BY Ronald Orol |
01/08/15 - 11:12 AM EST |
A top proxy adviser and the ex-CEO of a Fortune 500 pharmaceutical company once targeted by an billionaire activist on Wednesday clashed over the role two advisory firms play in boardroom battles pitting insurgent-backed dissident directors against incumbent executives.
"We should all be playing by the same rules," Robert Coury, Mylan Inc.'s (MYL) executive chairman, told the U.S. Chamber of Commerce at a proxy advisory firm conference. "The proxy advisory firms are not."
At issue are Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC, the two major proxy advisory firms in the U.S., which make recommendations on a wide variety of corporate vote matters. Their role is felt most heavily when they make influential recommendations to institutional investors for or against dissident director candidates nominated by activist fund managers. Insurgent funds often hope their candidates, if elected, will drive M&A, share buybacks, special dividends or other share-price improving changes at the targeted company. Corporate critics argue that the advisory firm recommendations are too influential in driving investor voting decisions and that they are sometimes based on faulty information that hurt a company's long-term prospects.
Coury, who was Mylan's CEO during the company's mid-2000s battle with billionaire activist Carl Icahn, lashed out at Glass Lewis and ISS at several points, arguing that in proxy fights and in other situations large shareholders will communicate with them but not with the targeted company, whose managers are often seeking to rebut a negative recommendation about one or more of their incumbent director candidates.
"When we [Mylan] pick up the phone and try to make contact with our investors, some are very obliged to take our meeting while others say they don't need to talk to us because they are already going with the proxy advisory firm recommendations," said Coury speaking to The Deal on the sidelines of the conference.
Coury urged the Securities and Exchange Commission to prohibit investors from voting their shares if they won't take the time to talk with a targeted company that has received a negative recommendation from a proxy advisory firm. He pressed the commission to require ISS and Glass Lewis to include corporate rebuttals along with their recommendation reports. Currently, the proxy advisory firms don't provide any option for a rebuttal.
"We're asking our shareholders, 'Let us come in front of you and tell you our side of the story. You don't have all the data about what is going on in the boardroom,'" Coury said. "If those institutions are not giving access to the company their stock should not count. These proxy advisors have a dangerous amount of weight when it comes to these recommendations."
He also urged the agency to require proxy advisory firms to provide additional transparency about their methodology and how they reach their conclusions, whether it involves director nominations or nonbinding proposals, adding that corporations must provide much more disclosure through securities filings. "Why shouldn't you guys disclose your internal processes; what you go through? How do you derive what you are deriving? If you haven't taken the time to talk with the company how do you form your basis for the position you take."
However, Robert McCormick, chief policy officer at Glass Lewis, dismissed Coury's concerns, arguing that the company's entire set of guidelines and pay for performance methodology is disclosed. "Other than disclosing our proprietary methodology I'm not sure what else we could disclose," McCormick said. "You don't disclose specific aspects of Mylan's pharmaceutical business but you do disclose certain aspects of it. There is a balance to be struck there."
McCormick told reporters after the event that he didn't think including a rebuttal from the company in their recommendation reports was necessary. "We've considered that but the company can file a rebuttal in proxy documents and on occasion they do rebut our or ISS recommendations and we'll update our report to reflect that," he said.
He also disputed Coury's concerns that institutional investors, including index funds, will talk to Glass Lewis and ISS but not to the targeted corporation. "I don't know about that," he said. "The institutional investors I know who hold the bulk of the shares in the U.S. talk to companies and that includes index funds."
Other corporate critics at the event also argued that proxy advisory firms don't give them enough access to explain their side of the story. Glass Lewis has a policy that generally prohibits meetings between them and activists or companies engaged in a heated director-election proxy contest. McCormick said he will agree to a meeting only if the company or activist would do it in a so-called "proxy talk" call that allows Glass Lewis investor clients to listen in, but added that this doesn't happen too often. An ISS official noted that in contested situations, it seeks to engage with representatives of both the dissidents and the target company as well as its clients and other interested parties prior to the publication of the firm's proxy analysis and recommendations. In addition, neither firm allows companies or activists to have pre-publication reviews of their director recommendation reports.
McCormick added that Glass Lewis will meet or talk with both activists or companies in situations where an activist has launched a campaign but no proxy fight materials have been distributed. He said that a targeted company is more likely to want to meet with Glass Lewis than an activist. "A meeting I have later today is with a company that was targeted and may be targeted again," he said.
In non proxy-contest situations, Glass Lewis has launched a pilot program where this proxy season for the first time it will provide a sample of 250 companies, including big and small firms, with the data behind their reports in advance of their recommendation report distribution. "It's a snap shot of the board members, how long they've been there, their compensation programs, whether executives have related-party transactions," he said. ISS provides its draft recommendation for traditional annual meeting proxy recommendation reports to S&P 500 companies 48 hours in advance of their publication for fact-checking purposes.
Securities and Exchange Commission member Dan Gallagher, a major critic of proxy advisory firms, said he was shocked to hear that some institutions don't talk to companies that receive negative recommendations. Speaking to reporters, he pointed out that concerns about proxy advisory firms have risen to become the number one complaint he has received from corporations. "There is no issue I've received more complaints on than the proxy advisory industry," he said.