confidence 

in the financial services sector of the economy. Some of this 

renewed interest is almost certainly due to the intense spotlight 

shined by the press, Congress and the SEC on the prominent role 

that conflicts of interest within the credit ratings industry played in 

fostering the credit and mortgage crisis that has engulfed the U.S. 

economy in recent years. Conflicts of interest at credit ratings 

agencies have been the focus of hearings, legislation, 

investigations and other actions from dozens of federal and 

international agencies and organizations. Among the U.S. 

government agencies and organizations that have taken actions on 

the issue are: Congress, the Financial Crisis Inquiry Commission, 
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©2011 Center On Executive Compensation 53 

the SEC, the U.S. Treasury Department, the Federal Reserve, the 

U.S. Department of Justice, the Federal Bureau of Investigation, 

the New York Insurance Department and the New York and 

California Offices of Attorneys General. 

 The results of this intense scrutiny, while still unfolding, 

include the establishment of almost an entirely new regulatory 

framework for credit ratings agencies in the Dodd-Frank Act. 

These regulatory changes are grounded in Congressional findings 

that the activities and performance of credit ratings firms, or 

NRSROs, are “matters of national public interest, as credit ratings 

agencies are central to capital formation, investor confidence, and 

the efficient performance of the United States economy.”150

Recently, some observers have drawn parallels between the 

detrimental impacts to the economy that unfolded from widely 

acknowledged – but largely unaddressed – conflicts of interest at 

credit ratings firms and the current situation in the proxy advisory 

industry. The SEC highlighted this analogy in its July 2010 

concept release requesting comments on the U.S. proxy system, 

where it stated that “in light of the similarity between the proxy 

advisory relationship and the ‘subscriber-paid’ model for credit 

ratings, we could consider whether additional regulations similar to 

those addressing conflicts of interest on the part of Nationally 

Recognized Statistical Rating Organizations (“NRSROs”) would 

be useful responses to stated concerns about conflicts of interest on 

the part of proxy advisory firms.”151 

A 2009 study on the credit ratings agencies by the 

Congressional Research Service listed a number of perceived 

reasons for the industry’s failings.152 They included: 

• business model bias; 

• the existence of a quasi-regulatory license; 

• flawed models and assumptions; 

• an inability to handle a voluminous amount of business; 

• challenges from high levels of fraud and lax mortgage 

underwriting; 

• insufficient regulation; 

• conflicts of interest involved in both rating and helping to 

design the same securities; 

• conflicts of interest in the provision of ancillary services to 

issuers whose securities they rate; and 

• limited liability under the First Amendment.153
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©2011 Center On Executive Compensation 54 

While not all of these conditions apply exactly to the proxy 

advisory industry or to each of the firms in it, what is striking is the 

number of parallels between the two industries. Section VII of this 

study will discuss how the regulatory regime imposed on credit 

ratings agencies may be applicable to the proxy advisory industry. 

 
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VI. Impact of Significant Inaccuracies 

and Lack of Transparency in Proxy 

Analyses 

One of most troubling developments with respect to proxy 

advisory firm analysis is the number and scope of inaccuracies in 

the research reports they produce on corporate issuers and a 

general lack of transparency in many of the methodologies, metrics 

and decision processes utilized by them to make voting 

recommendations. Because proxy analysis is largely concentrated 

in a few firms, the potential impact of these inaccuracies on the 

proxy voting system is substantial. Moreover, this is compounded 

when the substantial increase in the volume of votes and the import 

of those votes is considered. Recent survey data from the Center 

On Executive Compensation, presented below, highlights the 

frequency and types of inaccuracies found in proxy analyses on 

compensation issues. This chapter will also discuss potential 

reasons for the inaccuracies, and the potential impact of the lack of 

transparency on voting outcomes. 

A. Potential Reasons for Inaccuracies 

A number of reasons have been proffered for the significant 

level of inaccuracies found in reports produced by the proxy 

advisory industry. The most frequently cited reasons are lack of 

adequate resources and quality control procedures, pressures on the 

industry to reduce costs and the extremely short turnaround time 

available for proxy analyses. 

Lack of adequate resources and quality control. Perhaps 

the greatest reason why errors and inaccuracies have proliferated in 

proxy analyses is a lack of resources to deal with the sheer volume 

of data and information processed by these firms. The largest 

proxy advisor, ISS, claims it provides proxy analysis on nearly 

40,000 company meetings in more than 100 developed and 

emerging markets worldwide. The collection and processing of 

data for these companies encompassing management and 

shareholder proposals, financial performance, compensation plans 

and amounts, officers and directors, boards and board committees, 

anti-takeover and bylaw provisions, auditors, social and 

environmental performance and other governance issues is a 

monumental task. 
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©2011 Center On Executive Compensation 56 

Perversely, the trend toward regulators requiring greater 

volumes of disclosure by companies and more corporate 

accountability to shareholder votes, particularly in the United 

States and Europe, has greatly expanded the information 

processing and analytic requirements needed to assess proxy 

issues. 

To take one recent example, the SEC issued new rules in 2006 

requiring companies to disclose considerably more information in 

the Compensation Discussion and Analysis (CD&A) sections of 

their proxy statements regarding various key elements of 

compensation policies, practices, objectives and performance, 

along with seven specific tables of compensation data. The new 

rules have unquestionably multiplied the amount of quantitative 

and qualitative data available to investors to assess corporate 

compensation issues. But the CD&A section in large company 

proxy statements has now grown to an average of 26 pages.154 As 

a consequence, a proxy advisory firm, such as ISS, that attempted 

to cover more than 10,000 domestic companies (or a large and 

highly indexed investing institution that attempted to do its own 

compensation analysis) could potentially face the prospect of 

reading and digesting hundreds of thousands of pages of CD&A 

discussion and compensation tables merely to understand company 

compensation plans and practices – and that does not account for 

any independent analysis of these arrangements. 

Extrapolating this single example of how proxy research needs 

have snowballed from CD&A filings to the other disclosures that 

have been, or are in the process of being, required by the SEC in 

proxy statements – including those on audit firms and procedures, 

use of compensation consultants, director qualifications, risk 

management and oversight and board leadership – makes it easy to 

comprehend why many institutional investors have chosen to 

outsource corporate governance and proxy research. 

To cope with the massive amount of data collection and 

analysis required to analyze proxy issues at thousands of 

companies, the proxy advisory firms have, in turn, largely 

outsourced their own “data mining” operations. As noted in 

Chapter III, ISS maintains a data collection and research operation 

center in the Philippines with more than 150 employees. Other 

proxy advisors utilize third-party contract firms, some of them 

located overseas, to procure and extract proxy statement 

information from public company filings. 

The need to collect ever greater amounts of data and the trend 

toward outsourcing this task no doubt contribute to the potential 

for errors in proxy research. In addition, because of the seasonal 

nature of proxy analysis work, with a large fraction of U.S. public 
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©2011 Center On Executive Compensation 57 

company proxy filings taking place in a few months in the spring 

of each year, a considerable amount of the data collection and 

analysis work that remains is handled by temporary employees at 

the major proxy advisory firms. As participants in an investor 

roundtable sponsored by the Millstein Institute for Corporate 

Governance and Performance noted, this heavy reliance on 

temporary employees inevitably has led to concerns about the 

quality of the services being performed: 

Nevertheless, there is concern whether someone who may 

have limited, or no, business or proxy experience can make 

informed and appropriate voting recommendations. More 

than one investor present was uneasy about whether relying 

on the advice of inadequately resourced providers meant that 

they were not properly discharging their duties.

155

Industry cost pressures. The problem of a lack of adequate 

resources to prevent errors and inaccuracies in proxy research 

reports has likely been exacerbated in recent years by pressures on 

the proxy advisory firms to increase profitability in order to service 

debts incurred in their acquisitions (in the case of the largest firms) 

or to stem operating losses (at smaller firms). MSCI, for instance, 

announced in a regulatory filing in July 2010 that it was 

eliminating 70-80 jobs in a “first round” of cuts associated with its 

purchase of RiskMetrics Group and that a second round of 

restructuring changes was expected to be completed by the end of 

the first quarter of 2011.156 

Short turnaround time for analyses. Another frequently 

mentioned reason for inaccuracies in proxy analyses is the very 

tight time-frame under which proxy advisory firms operate in 

producing their reports for clients. Under corporate state law, 

issuers must generally provide written notice to shareholders of the 

annual meeting within a fixed number of days before the date of 

the meeting. 

For instance, Delaware corporate law requires notice of the 

annual meeting at least 10 days, but no more than 60 days, before 

the meeting. Under federal regulations, issuers using internetbased distribution of proxy materials must post these materials at 

least 40 days before the meeting date. But many institutional 

investors expect proxy advisory firms to provide them with 

research reports on matters to be voted on at annual meetings at 

least several weeks before the meeting date. Therefore, proxy 

advisory firms typically have a narrow window of time between 

when they obtain access to many proxy statements and when their 

reports must be made available to clients. 

Within this window, some – but not all – proxy advisory firms 

endeavor to make draft reports available to companies in order to 
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©2011 Center On Executive Compensation 58 

allow companies to comment on these drafts and any inaccuracies 

in them. A frequent complaint from issuers, however, is that the 

proxy advisory firms that do have such review procedures require 

any comments back from issuers within an unrealistic one- or twoday time-frame, which may occur over a weekend. 

B. Center On Executive Compensation Research on 

Inaccuracies 

The Center On Executive Compensation and its parent 

organization, HR Policy Association, conducted two member 

surveys in 2010 designed to gather data on the prevalence of 

inaccuracies in research by the proxy advisory firms on 

compensation-related matters. 

In one survey, conducted in August 2010, the HR Policy 

Association surveyed Chief Human Resource Officers regarding 

various aspects of their companies’ experiences with proxy 

advisory firms. Of those responding, 53 percent said that a proxy 

advisory firm had made one or more mistakes in a final published 

report on the company’s compensation programs. The most 

common types of inaccuracies found were: improper peer groups 

or peer data (19%), erroneous analysis of long-term incentive plans 

(17%), and inaccurate discussion of a company policy, plan or 

benefit based on provisions no longer in effect (15%).157

In response to a question about whether proxy advisory firms 

were using proper peer groups in evaluating compensation, 57 

percent of survey respondents said that a proxy advisory firm had 

used a compensation peer group in a preliminary draft of a report 

that failed to take into account the company’s size, industry, 

complexity or competition for talent. Of the firms that indicated 

the use of such an inappropriate peer group, 96 percent indicated 

that the peer group was not adjusted in the final version of the 

report.158 

Proper selection of industry peers is a critical component of 

pay analysis, because peer groups are heavily relied upon by both 

compensation committees and proxy advisory firms in their 

analysis of executive compensation. At companies where proxy 

advisory firms deem compensation to be excessive relative to 

industry peers and to performance, proxy advisors often 

recommend that investors withhold voting in favor of board 

nominees who serve on the compensation committee. 

Similarly, in a February 2010 survey of its Subscribers, the 

Center asked about the types of inaccuracies companies had 

experienced in 2008 or 2009 in a draft version of a proxy advisory 

service report regarding compensation programs. A sample of the 
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©2011 Center On Executive Compensation 59 

descriptions provided by companies of these inaccuracies is shown 

below in Table 3. 159 

TABLE 3: Sample Compensation-Related Inaccuracies 

Reported by Center On Executive Compensation 

Members in 2010 Survey 

• ISS and Glass Lewis significantly misstated the stock value of 

three of our executives from the Summary Compensation 

Table in 2008. 

• We experienced six inaccuracies in ISS’ draft report for the 

2009 proxy season. They related to the following: (i) vesting of 

performance shares, (ii) disclosure of non-equity bonus 

targets, (iii) incorrect attribution of aircraft gross-ups to one 

officer, (iv) payment of dividend equivalents on unvested 

performance share awards, (v) performance share targets at 

which payouts are made, and (vi) stating that our CEO was 

“entitled” to use company aircraft for personal travel, when in 

fact he is required to do so. 

• Both Proxy Governance and ISS miscalculated the total 

compensation by using the maximum opportunity for our 

performance share plan grant (three times fair market value on 

date of grant) compared with the target. Proxy Governance 

did make the correction; however, ISS did not correct the 

report, but merely added language to their report about the 

change in the SEC rule. 

• We found problems in report and told them, but they did not fix 

the discrepancies with the items in our proxy. When we asked 

them about it later, their response was that they only change 

items that they feel are significant or pertinent to the 

shareholders’ understanding of the information provided in the 

report. 

• In 2009, Glass Lewis elected to withhold against reelecting our 

Compensation Committee members based on our pay 

compared to their peer group. We noted that their analysis 

was based on our 2008 data versus the peer 2007 data. 

• ISS’ draft last year was obviously a cut and paste from their 

report on another company as it included negative language 

about personal use of the company aircraft. Although we 

lease a fractional share of an aircraft, there was no personal 

use of the aircraft by any company executive. 

• Glass Lewis did not calculate “pay for performance” correctly 

which led to a “D” compensation rating. 

• ISS characterized one gross-up on a perk as though it were a 

current, ongoing benefit that applied to everyone. We 

corrected them stating that the gross-up provision has been 

discontinued prospectively. 

Source: Center On Executive Compensation survey, February 2010 
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C. Lack of Transparency in Proxy Analyses and 

Recommendations 

In addition to the issue of inaccuracies in their analyses, many 

observers have noted concerns about the lack of transparency of 

proxy advisors in terms of their voting determinations, 

methodologies and their use of proprietary models on issues such 

as compensation. Issuers are concerned that many 

recommendations from proxy advisors are based on a “one-sizefits-all” governance approach that does not capture the differences 

in company situations or approaches. At the same time, there are 

concerns that proxy advisors utilizing a “case-by-case” or 

individualized approach to their recommendations can be 

inconsistent in how they treat companies or can be opaque with 

respect to their decision process on any particular issue. 

Similarly, there are concerns that the proxy advisors are 

unwilling to make their models completely transparent. In the area 

of compensation, for example, the major proxy advisory firms rely 

on proprietary models that relate a company’s executive pay to 

those of its peers and to the company’s performance relative to 

peers. These models form the basis for proxy advisors’ 

recommendations regarding many compensation-related ballot 

items. But proxy advisory firms say that many of the parameters 

of these models, such as the weightings of various performance 

factors utilized as inputs into the models, are considered 

proprietary and are not made available publicly. This effectively 

results in a “black box” situation for companies attempting to 

understand why a proxy firm may recommend against their 

compensation plans. 

D. Impact of Inaccuracies and Lack of Transparency on 

Voting Outcomes 

The impact of inaccuracies in reports and the lack of 

transparency in how proxy advisors make their recommendations 

raise serious issues for U.S. capital markets. Because institutional 

investors have come to rely so heavily on the information and 

recommendations provided by proxy advisory firms – and because 

proxy votes on many issues, from director elections to approval of 

compensation plans, are no longer perfunctory ratifications of 

management’s positions – errors or inaccuracies in proxy reports 

are now capable of causing significant harm to corporations and 

their investors. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 61 

 In recent years, for instance, the percentage of equity plans 

that ISS has recommended voting against has fluctuated between 

30 and 40 percent. If any significant percentage of these 

recommendations was based on erroneous or inaccurate data, as 

the Center’s survey data discussed earlier suggests, it would imply 

that inaccuracies at ISS are negatively impacting the compensation 

programs at a meaningful number of companies. As noted earlier, 

this influence is poised to grow with the addition of say on pay, 

proxy access and majority voting. 

The seriousness with which many corporations are taking the 

issue of inaccuracies in proxy analyses is illustrated by the fact that 

some companies now feel compelled to respond to inaccuracies in 

proxy reports by filing detailed rebuttals in their own public 

securities filings. For example, in May 2009, Target Corporation 

responded to what it said were numerous inaccuracies in a report 

issued by ISS/RiskMetrics related to a controversial proxy fight at 

Target by issuing a seven page white paper to its shareholders 

discussing what it described as “flaws” in the ISS analysis of the 

proxy fight. Among the inaccuracies that Target cited in the filing 

were: a mischaracterization of the company’s real estate strategy as 

“atypical” among major retailers, a flawed calculation of 

compound annual growth rates, failure to provide full context in 

quoting a corporate governance expert and mischaracterizing the 

company’s nominating practices.160 

E. Conclusion 

Proxy advisory firms have a fiduciary duty to provide accurate 

and reliable analyses on executive compensation and governance 

practices of corporate issuers to their institutional investor clients. 

Based on proxy advisory firm reports, corporate issuers are 

increasingly concerned that proxy advisors are transmitting 

inaccurate information to institutional investors that could 

adversely impact investors’ decisions on pay and governance 

matters. Because the potential impact on the companies is 

substantial, the Center believes that accuracy of reports should be 

more closely monitored and regulated by the SEC to minimize 

adverse impacts on pay for performance. 

 
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VII. The Existing Regulatory and Legal 

Framework for Proxy Advisors 

Given the reliance of institutional investors on proxy advisory 

firms, and the importance of proxy voting to the operation of 

capital markets and corporate governance, one would expect that 

the advisory industry would be heavily regulated. However, that is 

not the case. Proxy advisory firms are subject to very little 

regulation. The principal regulatory framework governing the 

industry is the Investment Advisers Act, but proxy advisers can 

essentially choose whether to be covered by the Act’s regulations. 

At present, the only real oversight of proxy advisors would 

come from institutional investors, who are required to monitor the 

activities of proxy advisors and ensure the independence of the 

recommendations made by them. Yet, institutional investors have 

little incentive to monitor the advisory firms carefully, since proxy 

advisory firms offer them an efficient and cost-effective way to 

discharge their fiduciary duties to vote proxies in the interest of 

their clients. This section will discuss the existing regulatory and 

legal framework governing the activities of proxy advisory firms. 

A. The Investment Advisers Act of 1940 

The principal legal and regulatory framework governing the 

activities of proxy advisory firms is the Investment Advisers Act of 

1940 (the Act). A person or firm is considered an “investment 

adviser” under the Act if, for compensation, they engage in the 

business of providing advice to others as to the value of securities, 

whether to invest in, purchase, or sell securities, or issue reports or 

analyses concerning securities.161 The SEC has stated that it 

considers proxy advisory firms to meet the definition of an 

investment adviser “because they, for compensation, engage in the 

business of issuing reports or analyses concerning securities and 

providing advice to others as to the value of securities.”162 The 

SEC has further stated that, as investment advisers, “proxy 

advisory firms owe fiduciary duties to their advisory clients.”163 

The U.S Supreme Court has articulated the fiduciary duty of 

investment advisers as a requirement that advisers act in the best 

interest of clients and disclose all conflicts of interest.164 The SEC 

has also stated that a “proxy advisory firm has a duty of care 

requiring it to make a reasonable investigation to determine that it 

is not basing its recommendations on materially inaccurate or 

incomplete information.”165 
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Although proxy advisory firms meet the definition of 

investment advisers, they have some discretion whether to register 

under the Advisers Act. The Act contains a prohibition against 

registering with the SEC for firms that have less than $25 million 

in assets under management – a provision Congress established in 

1996 to divide regulatory responsibility for advisers between the 

SEC and the states.166 Within a year of the recent passage of the 

Dodd-Frank Act, this threshold will rise to $100 million for most 

investment advisers if they are subject to regulation and 

examinations in their home states. This prohibition would apply to 

most proxy advisors because they typically do not manage client 

assets. 

To make matters more confusing, the prohibition is subject to 

several exemptions, including one that allows firms to register if 

they serve as consultants to pension plan clients with a minimum 

of $50 million in assets.167 As of December 2010, three proxy 

advisory firms – ISS, Proxy Governance and Marco Consulting 

Group –were registered with the SEC as investment advisers using 

this “pension consultant” exemption.168

Some provisions of the Investment Advisers Act apply to 

proxy advisory firms regardless of whether they have registered 

with the SEC. In particular, section 206 of the Act prohibits an 

adviser from engaging in “any transaction, practice or course of 

business which operates as a fraud or deceit on any client or 

prospective client.”169 Proxy advisors that elect to register as 

investment advisers are subject to a number of additional 

requirements, including requirements to: 

• file and make certain disclosures on an annual Form ADV; 

• adopt, implement and annually review an internal compliance 

program consisting of written policies and procedures; 

• designate a chief compliance officer to oversee its compliance 

program; 

• establish, maintain and enforce policies preventing misuse of 

non-public information; and 

• create and preserve certain records that are available for SEC 

inspection. 

According to a GAO study of proxy advisors in 2007, the 

SEC’s Office of Compliance Inspections and Examinations 

monitors the operations and conducts inspections of registered 

investment advisors, including the registered proxy advisory 

firms.170 As part of these examinations, the SEC stated, it “may 
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review the adequacy of disclosure of a firm’s owners and potential 

conflicts; particular products and services that may present a 

conflict; the independence of a firm’s proxy voting services; and 

the controls that are in place to mitigate potential conflicts.”171 

The GAO study noted that it did not independently assess the 

adequacy of the SEC examinations, but that the SEC reported that 

it did not identify any major violations of federal securities laws as 

part of its examinations of proxy advisors and had not initiated any 

enforcement actions against these firms.172

In May 2009, the SEC did settle an enforcement action against 

an investment adviser, INTECH Investment Management LLC and 

its COO related to that adviser’s policies, procedures and failure to 

disclose to clients a material conflict of interest related to its proxy 

voting policies.173 INTECH had been using a specialized proxy 

service provided by ISS designed to follow AFL-CIO voting 

recommendations. The SEC found that INTECH had violated 

Rule 206(4)-6 of the Investment Advisers Act, because its written 

policies and procedures did not address material conflicts that 

arose between INTECH’s interests and those of its clients who 

were not pro-AFL-CIO, and that it did not sufficiently describe to 

clients its voting policies and procedures. INTECH settled the 

case after consenting to a cease-and-desist order and the payment 

of civil penalties of $300,000 by the company and $50,000 by its 

COO.174

The INTECH settlement is important, because it establishes 

that the SEC is prepared to enforce the duty that exists for 

institutional investors to monitor the conflicts of interest that can 

arise in their own proxy voting policies and procedures. It does 

not speak directly, however, to the willingness of regulators to take 

enforcement actions against the proxy advisors themselves or 

against institutional investors for failure to monitor the conflicts of 

interest at proxy advisors. 

B. Rules Governing Proxy Solicitation 

The SEC has noted that because of the broad definition of 

“solicitation” under the Securities and Exchange Act of 1934, the 

provision of proxy advice constitutes a solicitation that normally 

would subject the proxy advisory firms to the information and 

filing requirements under the proxy rules in the Exchange Act. In 

1979, however, the SEC adopted a rule exempting proxy advisors 

from these informational and filing requirements, providing that 

certain conditions were met. 
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Specifically, the advisor: 

• must render financial advice in the ordinary course of its business; 

• must disclose to its client any significant relationship it has with 

the issuer or any of its affiliates, or with a shareholder proponent 

of the matter on which advice is given, in addition to any material 

interest of the advisor in the matter to which the advice relates; 

• may not receive any special commission or remuneration for 

furnishing the proxy voting advice from anyone other than the 

recipients of the advice; and 

• may not furnish proxy voting advice on behalf of any person 

soliciting proxies.175

The SEC has noted, however, that while proxy advisory firms 

are exempt from the informational and filing requirements 

governing proxy solicitation, they remain subject to an Exchange 

Act prohibition against false and misleading statements.176

C. Fiduciary Duty Only to Clients 

Although the SEC has stated that proxy advisory firms owe 

fiduciary duties to their clients, some observers and legal scholars 

have questioned whether, in practice, such duties serve as any real 

restraint on the proxy advisory industry. Corporate managers and 

directors owe clear fiduciary duties of care and loyalty to the 

corporation and its stockholders, which are designed to prevent the 

abuse of power by agents of the corporation. As Delaware Vice 

Chancellor Leo Strine has noted, however, “[u]nlike corporate 

managers, neither institutional investors, as stockholders, nor ISS, 

as a voting advisor, owe fiduciary duties to the corporations whose 

policies they seek to influence.”177 According to one law 

professor, therefore, the trend toward institutional investors’ 

greater reliance on the voting recommendations of proxy advisors, 

as opposed to those of corporate managers, essentially means they 

are “replacing agents who are constrained by relatively strong 

fiduciary duties with an agent who has relatively weak fiduciary 

duties.”178

The Department of Labor (DOL) has recently inserted itself 

into the regulatory landscape of proxy advisors. On October 22, 

2010, DOL proposed regulations that will expand the categories of 

individuals who would be considered fiduciaries under the 

Employee Retirement Income Security Act of 1974, as amended 

(ERISA).179 The plain language of the regulations indicates that 

ISS and Marco Consulting would fall within the purview of the 

regulations as they are SEC-registered investment advisers to the 

extent the proxy advisor effectively exercises discretion over the 
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©2011 Center On Executive Compensation 66 

proxy voting decision.180 The Preamble to the proposed 

regulations, however, specifically notes that “[the provision would 

apply to] advice and recommendations as to the exercise of rights 

appurtenant to shares or stock (e.g., voting proxies) . . .”181 It is 

unclear how the proposed regulations will be interpreted and 

whether they will apply only those firms registered as investment 

advisors with the SEC or all proxy advisory firms. 

The implications of the proposed regulations are extensive. If 

finalized, proxy advisory firms would arguably become subject to 

the wide range of fiduciary duties and obligations under ERISA, 

such as the duties of loyalty and prudence, and would be prohibited 

from engaging in self-dealing transactions. ERISA imposes 

significant civil penalties and excise taxes for fiduciary violations. 

As such, categorizing proxy advisory firms as ERISA fiduciaries 

may cause the ISS business model to become obsolete as the 

business model itself presents inherent conflicts of interest. 

ERISA would certainly consider it a breach of fiduciary duties for 

a firm, such as ISS, to provide consulting services to a corporate 

client at the same time that ISS is providing another client with 

“independent” proxy voting research and recommendations about 

the corporate client receiving consulting services. Until final 

regulations are released, we can only speculate as to whether and 

the extent of the regulatory framework that will be imposed upon 

proxy advisory firms under ERISA.182

 
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VIII. Proposals Addressing Proxy 

Advisor Conflicts and Lack of 

Transparency 

Proxy advisory firms play a central role in the proxy voting 

process and wield significant influence over the structure of 

executive compensation and corporate governance at most 

companies. Lacking sufficient regulatory oversight, the industry 

has developed organically. As a result, significant problems have 

developed regarding conflicts of interest, lack of transparency and 

analytical inaccuracies that could have a detrimental impact on 

shareholder value. 

There is a growing consensus that greater regulation of the 

industry, ranging from elimination of certain conflicts to clearer 

fiduciary responsibility and disclosure regarding their processes, is 

necessary to ensure that the information provided by proxy 

advisors is accurate and reliable. Notably, the International 

Organization of Securities Commissions (IOSCO), the 

international organization of securities regulators, recently revised 

its principles of securities regulation based on the lessons learned 

from the financial crisis and, among its new principles, was one 

directed at organizations like proxy advisors. The IOSCO stated 

that “entities that offer investors analytical or evaluative services 

should be subject to oversight and regulation appropriate to the 

impact their activities have on the market or the degree to which 

the regulatory system relies on them.”183 This section will analyze 

the leading proposals for remedying the perceived problems at 

proxy advisory firms through greater regulation. 

 
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©2011 Center On Executive Compensation 68 

A. The Proxy Advisory Industry Should Be Regulated by 

the SEC 

Most proposals calling for increased regulation of the proxy 

advisors recognize the primacy of the SEC’s regulatory authority 

over the industry. As a result, the most effective approach to 

regulation would be to have the SEC be responsible for additional 

regulation of the industry. The SEC has statutory authority over 

proxy advisors, which is highlighted by the fact that it has 

established exemptions for them from various SEC regulations – 

such as those governing proxy solicitations – that would otherwise 

impose significant administrative burdens on proxy advisory firms. 

As some observers have noted, the SEC could modify these 

exemptions to make their availability contingent on a proxy 

advisor meeting various standards or conditions. The SEC already 

has direct regulatory authority over two proxy advisors – ISS and 

Marco Consulting Group – that have voluntarily registered with 

the Commission as investment advisers. 

B. Proposals Contained in the 2010 SEC Concept 

Release 

On July 14, 2010, the Securities and Exchange Commission 

voted unanimously to issue a concept release on various aspects of 

the U.S. proxy voting system, opening its first comprehensive 

review of the proxy system in nearly 30 years. “The proxy is often 

the principal means for shareholders and public companies to 

communicate with one another, and for shareholders to weigh in 

on issues of importance to the corporation,” said SEC Chairman 

Mary L. Schapiro in announcing the release. “To result in effective 

governance, the transmission of this communication between 

investors and public companies must be – and must be perceived to 

be – timely, accurate, unbiased, and fair,”184 Schapiro said. 

Regarding proxy advisors, Schapiro noted that both companies 

and investors “have raised concerns that proxy advisory firms may 

be subject to conflicts of interest or may fail to conduct adequate 

research and base recommendations on erroneous or incomplete 

facts.”185 Twenty-two pages of the 151-page concept release were 

devoted to a discussion of proxy advisors and potential regulatory 

remedies for conflicts of interest, lack of transparency and 

inaccuracies in proxy analyses and recommendations. 
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©2011 Center On Executive Compensation 69 

 With respect to conflicts of interest, the SEC release suggests 

that one possible solution could be for the SEC to revise or provide 

interpretive guidance regarding the proxy rule exemption in 

Exchange Act Rule 14a-2(b)(3), under which a firm providing 

proxy advice must disclose to its clients “any significant 

relationship” it has with the issuer, its affiliates or a shareholder 

proponent. At present, some proxy advisors, including ISS, utilize 

a blanket disclosure in their reports to alert investors that they may 

have done business with the corporation that is the subject of the 

report and direct readers to an email address where they can ask for 

more information. 

 Alternatively, the SEC concept release suggests that the 

Commission could take three other approaches to addressing 

conflicts of interest at proxy advisors: 

• establish additional rules making it likely that proxy advisors 

would be required to register as investment advisers; 

• provide additional guidance on the fiduciary duty of proxy 

advisors or issue rules requiring specific disclosures of 

conflicts by registered investment advisors; or 

• issue regulations similar to those addressing conflicts by the 

credit ratings agencies, such as the prohibition of certain 

conflicts of interest and requiring specific disclosures and 

procedures to manage others. 

The release also discusses several proposals for addressing 

concerns about the accuracy and transparency of data and vote 

recommendations by proxy advisors, including: 

• requiring increased disclosure of the extent of research 

involved and the procedures and methods used to determine 

ratings or recommendations; 

• requiring disclosure of policies and procedures for interacting 

with issuers, informing issuers of vote recommendations and 

handling appeals of recommendations; and 

• requiring proxy advisors to publicly file vote recommendations 

with the Commission on a delayed basis. 

 The comments received from the concept release will be used 

to determine whether the SEC will pursue additional regulation of 

proxy advisory services and form the basis for proposed rules on 

the subject. 
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C. Other Regulatory Proposals 

Several variations of the ideas contained in the SEC concept 

release related to regulation of proxy advisors, as well as other 

novel regulatory ideas, have been circulated in recent years. The 

most prominent of these proposals are discussed below, including 

adoption of the credit ratings agency regulatory model, creation of 

public oversight board, development of a unique regulatory 

framework for the industry, and self-regulation through a voluntary 

code of conduct. 

Adoption of Credit Ratings Agency Regulatory Model. As 

discussed in Chapter IV of this paper, there are a number of 

parallels between the conflicts of interest and business model 

issues associated with the credit ratings agencies and those 

associated with proxy advisory firms. Perhaps the most widely 

discussed model for enhancing regulation of the proxy advisors 

involves imposing a regulatory regime similar to that which 

Congress and the SEC have mandated for credit ratings agencies. 

The SEC received initial authority to regulate credit ratings 

agencies under the Credit Rating Agency Reform Act of 2006, and 

formally voted in June 2008 to propose a series of reforms for 

credit ratings agencies. Many of these proposals were codified in 

2010 under the Dodd-Frank Act, which imposes substantial new 

controls and transparency requirements on credit ratings agencies. 

Table 4 below lists a number of the new provisions of the DoddFrank Act that apply to credit ratings agencies along with an 

analogous potential regulation that could be applied to the proxy 

advisory firms. 

The Dodd-Frank Act also created a new office at the SEC 

charged with overseeing standards related to credit ratings agencies 

and with conducting inspections. It also gave the SEC the 

authority to suspend or revoke the registration of credit ratings 

agencies for failure to satisfy certain requirements. In addition, 

Dodd-Frank required the SEC and the Comptroller General to 

undertake various studies of the credit rating agencies and their 

processes. Finally, the Dodd-Frank Act rescinded an exemption 

from the Securities Act that shielded credit ratings agencies from 

legal liability related to the inclusion of credit ratings in public 

security registration statements and confirmed the ability of 

investors to seek civil actions against credit ratings firms under the 

Exchange Act.

Creation of a Public Oversight Board. Another regulatory 

approach that has been suggested for the proxy advisory industry is 

the creation of a federal oversight board similar to the Public 

Company Accounting Oversight Board (PCAOB), which was 
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©2011 Center On Executive Compensation 71 

created in the wake of the Enron and WorldCom accounting 

scandals to oversee the public auditing firms. Professor Tamara 

Belinfanti of New York Law School argues in a 2009 paper that 

such a board could be “designed to provide systematic 

accountability of proxy advisors.”186 The general features and 

mandate of the PCAOB could be replicated for the proxy advisors, 

including auditing and ethics standards, inspections, registration 

requirements and the ability to investigate and discipline registered 

firms, according to Belinfanti. She adds that: 

The sentiments underlying the creation of the PCAOB 

are similar in contour and substance to the sentiments 

expressed by those concerned about the current 

landscape in the proxy advisory and corporate 

governance industry. Like auditors, ISS and other proxy 

advisors hold positions of significant perceived 

authority and expertise on which the market relies. And 

like auditors in the wake of Enron and WorldCom, 

there is a growing sentiment that an unrestrained and 

unaccountable proxy advisory industry is a disaster 

waiting to happen.187

The parallels to prior meltdowns and the impact of the PCAOB 

make this option worth considering. 

TABLE 4:

Regulatory Requirement for Credit 

Ratings Agencies in Dodd-Frank Act

Similar Potential Regulatory 

Requirement for Proxy Advisors

• establish internal controls for monitoring 

adherence to established policies and 

procedures 

• same

• submit annual compliance reports to the 

SEC 

• same

• take actions to prevent sales and 

marketing considerations from affecting 

ratings 

• take actions to prevent sales and 

marketing considerations from affecting 

voting recommendations 

• set qualifications standards for credit 

analysts 

• set qualification standards for proxy 

analysts

• establish procedures for assessing 

possible conflicts of interest with former 

employees 

• same

• maintain an independent board or board 

committee tasked with certain 

responsibilities related to the credit 

ratings agency business 

• maintain an independent board or board 

committee tasked with certain 

responsibilities related to the proxy 

advisory business 

• publicly disclose ratings methodologies 

and a description of the underlying data 

used in the ratings process 

• publicly disclose vote methodologies 

and description of underlying data used 

in deriving vote recommendations

• periodically disclose information on the 

historical accuracy of credit ratings

• periodically disclose information on the 

accuracy of vote recommendations
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©2011 Center On Executive Compensation 72 

Development of a Unique Regulatory Framework for Proxy 

Advisors. Rather than adopting a regulatory framework designed 

for other industries, some observers have proposed that the SEC 

develop a unique regulatory scheme designed specifically for 

proxy advisors. “At a minimum, all proxy advisory firms should 

be required to register as investment advisers, and the SEC should 

develop a unique regulatory framework for these firms under the 

Investment Advisers Act of 1940,” states a paper published in 

March 2010 by two prominent business groups.188 The paper also 

recommends: 

• public disclosure of the governance models used by proxy 

advisory firms, including guidelines, standards, methodologies 

and assumptions used in developing voting recommendations; 

• establishment of a more robust due diligence process and 

greater disclosure for institutional investors regarding proxy 

voting; 

• public disclosure by proxy advisors of all vote 

recommendations and decisions; 

• opportunities for public company input on draft proxy reports 

and recommendations; and 

• public disclosure by proxy advisors of all errors made in 

executing or processing voting instructions. 

 In public comments to the SEC concept release filed on Aug. 

5, 2010, the Center for Capital Markets Competitiveness (CCMC) 

of the U.S. Chamber of Commerce makes a number of similar 

recommendations regarding transparency and disclosure and 

proposes that the SEC consider new rules governing proxy 

advisors designed to ensure that “proxy advisors do what they say 

they are in business to do.”189 The CCMC letter says that the SEC 

should require proxy advisors to have a process “that demonstrates 

due care towards formulating accurate voting recommendations 

when applied in the unique context of each individual 

company.”190 This could be accomplished through rules “similar 

to the government’s use of the Administrative Procedures Act,” the 

CCMC says, and this implementation process should be 

transparent.191 “It should be apparent to the market, including the 

advisor’s own clients, when a recommendation proves correct, and 

when it proves incorrect,” the Chamber letter adds, noting that 

“one consequence of such transparency might be to encourage 

proxy advisors to compete with each other based on the quality of 

their voting recommendations.”192
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Greater Self-Regulation Through a Voluntary Code of 

Conduct. Finally, in addition to various proposals for greater 

government regulation of proxy advisors, some parties have 

advanced the idea of greater industry self-regulation through a 

standardized voluntary industry code of conduct. In 2008, the 

Millstein Center for Corporate Governance and Performance at the 

Yale School of Management held a roundtable workshop with 

institutional investors and proxy advisors and undertook 

independent research on the proxy system. This resulted in a 

policy brief that included a draft code of professional practices for 

the proxy advisory industry. “Considering the oft-repeated concerns that proxy advisors can appear opaque or conflicted, and the 

subsequent worry that conflicts of interest may affect the quality of 

voting recommendations, it is surprising that such a code has not 

yet been drafted,” the policy brief stated.193 “The adoption of an 

industry-wide code of conduct could bring more comfort to other 

market parties, including investors, issuers and other stakeholders, 

who would be able to compare the advisors’ policies against an 

industry standard.”194

The code of professional conduct developed under the auspices 

of the Millstein Institute was modeled after a code developed in 

2004 by the IOSCO for handling conflicts of interest at credit 

ratings agencies. The code covered four principal areas: 1) quality 

and integrity of the recommendation process; 2) advisor 

independence and avoidance of conflicts of interest; 3) advisor 

responsibilities to clients and issuers; and 4) disclosure of the code 

of conduct. 

The code contains more than 45 specific recommendations for 

proxy advisory firms within these four broad areas, a number of 

which have been incorporated into some of the regulatory 

proposals under consideration. Some of the proxy advisory firms 

made written responses to the Millstein Center that included 

statements suggesting they would implement at least some of the 

voluntary code of conduct suggestions. 

 
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D. Potential for Unintended Consequences from 

Enhanced Regulation of Proxy Advisors 

While many industry participants are strongly in favor of 

greater regulation for the proxy advisory industry, some remain 

concerned that such a move could have negative unintended 

consequences, including creating increased barriers to entry for 

new firms, further entrenchment of ISS as the dominant presence 

in the industry and giving proxy advisory firms a government “seal 

of approval” that would enhance their power and credibility. 

Many of the regulatory proposals for proxy advisors outlined in 

this section revolve around increased certification, procedural and 

public filing requirements that would likely increase costs for 

proxy advisory firms. The impact of these increased costs would 

likely be most significant, however, for smaller firms in the 

industry and potential new entrants, rather than on the industry 

leaders. With the possible exception of conflicts of interest, the 

problems in the proxy advisory industry “would not be solved, and 

may even be exacerbated, by SEC regulation,” says Paul Rose, a 

law professor at Ohio State University, who notes a tendency for 

regulation to stifle, rather than promote, competition: 

SEC regulation of the industry may actually increase the 

market power of the few major corporate governance 

players. As Jonathan Macey has argued in the context of 

derivatives regulation (a much more competitive industry 

than governance ratings, at least in terms of the number of 

significant market participants), the fixed costs associated 

with regulation would serve as barriers to entry of new 

competitors in the market. This would be an especially 

unfortunate side-effect in a market that is already dominated 

by a single firm which competes with only a handful of 

others.195

A February 2010 Center survey of its Subscribers regarding 

regulation of the proxy advisors by a federal agency as a way of 

ensuring quality control by proxy advisors and reinforcing the 

integrity of the proxy voting process, found that nearly two-thirds 

of the respondents favored regulation. But a significant minority 

questioned the effectiveness of this approach or raised concerns 

about unintended consequences. One respondent stated a concern 

that regulation would amount to a “Good Housekeeping Seal of 

Approval” for proxy advisors that could give them “undue 

credibility.” Another echoed this sentiment, stating that regulation 

“would give [advisors] even more legitimacy than they already 

have and could cause some shareholders to believe that because 

they are regulated by the SEC, their opinion should be given 

greater weight.”196 
A Call for Change in the Proxy Advisory Industry Status Quo 

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E. The Need for Effective Enforcement 

Despite legitimate concerns over the unintended consequences 

of regulation, a regulatory approach may be the most effective 

means to begin to unravel the web of conflicts and the inaccuracies 

in reports produced by the industry. Thus, whatever changes to 

regulation of the proxy advisory industry get made, effective 

enforcement will be a key element in their success. 

To date, the proxy advisory firms that are registered as 

investment advisers have not been subject to significant SEC 

enforcement actions, despite considerable concern about conflicts 

of interest, lack of transparency and inaccuracies in their reports.197 

SEC enforcement in the proxy voting field to date has primarily 

focused on warning institutional investors of their duty to take 

reasonable steps to ensure that, when they use third-party proxy 

advisors, these advisors are independent and can make voting 

recommendations that are impartial and in the best interests of the 

investor’s clients. In 2009, the SEC settled its first enforcement 

action against an investment adviser for not sufficiently describing 

its proxy voting policies and procedures and for failing to disclose 

a material conflict of interest.198

At least one observer has suggested that SEC enforcement 

could potentially become more robust if the SEC’s Division of 

Corporate Finance took a greater role in regulating proxy advisors 

rather than deferring to the Division of Investment Management, 

which regulates investment advisers. Paul Rose, a law professor at 

Ohio State University, notes in a paper examining the corporate 

governance industry that the SEC’s Division of Corporate Finance, 

which oversees corporate disclosure, including proxy statement 

and shareholder proposal reviews, has already issued rules to limit 

auditor and security analyst conflicts of interest. Rose argues that 

it could do so for proxy advisors as well. “It is possible that the 

Division of Corporation Finance would take a different view of 

ISS’ potential conflicts than the Division of Investment 

Management,” Rose writes, and “the Division of Corporation 

Finance is under no obligation to refrain from regulating the 

corporate governance industry nor from referring a conflicts matter 

to the SEC’s Division of Enforcement if it perceives a problem 

with the industry’s activities.”199 This approach would be 

consistent with the SEC’s role as the protector of investors and 

with ensuring that information disclosed by corporations is being 

transmitted accurately to institutional investors. 

 
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IX. Potential for Addressing the 

Market Power of Proxy Advisors 

Through Increased Competition 

An alternative or supplemental approach to increased 

regulation of the proxy advisory industry as the primary 

mechanism for addressing the substantial problems in the industry 

–including conflicts of interest, lack of transparency and 

concentrated market power – is to foster greater competition in the 

industry and expand voter participation. This section will discuss 

the need for greater competition in the industry and two prominent 

ideas for spurring competition and broader voter participation. 

 

A. The Case for Greater Competition in the Proxy 

Advisory Industry 

A common theme expressed by many who have an interest in 

the proxy voting system is the need for greater competition in the 

proxy advisory business because of the level of unchecked power 

of the largest proxy advisors. The relative lack of competition in 

the industry has been commented on in many studies of the 

industry, including the 2007 Government Accountability Office 

report, which noted that ISS had more clients than all of the other 

proxy advisory firms combined.200 The GAO reported that many 

of the institutional investors it had interviewed believed “that 

increased competition could help reduce the cost and increase the 

range of available proxy advisory services.”201 It also noted, 

however, that significant barriers to new competition existed in the 

industry, including the need to offer comprehensive company 

research coverage and sophisticated database and vote execution 

platforms. Moreover, it stated that “because of its dominance and 

perceived market influence, corporations may feel obligated to be 

more responsive to requests from ISS for information about 

proposals than they might be to other, less-established proxy 

advisory firms, resulting in a greater level of access by ISS to 

corporate information that might not be available to other 

firms.”202

A number of academics have also written about the relative 

lack of competition for ISS. Tamara Belinfanti, a professor at New 

York Law School, has postulated that “the anemic level of 

competition” currently present in the proxy advisory industry is 

due to significant “first mover” advantages for ISS as well as 

significant barriers to entry.203 Among the “first mover” 

advantages that accrue to ISS, Belinfanti says, are network effects, 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 77 

consumer switching costs, acquisition of resources and assets and 

technology preemption. Regarding network effects, she notes that 

“on the institutional client side, the more mutual funds that use 

ISS’ services, the more a mutual fund can feel secure in relying on 

ISS’ advice because it is assured that its voting practices are in line 

with the industry.”204 Among the barriers to entry cited by 

Belinfanti are a need to provide company coverage that matches 

that provided by ISS (more than 40,000 companies in 110 

countries); the development, implementation and maintenance of 

sophisticated technology platforms; and the costs for clients of 

switching vote execution services. 

While first mover advantages and barriers to entry have no 

doubt played a role in ISS maintaining a dominant position, as 

discussed in Chapter III, the firm’s strategy of habitually buying its 

largest rivals has also been a key factor in its market dominance. 

Proxy Governance Inc., a former ISS competitor, summed up the 

competitive situation regarding ISS in a letter to the Millstein 

Institute and the SEC as follows: “[i]f there is one issue on which 

virtually all market participants (with the possible exception of 

RiskMetrics/ISS) would seem to agree, it is that there should be 

more than one proxy advisor and that the perpetuation of the nearmonopoly status of RiskMetrics/ISS is not in the long-term 

interests of investors or our capital markets.”205 This statement is 

particularly noteworthy as Proxy Governance, Inc. abruptly ceased 

its operations at the end of 2010, leaving most institutional 

investors with two options for proxy advisory services: ISS or 

Glass Lewis.206 Proxy Governance entered into an agreement with 

ISS’ competitor, Glass Lewis, to assume all of their customer 

contracts.207 

While the need for greater competition in the proxy advisory 

field is evident, the willingness of investors to support more than a 

few firms in the industry remains very much in question. The 

GAO study acknowledged this dilemma, noting that some of the 

investors it had spoken with “questioned whether the existing 

number of firms is sufficient, while others questioned whether the 

market could sustain the current number of firms.”208 

In comments to the SEC, a law firm made a similar point 

stating that “[g]iven the costs attendant to establishing a proxy 

adviser and coverage of even the most widely held stocks, we are 

highly skeptical that there will be new market entrants, and we 

believe that as more mutual funds engage proxy advisers to assist 

in developing and implementing proxy voting policies and 

procedures the virtual monopoly enjoyed by the current providers 

in the proxy adviser market will only grow more powerful.”209 

Meanwhile, the SEC, as part of its review of the U.S. proxy 
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system, has taken note of the dominant market position of ISS 

among proxy advisors and asked for comments on how this may be 

affecting the quality of voting recommendations from ISS and 

other proxy advisors.210

B. A Non-Profit Utility Model for Proxy Services 

In addition to the perceived need for more competition in the 

proxy advisory field – and a diminution in the market power of ISS 

– some industry participants have articulated the need for a 

different business model for proxy advisors to better serve the 

public interest and to remove conflicts of interest associated with 

the fact that all of the major proxy advisors are commercial 

businesses. Specifically, an argument has been made that the 

interests of investors, issuers and the public would be better served 

with a system where the provision of proxy research and 

recommendations was treated like a public utility function – with 

low prices, heavily regulated procedures and no conflicts – rather 

than as a specialized consulting service. 

As noted in Chapter III, one proxy advisor, Proxy Governance 

Inc., had explored the concept of reconstituting itself into a nonprofit entity called the Proxy Governance Institute. In a June 2010 

public letter to the SEC, Proxy Governance said that the 

“underlying premise of this concept is that corporate governance 

and, by extension, proxy voting are matters of public policy with 

important societal implications that transcend any one company, 

shareholder or group of shareholders.”211 The letter stated that the 

new institute would serve “individual and institutional investors, 

issuers and the public interest by providing low-cost – and, in some 

cases, free – independent and conflict-free corporate governance 

advice and information.” In a concept summary attached to the 

letter, Proxy Governance outlined a number of key points 

regarding its concept and business model for the Institute. 

The letter from Proxy Governance to the SEC about its 

proposal for the Institute also reinforces the notion that the 

competitive landscape in the proxy advisory industry is difficult 

for smaller firms. The letter states that “the business incentives 

for providing ready access to quality corporate governance and 

proxy voting services are substantially narrower than the wideranging need for these services.” The letter adds that while its 

“approach to governance, its work product and research and voting 

technology are highly regarded, its influence in addressing these 

challenges has not met expectations.”212 It is ironic that this 

proponent of increased competition in the proxy advisory industry 

recently succumbed to the realities of a tough economy and an 

industry monopolized by one firm. Having struggled for quite 
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some time, Proxy Governance ceased its operations at the end of 

2010, entering into an agreement with Glass Lewis to take over 

their customers’ proxy voting and advisory services contracts.213

Several other firms have also recently entered the proxy 

research or voting information market using a non-profit structure. 

The Sustainable Investments Institute (Si2) supported primarily by 

a group of college and university endowments, provided proxy 

research on social and environmental issues during its first proxy 

season in 2010. And several organizations that seek to assist retail 

investors in voting have also chosen a non-profit structure. In some 

ways, the founding of Si2 and the proposed reconstitution of Proxy 

Governance as a non-profit represent a circling back to the origins 

of the proxy advisory industry when the Investor Responsibility 

Research Center operated as a not-for-profit. 

One aspect of the Proxy Governance Institute proposal that 

raised an interesting fiduciary question is the concept of giving 

“open access” to the Institute’s voting platform for third parties to 

express their corporate governance views or recommendations. 

By allowing various institutions to display their voting patterns or 

recommendations on its platform, the Institute would make it 

easier for institutional investors to follow the voting advice of 

other like-minded institutions. Or, taking the concept one step 

further, an investor could choose to vote according to the 

consensus pattern of vote recommendations from multiple 

institutions (and/or proxy advisors) that the investor selected 

because it believed those institutions had the most thoughtful 

approach to proxy voting. One question that arises from this 

approach is whether an institutional investor that chose to 

essentially follow the voting policies and recommendations of 

another institution (or a group of institutions) would be meeting its 

fiduciary duties with respect to proxy voting. 

Some observers have argued that the fiduciary protection that 

an institutional investor should receive from following the voting 

recommendations of another institutional investor that had taken a 

careful and diligent approach to proxy voting should, if anything, 

be superior to that received from following the advice of a proxy 

advisor – if for no other reason than that the other institution’s 

voting would be based on having an actual financial stake in the 

voting outcomes. It is believed that this issue has never been 

litigated and that the SEC has not offered any guidance on it. 

The issue is important, however, because it has the potential to 

diminish the influence of proxy advisory services by allowing 

investors to readily meet their fiduciary obligations for proxy 

voting in a cost-effective manner without hiring a proxy 

advisory firm. 
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C. Mechanisms to Promote Greater Participation in 

Proxy Voting by Retail Investors 

Another potential way to bring greater competition to the proxy 

voting market involves the promotion of higher participation rates 

and better informed voting by retail investors. This issue has 

received increasing attention over the last two years for several 

reasons. First, there has been a noticeable falloff in the already 

low historical level of proxy voting by retail investors in recent 

years due to changes in how issuers are allowed to disseminate 

proxy information. At the same time, however, certain 

technological and infrastructure developments are underway that 

have the potential to greatly facilitate the ability of retail investors 

to utilize what has been termed “client-directed voting.” 

Proxy voting by retail investors has historically been at a much 

lower participation rate than that for institutional investors, many 

of which have a fiduciary obligation to vote. A number of 

academics have suggested that this low voting participation is a 

rationale response by retail investors to their limited information 

and impact on voting results. Stephen Bainbridge, a law professor 

at the UCLA School of Law, has noted: 

Given the length and complexity of corporate disclosure 

documents, especially in a proxy contest where the 

shareholder is receiving multiple communications from the 

contending parties, the opportunity cost entailed in 

becoming informed before voting is quite high and very 

apparent. In addition, most shareholders’ holdings are too 

small to have any significant effect on the vote’s outcome. 

Accordingly, shareholders can be expected to assign a 

relatively low value to the expected benefits of careful 

consideration. Shareholders are thus rationally apathetic. 

For the average shareholder, the necessary investment of 

time and effort in making informed voting decisions simply 

is not worthwhile.214

According to data provided by Broadridge Financial Services, 

among retail investor accounts in 2009, 17 percent of Objecting 

Beneficial Owner (OBO) accounts voted (representing 34 percent 

of shares held by these accounts) while 15 percent of NonObjecting Beneficial Owner (NOBO) accounts voted (representing 

25 percent of shares held in these accounts.)215 This contrasts with 

institutional voting rates that typically exceed 90 percent. The lack 

of voting participation by retail investors (or by brokers on their 

behalf) is important to corporate issuers and to voting results 

because retail investors have traditionally cast their votes 

disproportionately in support of management on shareholder 

voting matters when compared to major institutional investors. 
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©2011 Center On Executive Compensation 81 

The Impact of E-Proxy on Retail Voting Participation. 

Retail voting participation has fallen sharply in recent years at least 

in part due to new regulations adopted by the SEC permitting the 

electronic delivery of proxy materials, including through a “notice 

and access” process that allows issuers to send shareholders only a 

notice describing the availability of proxy materials on the Internet. 

The SEC adopted these “e-proxy” rules in 2007 and they were first 

utilized by a significant number of companies in 2008. By the 

2010 proxy season, more than 1,500 companies were utilizing 

“notice and access” proxy delivery.216

 While the new rules led to large documented savings in proxy 

distribution costs for companies, they also brought a dramatic 

decline in retail investor voting at accounts who received the 

notice-only proxy delivery option. John White, former Director of 

the SEC’s Division of Corporate Finance, noted in August 2008 

that during the 2008 proxy season, the 653 issuers who used the 

“notice and access” process experienced a 73 percent drop in the 

number of retail accounts voting and a 52 percent drop in retail 

shares voted.217 

More recent data provided by Broadridge shows that for the 

11-month period from July 1, 2008 through May 31, 2009, among 

issuers who used a “mixed-option” method – using “notice and 

access” delivery for some retail accounts and “full-set” delivery for 

others – the percentage of retail accounts that voted when receiving 

notice-only was only 4.1 percent, compared with 21.4 percent for 

retail accounts that received “full-set” delivery of proxy 

materials.218 The drop in the actual percentage of retail shares 

voted was less, with 13.5 percent of shares voted by notice-only 

retail investors versus 28.6 percent during the same period by 

“full-set” investors – meaning that the retail investors with the 

largest holdings under either delivery option were more likely to 

vote. 

The SEC has indicated concern about the drop in retail voting 

and, in March 2010, it adopted amendments to its rules regarding 

the Internet availability of proxy materials. The new rules are 

designed to provide additional flexibility to issuers regarding the 

format of shareholder notices and to allow issuers to include 

explanatory materials in shareholder communications under the 

“notice and access” delivery system.219 The Commission also 

expanded its Office of Investor Education and Advocacy and 

greatly expanded the portion of its Investor.gov website dedicated 

to providing information related to proxy voting with an eye 

toward making it easier for retail investors to understand how to 

vote. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 82 

Initiatives to Promote Client-Directed Voting. At the same 

time that SEC rules for e-proxy were curtailing voting by retail 

investors, other developments were occurring aimed at restoring 

the voting power of retail investors. Perhaps the most prominent of 

these was a campaign to get the SEC to approve and to facilitate 

the development of client-directed voting, or CDV. 

The term “client-directed voting” is generally attributed to 

Stephen P. Norman, Corporate Secretary at American Express 

Company, who proposed it as a way to bolster retail voting 

participation in the wake of the NYSE’s 2006 decision to propose 

the elimination of discretionary broker voting in director elections. 

In December 2006, Norman made a presentation advocating CDV 

at a conference. His proposal called for allowing retail investors to 

inform brokers of their predetermined proxy voting instructions, 

which the brokers would then execute in cases where the investor 

did not return a proxy vote. These voting instructions would be set 

at the time of the original agreement between the broker and the 

investor, but the investor would retain the right to change or 

override the pre-determined instruction. Norman’s CDV proposal 

would allow, but not require, an investor to provide an instruction 

to their broker to vote in a limited number of ways, including: 

• vote in accordance with the board’s recommendation; 

• vote against the board’s recommendation; 

• abstain from voting; or 

• vote proportionately with the broker’s instructed votes from 

other retail investors on the same issue.220

This concept of CDV was quickly endorsed by the Society of 

Corporate Secretaries & Governance Professionals, who said in a 

comment letter to the NYSE that it would “encourage reengagement of that segment of retail owners who are currently not 

voting, or rarely voting” and “provide privacy for those investors 

who seek it, while ensuring a fair vote, the certainty of a quorum, 

and the satisfactory conclusion of business at annual meetings.”221 

At the same time, however, critics of the limited set of voting 

options under this version of CDV proposed a more expansive 

view of how it should work. “It is possible to conceive of a much 

more robust model for CDV in which retail investors would have 

access to a variety of meaningful choices for directed voting,” 

wrote John Wilcox, Chairman of Sodali and an independent 

consultant on corporate governance to TIAA-CREF. “To be 

meaningful, CDV should provide [beneficial owners] an array of 

voting analyses and choices from different types of institutional 

investors and other groups, including public pension funds, 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 83 

environmental and social investors, long term centrists such as 

TIAA-CREF, labor unions, advocacy investors, etc.,” Wilcox 

said.222 Moreover, in the absence of greater voting options, 

customization and accountability mechanisms, Wilcox said, CDV 

could be criticized as a “‘dumbing-down’ exercise or a thinly 

disguised alternative to broker discretionary voting, which is no 

longer permitted.”223

Similar objections to a narrow interpretation of CDV have been 

voiced by Mark Latham and James McRitchie. Latham, a founder 

of votermedia.org, has championed the idea that individual 

investors could raise both their voting participation and the quality 

of their decisions by using the Internet to copy the voting decisions 

of institutional investors or professional proxy advisors. He has 

also advocated a system where issuers would be required to make 

funds available to professional proxy advisors, who were chosen 

by shareholders, to make their voting recommendations available 

to all shareholders.224 McRitchie, the publisher of an on-line 

corporate governance website, calls for “open CDV systems” that 

would allow shareholders “to informally build individualized 

proxy voting policies, much like formal policies maintained by 

institutional investors.”225 Many third-party voting platforms or 

“feeds” could be created around specific issues of interest to retail 

investors, who could choose to follow voting advice based on their 

specific policy concerns or their affiliation with various “brands” 

that were consistent with their own values. 

Early on-line versions of affinity-based CDV voting tools and 

information that allow investors to piggy-back on the vote 

recommendations and knowledge of others are already in 

operation. Two examples of these systems are MoxyVote and 

ProxyDemocracy. MoxyVote is a free website that allows 

investors to see upcoming annual meeting ballots and the intended 

votes of a variety of different advocacy and investor groups. The 

site is an affiliate of TFS Capital, a registered investment advisor 

with more than $1 billion in hedge fund and mutual fund assets 

under management.226 ProxyDemocracy is a non-profit, 

foundation-supported organization that provides free on-line tools 

and information that allow investors to see how institutional 

investors that publicize their voting intentions in advance of 

meetings intend to vote. It also provides a ranking system 

designed to track the extent to which mutual fund families support 

activist positions in their proxy voting patterns.227 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 84 

The SEC has indicated that it is studying CDV – which it has 

re-labeled “advance voting instructions” – as part of its review of 

the U.S. proxy system. Client-directed voting and similar 

developments aimed at retail investors have the potential to lessen 

the overall influence of proxy advisory firms, both by diluting the 

present disproportionate impact of institutional proxy votes and by 

making it easier for entities to provide voting policies or 

recommendations that could be readily and widely utilized by 

others. At the same time, however, the CDV model, if 

implemented in certain ways, could potentially increase the 

influence of proxy advisors. This could be the case, for instance, if 

the voting recommendations of existing proxy advisory firms 

became the most prominent or widely used voting options for retail 

investors on CDV voting sites. 

 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 85 

IX. The Center On Executive 

Compensation’s Recommendations 

for Reform of the Proxy Advisory 

Industry 

The Center On Executive Compensation believes that the most 

effective approach for mitigating and addressing the issues 

surrounding conflicts of interest, lack of transparency, inaccuracies 

in reporting and lack of competition in the industry will require a 

series of regulatory and market reforms. On the regulatory side, 

the Center recommends the following reforms: 

1. Ban on Worst Form of Conflicts. The most serious issue 

facing the proxy advisory firm industry is at the largest proxy 

advisory firm, ISS, which provides consulting services to 

corporate issuers while simultaneously providing 

“independent” analyses to institutional investors on those same 

companies. This approach creates a vicious cycle in which 

companies may feel an obligation to patronize ISS for its 

consulting services in order to obtain favorable proxy voting 

recommendations on their proposals. 

The Center believes that it would be impossible for a proxy 

advisory firm to provide both of these services and still meet 

their fiduciary obligations to the institutional investors. For 

this reason, the SEC should ban proxy advisory firms, or their 

affiliates, from providing advisory services to institutional 

investors, while at the same time providing consulting services 

to corporate issuers on the matters of proxy votes. Until the 

change is effective, the SEC should mandate disclosure of the 

fees paid and services obtained from proxy advisors in the 

proxy statement, similar to the disclosures currently required 

for compensation consultants. 

2. Full Disclosure of Other Conflicts. The SEC should 

mandate disclosures designed to make the financial 

relationships that underpin the most controversial aspects of the 

proxy advisory industry transparent to investors. Specifically, 

the Center recommends that the SEC should require proxy 

advisory firms to disclose, in any report containing voting 

recommendations about a specific issuer, whether the firm has 

received consulting fees from either the issuer, or the 

proponent of a shareholder resolution on the ballot at that 

issuer, in the previous year and the amount of those fees. This 

disclosure should be located where it is easily assessable to any 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 86 

investor who is relying on the recommendation in the report. 

This should be in tabular format to allow ease in identifying 

potential conflicts of interest. 

3. Disclosure of Methodologies Behind Voting 

Recommendations. The SEC should mandate that proxy 

advisory firms disclose the analytic processes, methodologies 

and models utilized to derive their voting recommendations. 

For instance, proxy advisory firms that utilize pay-forperformance compensation models to determine 

recommendations on compensation plans or advisory say on 

pay votes should be required to publicly disclose all inputs, 

formulas, weightings and methodologies used in these models. 

Such disclosure would allow issuers and investors to 

effectively assess the merits and weaknesses of such models 

and to provide feedback to proxy advisory firms on these 

models. 

4. Clarification of Fiduciary Duties of Institutional Investors 

and Plan Sponsors. The SEC should provide additional 

guidance to investment advisers and plan sponsors making it 

clear that their fiduciary obligations to vote proxies in the 

interests of investors require diligent monitoring of the 

conflicts, practices and competence of third-party proxy 

advisors. The mere act of hiring a proxy advisor should not be 

sufficient to allow institutions to meet their fiduciary 

obligations. Moreover, these obligations should be vigorously 

enforced to provide a true incentive for institutions to take 

seriously their role in monitoring and influencing proxy 

advisory firm behaviors and policies. 

5. Implement SEC Monitoring of Proxy Firm 

Recommendations The SEC should implement periodic 

reviews of proxy firm research reports to check for accurately 

and completeness, much the way the SEC currently does for 

company filings. SEC review would be an effective means to 

educate proxy advisors regarding the SEC’s expectations 

regarding the proxy firms’ exercise of due care in issuing 

reports. It would also help educate the SEC as to the role 

proxy advisory firms play in the proxy process. 

In addition to recommending these regulatory reforms, the 

Center believes that private sector corporations and institutions 

should support measures designed to bring additional competition 

into the proxy advisory industry and to promote greater voting 

participation by retail investors. 
A Call for Change in the Proxy Advisory Industry Status Quo 

©2011 Center On Executive Compensation 87 

XI. Endnotes 

 

1

 Tamara C. Belinfanti, The Proxy Advisory and Corporate Governance Industry: The Case for Increased Oversight 

and Control 14 (N.Y.L. Sch. Legal Studies, Research Paper Series 09/10 No. 18, Spring 2009). 2 Id. at 12. 3

 Jennifer E. Bethel & Stuart L. Gillan, The Impact of the Institutional and Regulatory Environment on Shareholder 

Voting, FINANCIAL MANAGEMENT 29, 34 (Winter 2002); Cindy R. Alexander, Mark A. Chen, Duane J. Seppi & Chester S. 

Spratt, The Role of Advisory Services in Proxy Voting (Nat’l Bureau of Econ. Research, Working Paper No. 15143, 

2009). 

4

 Alexander, supra note 3, at 3-4. 5

 Yin Wilczek, Bounty Program to Cramp Corporate Boards: ABA Speakers Discuss Governance Provisions, DAILY 

REPORT FOR EXECUTIVES, Aug. 10, 2010. 6

 Kristen Gribben, Proxy Advisers: Intermediaries Spark Changes in Pay Practices, FINANCIAL TIMES, June 17, 2009, 

available at http://www.ft.com. 7

 Jeffrey Gordon, ‘Say on Pay’: Cautionary Notes on the UK Experience and the Case for Shareholder Opt-In 325 

(Columbia Law & Economics Working Paper No. 336; European Corporate Governance Inst. Working Paper No. 

117/2009, Aug. 2009). 

8

 Comment letter from Judy Schub, Managing Director, CIEBA, to Elisabeth M. Murphy, Secretary, Sec. Exch. 

Comm’n 3 (Aug. 13, 2009), available at http://sec.gov/comments/s7-10-09/s71009-123.pdf. 9

 U.S. GOV’T ACCOUNTABILITY OFFICE, CORPORATE SHAREHOLDER MEETINGS: ISSUES RELATING TO FIRMS THAT ADVISE INSTITUTIONAL 

INVESTORS ON PROXY VOTING, GAO-07-765, 10 (2007). 10 Meagan Thompson-Mann, Voting Integrity: Practice for Investors and the Global Proxy Advisory Industry 9 (Yale 

Sch. of Mgmt. Millstein Ctr. for Corporate Governance & Performance, Policy Briefing No. 3, 2009). 11 Ira M. Millstein, ISS’ Role in Corporate Governance Standards Setting, Speech at the Annual Conference of 

Institutional Shareholder Services (Oct. 19, 2005). 

12 Alistair Barr, Controversy Ignites Competition in Proxy Advisory Business, DOW JONES NEWS SERVICES, June 11, 2007. 13 HR Policy Ass’n, 2010 Summer Chief Human Resource Officer Survey, Sept. 1, 2010. 

14 BROADRIDGE INVESTOR COMMUNICATION SOLUTIONS, 2010 PROXY SEASON: KEY STATISTICS & PERFORMANCE RATINGS, 2010. 15 Press Release, Yale Univ. Office of Pub. Affairs, SOM Event Explores the Origins of Shareholder Activism Around 

the World (Oct. 30, 2009). 

16 Stuart L. Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the United States, 19 JOURNAL OF APPLIED 

CORPORATE FINANCE 55 (Winter 2007). 17 The rule was first designated Rule X-14 A7. See Sec. Exch. Act Rel. No. 3347 (Dec. 18, 1942). This rule is a 

predecessor to current SEC Rule 14a-8, 17 C.F.R. § 240. 18 Gillan, supra note 16. 19 THE CONFERENCE BOARD, 2008 INSTITUTIONAL INVESTMENT REPORT: TRENDS IN INSTITUTIONAL INVESTOR ASSETS AND EQUITY 

OWNERSHIP OF U.S. CORPORATIONS (Sept. 2008). 20 NACD Directorship, Institutional Ownership Multiplies, Sept. 2, 2008, http://www.directorship.com. 21 THE CONFERENCE BOARD, supra note 19. 22 While the S&P 500 Index dates back to 1957, index investing was not readily available until the early 1970s, 

when several investment managers – including John McQuown and David Booth at Wells Fargo, Rex Sinquefield at 

American National Bank, and John Bogle, the founder of Vanguard Group -- recognized that most mutual fund 

managers were not outperforming broad market indices and launched index funds. The concept met with 

skepticism at first, but became increasingly popular as growing numbers of investors accepted an economic theory 

known as the efficient-market hypothesis, which held that all relevant new information about a company’s 

prospects was rapidly incorporated into stock prices. By the early 1980s, major indexing firms, such as 

Dimensional Fund Advisors, Batterymarch and the Russell Investments, were launching equity indices or funds 

aimed at large institutional investors. 

23 BROADRIDGE INVESTOR COMMUNICATION SOLUTIONS, supra note 14. 
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 24 Letter from Allan Lebowitz, Deputy Assistant Sec’y of the Pension Welfare Benefits Admin. at the U.S. Dep’t of 

Labor, to Helmuth Fandl, Chairman of the Ret. Bd., Avon Products, Inc. (Feb. 23, 1988). 

25 Id.; See also Dep’t of Labor Interpretive Bulletin 94-2 (July 29, 1994) (In this subsequent interpretive bulletin, the 

Department of Labor reiterated and augmented the Avon Letter extending the fiduciary principles regarding proxy 

voting to the shares of foreign corporations). 26 Sec. Exch. Comm’n, Final Rule: Proxy Voting by Investment Advisers, Advisers Act Release No. 1A-2106, 17 C.F.R. 

§ 275 (Jan. 31, 2003). 

27 Id. 28 Id. 29 Letter from Douglas Scheidt, Associate Director and Chief Counsel, Sec. Exch. Comm’n, to Kent Hughes, 

Managing Director, Egan-Jones Proxy Services (May 24, 2004). 30 Charles M. Nathan, The Parallel Universes of Institutional Investing and Institutional Voting, HARVARD LAW SCHOOL 

FORUM ON CORPORATE GOVERNANCE AND FINANCIAL REGULATION, April 6, 2010, 

http://blogs.law.harvard.edu/corpgov/2010/04/06/the-parallel-universes-of-institutional-investing-andinstitutional-voting/; Charles M. Nathan, The Future of Institutional Share Voting: Three Paradigms, HARVARD LAW 

SCHOOL FORUM ON CORPORATE GOVERNANCE AND FINANCIAL REGULATION, July 23, 2010, 

http://blogs.law.harvard.edu/corpgov/2010/07/23/the-future-of-institutional-share-voting-three-paradigms/. 31 Charles M. Nathan, The Future of Institutional Share Voting: Three Paradigms, HARVARD LAW SCHOOL FORUM ON 

CORPORATE GOVERNANCE AND FINANCIAL REGULATION, July 23, 2010, 

http://blogs.law.harvard.edu/corpgov/2010/07/23/the-future-of-institutional-share-voting-three-paradigms/. 32 Sec. Exch. Comm’n, Compliance Alert, July 2008, http://www.sec.gov/about/offices/ocie/complialert0708.htm. 33 Gibson, Dunn & Crutcher, LLP , SEC Enforcement Action Focuses on Investment Adviser's Proxy Voting Policies 

and Procedures (May 21, 2009). 34 Press Release, Sec. Exch. Comm’n, SEC Votes to Seek Public Comment on U.S. Proxy System (July 14, 2010). 35 New York Stock Exchange Comm’n on Corp. Governance, Report of the New York Stock Exchange Commission on 

Corporate Governance, Sept. 23, 2010, at 15 http://www.nyse.com/pdfs/CCGReport.pdf. 36 Charles M. Nathan, The Parallel Universes of Institutional Investing and Institutional Voting, HARVARD LAW SCHOOL 

FORUM ON CORPORATE GOVERNANCE AND FINANCIAL REGULATION, April 6, 2010, 

http://blogs.law.harvard.edu/corpgov/2010/04/06/the-parallel-universes-of-institutional-investing-andinstitutional-voting/. 

37 Leo E. Strine Jr., The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (And 

Europe) Face, 30 Del. J. Corp. L. 673, 688 (2005). 38 Leo E. Strine Jr., Toward a True Corporate Republic: A Traditional Response to Lucian’s Solutions for Improving 

Corporate America, Harvard Law School John M. Olin Center for Law, Economics and Business, Discussion Paper 

Series, No. 541, 11 (2006), http://lsr.nellco.org/harvard_olin/541. 39 Dean Starkman, A Proxy Adviser’s Two Sides: Some Question Work of ISS for Companies it Scrutinizes, WASH. POST, 

Jan. 23, 2006, at D1. 

40 Wilczek, supra note 5. 41 Bethel, supra note 3, at 30. 42 Ernst G. Maug & Kristian Rydqvist, Do Shareholders Vote Strategically? Voting Behavior, Proposal Screening, and 

Majority Rules (European Corp. Governance Inst., Working Paper No. 31, 2006). 43 Alexander, supra note 3. 44 Id. at 26-27. 45 Id. at 32. 46 Stephen Choi, Jill Fisch & Marcel Kahan, Director Elections and the Influence of Proxy Advisors 51 (N.Y.U. School 

of Law, Law & Econ. Research Paper Series, Working Paper No. 08-22, 2008). 

47 Colin Diamond & Irina Yevmenenko, Who is Overseeing the Proxy Advisors?, 3 BLOOMBERG CORP. L. JOURNAL 606, 

617 (2008). 

48 There are several variations in majority voting policies. Many companies initially adopted a form of majority 

voting that requires directors who do not receive majority support to tender their resignations, but gave the board 

discretion in deciding whether to accept the tendered resignation. Because of growing investor concern that this 
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essentially makes director election votes advisory, more companies are now adopting so-called “true” majority 

election standards. For a history of the development of majority voting policies and standards, see Claudia H. Allen, 

Neal, Gerber & Eisenberg, LLP, Study of Majority Voting in Director Elections (Feb. 20, 2006 & Nov. 12, 2007). 49 Elizabeth Amon, Will Majority Voting Prevail in Corporate Elections, CORPORATE COUNSEL, July 21, 2006, available 

at http://www.law.com/jsp/cc/PubArticleCC.jsp?id=900005458428. 50 Council of Institutional Investors, Majority Voting for Directors, 

http://www.cii.org/resourcesKeyGovernanceIssuesMajorityVotingForDirectors. 51 RiskMetrics Group, 2010 Postseason Report, at 44. 52 The percentage of smaller companies who have adopted majority voting is much lower – approximately 25 

percent according to a 2008 study. See Annalisa Barrett & Beth Young, Majority Voting in Director Elections – It is 

Not Yet Standard Practice, THE CORPORATE LIBRARY (Dec. 2008). 53 For example, during 2007 and 2008, of the fifteen companies where precatory proposals asking companies to 

implement annual say on pay vote received majority support, only five of those companies implemented such a 

vote. See Press Release, The Corp. Library, Two-thirds of Companies Ignore Majority Support of ‘Say on Pay’ (July 

22, 2008). However, the percentage of firms that implemented say on pay votes after having majority-supported 

precatory proposals on this issue in 2009 and 2010 has risen. Id. 54 Troubled Assets Relief Program, Pub. L. No. 110-343, 122 Stat. 3765 (2008). 

55 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). 

56 Center On Executive Compensation data. 

57 Press Release, Towers Watson, Few U.S. Companies Well Prepared for Executive Say on Pay Legislation, Towers 

Watson Survey Finds (June 29, 2010), http://www.towerswatson.com/united-states/press/2373. 58 Gribben, supra note 6. 59 Mary Hughes, Heightened SEC Expectations for Disclosure May Require Amended Filings, Official Says, DAILY 

REPORT FOR EXECUTIVES, June 3, 2010. 60 Peter C. Clapman, Next Steps? Be Careful What You Wish For, DIRECTORS & BOARDS, Summer 2008, 

http://www.entrepreneur.com/tradejournals/article/181776560.html. 61 Sec. Exch. Comm’n, Self-Regulatory Organizations: New York Stock Exchange LLC; Order Approving Proposed 

Rule Change, as modified by Amendment No. 4, to Amend NYSE Rule 452 and Corresponding Listed Company 

Manual Section 402.08 to Eliminate Broker Discretionary Voting for the Election of Directors, Except for Companies 

Registered under the Investment Company Act of 1940, and to Codify Two Previously Published Interpretations 

that Do Not Permit Broker Discretionary Voting for Material Amendments to Investment Advisory Contracts with 

an Investment Company; Release Nos. 34-60215; File No. SR-NYSE-2006-92 (July 1, 2009). 

62 See Scott Fenn, Sharp Increase in Shareholder Votes Opposing Director Nominees, HARVARD LAW SCHOOL FORUM ON 

CORPORATE GOVERNANCE AND FINANCIAL REGULATION, Sept. 29, 2009, 

http://blogs.law.harvard.edu/corpgov/2009/09/29/sharp-increase-in-shareholder-votes-opposing-directornominees/. 

63 Skadden, Arps, Slate, Meagher & Flom, LLP & Affiliates, The Dodd-Frank Act: Commentary and Insights 93 (July 

12, 2010). 

64 Press Release, Sec. Exch. Comm’n, SEC Adopts New Measures to Facilitate Director Nominations by Shareholders 

(Aug. 25, 2010). 

65 Sec. Exch. Comm’n, Final Rule: Facilitating Shareholder Director Nominations, Release Nos. 33-9136; 34-62764; 

IC-29384; File No. S7-10-09, 17 C.F.R. §§ 200, 232, 240, 249 (Aug. 25, 2010). 

66 Sec. Exch. Comm’n, Final Rule: Shareholder Proposals Relating to the Election of Directors, Release No.34-56914; 

File No. S7-17-07, 17C.F.R § 240 (Jan. 10, 2008). 

67 See Bus. Roundtable & Chamber of Commerce of the U.S. v. Sec. Exch. Comm’n, Case No. 10-1305 (D.C. Cir. Sept. 

29, 2010) (seeking review of recent changes to SEC’s proxy and related rules and to stay effect of new rules 

pending review). 

68 Comment letter from Judy Schub, supra note 8, at 3. 69 RiskMetrics Group, Inc., Registration Statement (Form S-1)(Sept. 19, 2007). In connection with its IPO, the 

consideration paid to ISS included $482.7 million in cash, 2,774,351 shares of RiskMetrics common stock with a 
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value of $42.4 million, and 1,396,000 stock options valued at $16.3 million. The document also notes that 

RiskMetrics borrowed $425 million to complete the acquisition. 

70 MSCI Inc., Quarterly Report (Form 10-Q) (July 2, 2010). 

71 Institutional Shareholder Services, Inc., Uniform Application (Form ADV) (Mar. 31, 2010). Form ADV is an annual 

SEC filing made by registered investment advisers. 72 ISS for Sale, GLOBAL PROXY WATCH (Davis Global Advisors Inc.), Sept. 8, 2006. 73 Aaron Lucchetti, MSCI Seizes RiskMetrics in Union of Niche Firms, WALL ST. J., March 2, 2010. 74 John Greenwald, What’s Next for Caesar’s Wife?, CORPORATE BOARD MEMBER, 2nd Quarter 2010. 75 RiskMetrics Group, Annual Report (Form 10-K) (Feb. 24, 2010). 

76 Id. 77 Id. 78 Id. 79 Institutional Shareholder Services, Inc., Due Diligence Compliance Package 7 (Mar. 2010), available at 

http://www.issgovernance.com/files/ISSDueDiligenceCompliancePackage.pdf. 80 RiskMetrics Group, supra note 75, at 17. 81 See, e.g., Robert Daines, Ian Gow & David Larcker, Rating the Ratings: How Good are Commercial Corporate 

Governance Ratings? (Stanford Univ. Sch. of Law, Law & Econ. Research Paper Series, Paper No. 360, Sept. 4, 

2009). 

82 Glass Lewis was initially registered as an investment adviser but it withdrew that registration in 2005. See U.S.

GOV’T ACCOUNTABILITY OFFICE,supra note 9, at 9. 83 Gretchen Morgenson, How to Succeed on Wall Street, Conflict-Free, N.Y. TIMES, Dec. 19, 2004. 84 Glass, Lewis and Co. – Rustic Canyon, http://www.rusticcanyon.com (describing the capitalization of Glass, Lewis 

& Co.). 

85 Glass, Lewis & Co., Notice of Exempt Offering of Securities (Form D) Sept. 28, 2005. 86 Xinhua Finance, 2008 Annual Report. 

87 Press Release, Glass, Lewis & Co., Xinhua Finance to Acquire Glass, Lewis & Co.(Dec. 14, 2006), available at 

http://www.glasslewis.com/downloads/624-62.pdf. 

88 Sarah Coffey, Glass Lewis Execs Quit Amid Disclosure Concerns, REUTERS (May 21, 2007). 89 David Scheer, Glass Lewis Director Resigns, Citing Firm’s Takeover, BLOOMBERG (May 21, 2007). 90 Canada Pension Fund to buy Proxy Advisor Glass Lewis, REUTERS (Oct. 5, 2007). 91 Glass, Lewis & Co., What We Do, http://www.glasslewis.com/solutions/index.php. 92 Press Release, Glass, Lewis & Co., Leading governance firm to provide PGI clients with proxy voting and advisory 

services (Dec. 20, 2010) (explaining there will be a “seamless transfer of customer contracts to Glass Lewis” and 

“PGI will not be providing proxy voting or advisory services after the end of [2010].”), available at

http://www.prnewswire.com/news-releases/glass-lewis-announces-agreement-with-pgi-112178089.html. 93 Proxy Governance, Inc., Proxy Governance History,

www.proxygovernance.com/content/pgi/content/history.shtml. 94 Proxy Governance, Inc., Uniform Application (Form ADV) (March 19, 2010). 

95 Id. 96 Proxy Governance Inc., A Better Kind of Proxy Advisory and Voting Service, 

https://www.proxygovernance.com/content/pgi/index.jsp. 97Id. 98 Proxy Governance, Inc., A Full Range of Proxy Advisory, Voting and Reporting Services, 

https://www.proxygovernance.com/content/pgi/content/full_range.shtml. 99 Proxy Governance, Inc., supra note 93. 100 Proxy Governance, Inc., The Proxy Governance Institute: Concept Summary, June 16, 2010; see also 

 Barry Burr, Proxy Governance Mulls Change to Not-for-Profit, PENSIONS & INVESTMENTS, July 22, 2010. 101 Proxy Governance, Inc., supra note 100, at 1. 102 Id. 103 Id. at 2. 104 Id.
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 105 Aaron Luchetti, Tiny Firm Gives Ratings Giants Another Worry, WALL ST. J., Feb. 9, 2008, at B1. 106 Sec. Exch. Comm’n, Order Granting Registration of Egan-Jones Rating Company to Add Two Additional Classes 

of Credit Ratings, Release No. 59056 (Dec. 4. 2008). 

107 Sean J. Egan, Testimony Before the Senate Committee on Banking, Housing and Urban Affairs (Feb. 8, 2005), 

available at http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=66c80ccf-ef70-40a0-

815d-909b39fac24a. 

108 Egan-Jones Proxy Services, About Egan-Jones Proxy, www.ejproxy.com/about.aspx. 109 Id. 110 Id. 111 Marco Consulting Group, Uniform Application (Form ADV) (Jan. 15, 2010). 112 Marco Consulting Group, Proxy Voting, www.marcoconsulting.com/2.3.html. 113 Id.; Marco Consulting Group, Company History, www.marcoconsulting.com/Company_history.html. 114 Sustainable Investments Institute, Mission, www.siinstitute.org/index.html. 115 Leslie Wayne, Have Shareholder Activists Lost Their Edge?, N.Y. TIMES, Jan. 30, 1994, at C7. 116 Sec. Exch. Comm’n, Concept Release on the U.S. Proxy System, Release No. 34-62495 (July 14, 2010). 117 U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 9, at 10. 118 Thompson-Mann, supra note 10, at 9. 119 Millstein, supra note 11. 120 Starkman, supra note 39. 121 Id.; Edward F. Smith, NACD Directorship, White Knight Swoops in for Glass Lewis, Dec. 1, 2007, 

http://www.directorship.com/white-knight-swoops-in-for-glass-lewis/. 122 Institutional Shareholder Services, Inc., supra note 79, at 4. ICS is an acronym for ISS Corporate Services, Inc., a 

wholly-owned subsidiary of ISS that provides corporate consulting services. 123 Id. at 5. 124 Id. 125 Id. (containing both documents). 126 RiskMetrics Group, Inc., Annual Report (Form 10-K) (Feb. 24, 2010). 

127 See Institutional Shareholder Services, Inc., Engaging with ISS, 

http://www.riskmetrics.com/policy/EngagingWithISS. On this website, ISS lists the following question and answer: 

My company has purchased services from ISS Corporate Services ("ICS"). May I note that fact during our 

engagement with the ISS research analysts? 

No. Issuers who are ICS clients may not disclose publicly or to an ISS analyst that they have acquired 

products or services from ICS, per their contract with ICS. ISS does not give preferential treatment to, and is 

under no obligation to support, any proxy proposal of an issuer whether or not that issuer has purchased 

products or services from ICS. We request that in any communication you may have with ISS analysts, you 

do not disclose your identity as an ICS client or potential client, in order to protect the integrity of our 

research process.

128 Barr, supra note 12. 129 Id. 130 Ontario Teachers’ Pension Plan, Governance, 

http://www.otpp.com/wps/wcm/connect/otpp_en/Home/Governance. 131 Canadian Coalition for Good Governance, Welcome to the Canadian Coalition for Good Governance, 

http://www.ccgg.ca. 

132 Institute of Corporate Directors, Mission and Vision, 

http://www.icd.ca/AM/Template/cfm?Section=MIssion_and_Vision&Template=/CM/HTMLDisplay.cfm&ContentID

=62. 

133 Ontario Teachers’ Pension Plan, Relationship Investing, 

http://www.otpp.com/wps/wcm/connect/otpp_en/home/investments/public+equities/relationship+investing. 134 Glass, Lewis & Co., Conflict of Interest Statement, http://www.glasslewis.com/company/disclosure.php. 
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 135 Id. 136 Id. 137 William J. Holstein, The Ownership of Glass Lewis is All Wrong, BNET Insight, Oct. 29, 2007, available at

http://www.bnet.com/blog/ceo/the-ownership-of-glass-lewis-is-all-wrong/1048. 138 See Press Release, supra note 92. 139 Gretchen Morgenson, Pfizer and the Proxy Adviser, N.Y.TIMES, April 21, 2006. 140 U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 9, at 12. 141 Proxy Governance, supra note 93. 142 See, e.g., Tom Brown, Egan-Jones is Conflict-Free? Not a Chance, SEEKING ALPHA, Feb. 12, 2008. 143 Egan-Jones Ratings Company, Application For Registration as a Nationally Recognized Statistical Rating 

Organization Exhibit 6 (Form NRSRO)(Mar. 28, 2008). 144 Id. 145 Egan-Jones Proxy Services, supra note 108. 146 Egan-Jones Ratings Company, Credit Ratings Services, http://www.egan-jones.com. 147 Thompson-Mann, supra note 10, at 10. 148 Marco Consulting Group, supra note 112. 149 Marco Consulting Group, supra note 111. 150 Dodd-Frank Wall Street Reform and Consumer Protection Act § 931, Pub.L. 111-203, 124 Stat. 1376 (2010). 151 Sec. Exch. Comm’n, supra note 116, at 121. 152 GARY SHORTER & MICHAEL V. SEITZINGER, CONG. RESEARCH SERV., CREDIT RATING AGENCIES AND THEIR REGULATION 6-8 (Sept. 

3, 2009). 

153 Id. 154 Based on the Center On Executive Compensation’s analysis of 2009 proxy statements for the top 50 companies 

in the Fortune 500. 

155 Thompson-Mann, supra note 10, at 15. 156 MSCI Inc., Current Report (Form 8-K) (July 29, 2010). 157 HR Policy Ass’n, supra note 13. 158 Id. 159 Center On Executive Compensation, Results of Quick Survey on Executive Compensation Practices and Policy 

Changes 1-2 Feb. 2010. 

160 Target Corp., White Paper on the RiskMetrics Report on Target Corporation, Proxy Statement (Schedule 14A) 

(May 21, 2009). 

161 Investment Advisers Act of 1940, § 202(a)(11), 15 U.S.C. § 80b-2(a)(11). 162 Sec. Exch. Comm’n, supra note 116, at 110. 163 Id. 164 See Sec. Exch. Comm’n vs. Capital Gains Research Bureau Inc., 375 U.S. 180 (1963). 165 Sec. Exch. Comm’n, supra note 116, at 119. 166 National Securities Markets Improvements Act of 1996, Pub. L. 104-290, 110 Stat. 3416 (1996). 167 Investment Advisers Act of 1940 § 203A-2, 15 U.S.C. § 80b-3a(a). 168 Despite being registered, Proxy Governance ceased providing proxy voting and advisory services at the end of 

2010. Accordingly, only two proxy advisory firms remain that are registered as investment advisers with the SEC. 

Proxy Governance entered into an agreement with Glass Lewis to assume their customer contracts. Glass Lewis is 

not a registered with the SEC. See Press Release, supra note 92. 169 Investment Advisers Act of 1940 § 206-2, 15 U.S.C. § 80b-6(2). 170 U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 9, at 12. 171 Id. 172 Id. 173 Gibson, Dunn & Crutcher, LLP, supra note 33. 174 Id. 175 Sec. Exch. Comm’n, supra note 116, at 108-09. 176 Id. at 110. 
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 177 Strine, Jr., supra note 38, at 11. 178 Belinfanti, supra note 1, at 40. 179 Dep’t of Labor, Definition of the Term “Fiduciary,” 75 Fed. Reg. 65,263 (proposed Oct. 22, 2010) (to be codified 

at 29 C.F.R. § 2510). 

180 Proposed 29 C.F.R. § 2510.3-21(c)(1)(ii)(C). 181 Dep’t of Labor, supra note 179, at 65,266. 182 The Department of Labor has requested comments from interested parties regarding the proposed regulations. 

The due date for comments is January 20, 2011. The regulations will not become effective until 180 days after the 

publication of the final regulation in the Federal Register. 183 Press Release, The Int’l Org. of Sec. Comm’ns, Global Securities Regulators Adopt New Principles and Increase 

Focus on Systemic Risk 9 (June 10, 2010). 184 Press Release, supra note 34. 185 Id. 186 Belinfanti, supra note 1, at 54. 187 Id. at 53-54. 188 Nat’l Investor Relations Inst. and Soc’y of Corporate Sec’ys & Governance Prof’ls, Proxy Advisory Services: The 

Need for More Regulatory Oversight and Transparency (Discussion Draft, Mar. 4, 2010). 189 Comment letter from Tom Quaadman, Executive Dir. Fin. Reporting & Inv. Opportunity, Ctr. for Capital Markets 

Competitiveness, to Mary Schapiro, Sec’y, Sec. Exch. Comm’n 3 (Aug. 5, 2010). 

190Id. at 4. 191 Id. 192 Id. 193 Thompson-Mann, supra note 10, at 18. 194 Id. 195 Paul Rose, The Corporate Governance Industry, J. CORP. L. 138 (Summer 2007) (citation omitted). 196 Center On Executive Compensation, supra note 159, at 4. 197 U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 9, at 12. 198 See Gibson, Dunn & Crutcher, LLP, supra note 33. 199 Rose,supra note 195, at 13. 200 U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 9, at 13. 201 Id. at 15. 202 Id. at 13. 203 Belinfanti, supra note 1, at 28. 204 Id. at 30. 205 Letter from Michael Ryan, Jr., President & Chief Operating Officer, Proxy Governance, to Meagan ThompsonMann, Millstein Inst. for Corporate Governance & Performance 7 (July 23, 2008), available at 

https://www.proxygovernance.com/content/pgi/img/2008MillsteinResponse.pdf. 206 Press Release, supra note 92. 207 Id. 208 U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 9, at 14-15. 209 Comment letter from Troutman Sanders, LLP, to Jonathan G. Katz, Sec’y, Sec. Exch. Comm’n (Nov. 22, 2002). 210 Sec. Exch. Comm’n, supra note 116, at 124. 211 Comment letter from Michael Ryan, Jr., President & Chief Operating Officer, Proxy Governance, to Elisabeth M. 

Murphy, Fed. Advisory Comm. Mgmt. Officer, Sec. Exch. Comm’n (June 25, 2010). 

212 Id. 213 Press Release, supra note 92. 214 Stephen M. Bainbridge, Remarks on Say on Pay: An Unjustified Incursion on Director Authority 10 (UCLA Sch.L., 

Law & Economics Research Paper Series, Research Paper No. 08-06, March 4, 2008). 

215 Sec. Indus. and Fin. Markets Ass’n, Report on the Shareholder Communications Process with Street Name 

Holders, and the NOBO-OBO Mechanism 20 (Sec. Indus. & Fin. Markets Ass’n. Proxy Working Group, June 10, 

2010). 
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 216 BROADRIDGE INVESTOR COMMUNICATION SOLUTIONS, supra note 14. 217 John W. White, Dir., Division of Corp. Fin., Sec. Exch. Comm’n, Address before the Amer. Bar. Ass’n, Corporate 

Finance – A Year of Progress, (Aug. 11, 2008). 218 Sec. Exch. Comm’n, Amendments to Rules Requiring Internet Availability of Proxy Materials, Release Nos. 33-

9073; 34-60825, at 7 (Oct. 14, 2009). 

219 Sec. Exch. Comm’n, Final Rule: Amendments to Rules Requiring Internet Availability of Proxy Materials, 

Exchange Act Release Nos. 33-9108, 34-61560, 17 C.F.R. §§ 230, 240 (Mar. 29, 2010). 

220 NYSE Proxy Working Group, August 27, 2007 Addendum to Report and Recommendation of the Proxy Working 

Group to the New York Stock Exchange Dated June 5, 2006 5 (Aug. 27, 2007). 221 Comment letter from David W. Smith, Soc’y of Corporate Sec’ys & Governance Prof’ls to Catherine Kinney, 

President and Co-Chief Operating Officer, New York Stock Exchange Group (Dec. 14, 2006). 

222 John Wilcox, Fixing the Problems with Client Directed Voting, HARVARD LAW SCHOOL FORUM ON CORPORATE 

GOVERNANCE AND FINANCIAL REGULATION, March 5, 2010, http://blogs.law.harvard.edu/corpgov/2010/03/05/fixing-theproblems-with-client-directed-voting/. 223 Id. 224 See Mark Latham, The Internet Will Drive Corporate Monitoring, CORPORATE GOVERNANCE INT’L (June 2000); Mark 

Latham, Proxy Voting Brand Competition, 5 J. INV. MGMT. 79-90 (2007). 225 Comment letter from James McRitchie, Publisher, Corporate Governance Int’l, to Elisabeth M. Murphy, Sec’y, 

Sec. Exch. Comm’n (July 16, 2010). 

226 See Moxy Vote, http://www.moxyvote.com. 227 See Proxy Democracy, http://www.proxydemocracy.org.