NASDAQ OMX Group has asked the SEC to require greater transparency and disclosure from proxy advisers, saying the firms exert ‘outsized influence from the shadows’ that can discourage companies from going public.
In a 10-page letter, NASDAQ asks for new rules that would oblige proxy advisory firms such as Glass Lewis and ISS to disclose the formula and models they use to arrive at their recommendations as well as any relations that could result in a potential conflict of interest.
Proxy advisory firms’ services ‘cannot be evaluated in a meaningful manner, including by the shareholders who rely on them and the companies that are left unsure what it requires to satisfy them,’ NASDAQ writes in the letter. ‘Unless we enable companies and all market participants to have full information about the practices and activities of the firms, the firms will continue to exert outsized influence from the shadows in which they operate and profit.’
NASDAQ says public companies often feel forced to comply with the recommendations of proxy advisory firms, particularly regarding corporate governance issues, even when the recommendations are not in the companies’ best interests.
‘There is evidence the [proxy advisory] firms not only increase the costs of being a public company, but also create disincentives for companies to become public in the first place,’ NASDAQ writes. ‘The changes we advocate seek to address these concerns and promote transparency and fairness in this important area, to the benefit of companies, shareholders and the public interest.’
Mary Schapiro, who resigned almost a year ago as head of the SEC, said in 2011 that the commission was considering proposing new regulations for the proxy advisory industry. The firms currently operate under guidance given by the SEC almost 10 years ago.
In the decade since that guidance, NASDAQ says, institutional investment has grown to cover 75 percent of all share ownership in the US, and institutional investors are increasingly turning to proxy advisory firms to help them vote their shares. ISS and Glass Lewis, according to NASDAQ, together control 97 percent of the market for proxy advisory services.
‘Between them, ISS and Glass Lewis influence the votes of one fourth to one half of the shares of the typical mid-cap or large-cap company,’ NASDAQ writes. It cites a study by Stanford University, which concludes that opposition by a proxy adviser prompts a 20 percent increase in negative votes cast.
