0001 1 U.S. SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 6 7 PROXY ADVISORY FIRMS ROUNDTABLE 8 9 10 11 12 13 14 Thursday, December 5, 2013 15 9:26 a.m. 16 17 18 19 20 21 22 23 U.S. Securities and Exchange Commission 24 100 F Street, N.E. 25 Washington, D.C. 0002 1 PARTICIPANTS: 2 3 MARY JO WHITE, Chairman 4 LUIS A. AGUILAR, Commissioner 5 DANIEL M. GALLAGHER, Commissioner 6 KARA M. STEIN, Commissioner 7 MICHAEL S. PIWOWAR, Commissioner 8 NORM CHAMP 9 KEITH HIGGINS 10 SARA CORTES 11 12 PANEL MEMBERS PRESENT: 13 KAREN BARR, General Counsel, Investment Adviser 14 Association 15 JEFFREY BROWN, Legislative and Regulatory Affairs, 16 Charles Schwab 17 MARK CHEN, Associate Professor of Finance, Georgia 18 State University 19 MICHELLE EDKINS, Managing Director and Global Head, 20 Corporate Governance and Responsible 21 Investment, BlackRock, Inc. 22 YUKAKO KAWATA, Partner, Davis Polk & Wardwell, LLP 23 HOIL KIM, Vice President, Chief Administrative 24 Officer and General Counsel, GT Advanced 25 Technologies, Inc. 0003 1 PANEL MEMBERS PRESENT (CONT.): 2 ERIC KOMITEE, General Counsel, Viking Global 3 Investors, LP 4 JEFF MAHONEY, General Counsel, Council of 5 Institutional Investors 6 NEIL MINOW, Co-founder and Board Member, GMI Ratings 7 TREVOR NORWITZ, Partner, Wachtell, Lipton, Rosen & 8 Katz 9 HARVEY PITT, CEO, Kalorama Partners 10 KATHERINE RABIN, CEO, Glass Lewis & Co., LLC 11 GARY RETELNY, President, Institutional Shareholder 12 Services, Inc. 13 MICHAEL RYAN, Vice President, Business Roundtable 14 and Former President and COO of Proxy 15 Governance, Inc. 16 ANNE SHEEHAN, Director of Corporate Governance, 17 CalSTRS 18 DAMON SILVERS, Director of Policy and Special 19 Counsel, AFL-CIO 20 DARLA STUCKEY, Senior Vice President of Policy and 21 Advocacy, Society of Corporate Secretaries 22 LYNN TURNER, Manager Director, LitiNomics, Inc. 23 24 25 0004 1 C O N T E N T S 2 3 Introduction, Keith Higgins 6 4 Opening Remarks: 5 Chair Mary Jo White 6 6 Commissioner Luis Aguilar 9 7 Commissioner Daniel Gallagher 13 8 Commissioner Michael Piwowar 14 9 First Panel: Use of Proxy Advisory Services 22 10 Second Panel: 2010 Concept Release on U.S. Proxy 11 Voting System 92 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0005 1 P R O C E E D I N G S 2 MR. HIGGINS: This is a great group. Everybody 3 eager, ready to go, ready to start early. So good 4 morning. 5 My name is Keith Higgins, and I'm the Director 6 of the Division of Corporation Finance here at the 7 Securities and Exchange Commission, and next to me is 8 Norm Champ, who is Director of the Division of Investment 9 Management. It is our pleasure today to moderate this 10 staff roundtable on proxy advisory services and proxy 11 voting. 12 Before I go any further, I need to note that 13 although the purpose of today's roundtable is to hear 14 your views, to the extent that Norm and I inadvertently 15 express any of our views today, I assure you they are our 16 own views and they're not the views of the Commission or 17 any other members of the staff. 18 In fact, as moderators we may at times ask 19 questions and make statements that don't necessarily 20 reflect our own views, but that we offer up simply to 21 stimulate discussion, even though I'm quite sure we 22 probably don't need to do much looking at this group -- 23 (Laughter.) 24 MR. HIGGINS: -- to stimulate discussion. We 25 do hope that these questions though will contribute to a 0006 1 meaningful and constructive dialogue. 2 We're happy to have with us today Chair Mary Jo 3 White, Commissioner Luis Aguilar, Commissioner Gallagher 4 and Commissioner Piwowar. Commissioner Stein was unable 5 to make it here early this morning, but she plans to join 6 us later in the day and she sends her regrets. 7 So first, welcome to everybody both here in 8 Washington and joining us via Webcast and to our 9 participants, and we thank you very much for agreeing to 10 participate in today's discussion and lending us your 11 experience and expertise on this very important topic. 12 Participants we have here today represent many 13 diverse viewpoints; include representatives from 14 institutional investors, investment advisers, issuers, 15 academia, law firms, and of course, proxy advisory 16 services themselves. I have little doubt that the group 17 will lead us through a lively, thought provoking, 18 informative discussion, and that we'll hear a lot of 19 views on these very important topics that have garnered a 20 significant amount of public interest. 21 Moreover, we hope this discussion today will be 22 a catalyst for further debate, and we urge people to join 23 us in the debate by sending us your thoughts in the form 24 of comment letters. Our press release indicated we have 25 both Web intake form and an email address that you can 0007 1 send comments, and then we welcome you to do so. 2 With that, I'd like to invite Chair White to 3 make some opening remarks after which each of the other 4 Commissioners who are with us will also make some brief 5 remarks. 6 Chair White. 7 CHAIR WHITE: Thank you very much, Keith. 8 And good morning to everybody and welcome to 9 today's Roundtable on Proxy Advisory Services. 10 Let me begin by, I guess, reiterating Keith's 11 thanks to all of our panelists for sharing their views on 12 what our really very important set of issues of interest 13 to the SEC, to investors, to issuers and all of the 14 securities markets generally. There's no substitute for 15 getting the right people in the room together, I think, 16 to air your views and various points of view, and I think 17 we've assembled a very impressive group of professionals 18 really representing a very broad range of perspectives 19 which will, you know, help inform us as we continue our 20 study of the use of proxy advisory services and the 21 various calls for reform. 22 In addition to our panelists, we have many 23 others attending in person or watching online, and we 24 welcome all of your views as well, as I think Keith 25 alluded to, including through our public comment file on 0008 1 our Web site. So we certainly encourage any and all 2 views, any and all comments as we proceed today and after 3 today. 4 As you know, I think, for obvious reasons the 5 proxy process has been of significant interest to the 6 Commission for a number of years. Exercising the vote on 7 important issues is one of the most significant rights 8 that investors have. The system that allows investors to 9 exercise that right needs to be robust, effective, and a 10 workable system. 11 In 2010, again, as most in this room know, the 12 Commission published a comprehensive concept release on 13 the proxy voting system seeking comment as to whether the 14 U.S. proxy system as a whole operates with accuracy, 15 reliability, transparency, accountability, and integrity 16 that investors and issuers should expect. As part of 17 that release, the Commission sought information on the 18 role of third parties in the proxy process, including 19 proxy advisory firms. 20 Proxy advisory firms clearly play an important 21 role in the proxy process by, among other things, 22 assisting investors in analyzing and considering how to 23 vote their shares. And the proxy process truly lies at 24 the center of the ongoing and important dialogue between 25 companies and investors. 0009 1 It is this dialogue that includes the investors 2 who own the companies, the executives who run them, and 3 the boards that oversee them that help to ensure that 4 companies are responsive to their investors and investors 5 are properly informed about the decisions they are asked 6 to make. 7 Today through this roundtable we're continuing 8 our examination of the proxy process with an important 9 discussion about the use of proxy advisory services by 10 investment advisers and institutional investors. Our 11 agenda is divided into two parts. The first focuses on 12 the factors that have contributed to the use of proxy 13 advisory services and the purposes they serve. 14 The second focuses on current topics of 15 interest, including conflicts of interest that may exist 16 for proxy advisory firms and users of their services; the 17 transparency and accuracy of the recommendations made by 18 proxy advisory firms; and what the nature and extent of 19 reliance by investors on proxy advisor recommendations is 20 and should be. 21 I am particularly interested in the discussion 22 of conflicts of interest that may or may not arise in 23 connection with the participation of proxy advisors in 24 our system, what they are, and views on how they should 25 be addressed. 0010 1 I also hope to hear about the process by which 2 proxy advisory firms formulate their voting positions and 3 their governance ratings, the transparency of the 4 process, and whether and how additional transparency may 5 be introduced into the process. 6 The SEC's commitment to open and complete 7 dialogue extends to our own decision-making processes, 8 which is why we've asked all of you to be here today, and 9 we look forward to what I'm sure will be a very lively 10 and informative discussion. 11 Speaking for my fellow Commissioners and the 12 SEC staff, we very much appreciate your willingness to 13 participate in this roundtable and your insights and 14 experiences will be invaluable. 15 Thank you very much. 16 MR. HIGGINS: Thank you, Chair White. 17 Commissioner Aguilar. 18 COMMISSIONER AGUILAR: Thank you, Keith. 19 Let me also start by welcoming each of the 20 participants here today. We really appreciate your 21 taking the time to be with us, as well as welcoming the 22 public audience whether here in person or watching by 23 telecast or Webcast. 24 It should go without saying, but it is also 25 worth always keeping in mind that public company 0011 1 shareholders have a vital role to play in corporate 2 governance. To that end, they are given important rights 3 under federal and state law. Chief among these are the 4 right to vote for the election of directors and other 5 significant matters and to make their views known to the 6 company's management and to the board of directors. 7 Most corporate shareholders exercise their 8 voting rights by proxy, which makes federal regulation of 9 the proxy process a critical focal point for investor 10 protection purposes. To support the exercise of their 11 voting rights, many institutional investors and 12 investment advisers hire proxy advisory firms to provide 13 analysis and voting recommendations on matters appearing 14 on the proxy. 15 These firms often also provide other services 16 to their institutional clients, such as executing votes 17 in accordance with investor instructions, engaging in 18 recordkeeping and other administrative tasks associated 19 with voting, conducting corporate governance research, 20 and helping to mitigate conflicts of interest concerns 21 that their clients may have. 22 The Commission recognized the role of proxy 23 advisory firms in its 2010 concept release regarding the 24 federal proxy system. In that release, the Commission 25 noted certain potential concerns relating to the 0012 1 activities of proxy advisors including, among other 2 things, the potential effects on shareholders of any 3 conflict of interest by the proxy advisory firm to the 4 extent such conflicts may not be sufficiently disclosed 5 and managed. 6 For example, some proxy advisory firms also 7 provide consulting services to issuers or to shareholders 8 that may have their own proposals to be voted on. This 9 may present the potential for conflict of interest, 10 particularly if a proxy advisory firm makes 11 recommendations to investor clients with respect to the 12 very same matters it has consulted on. 13 It is reasonable to ask if such actual or 14 potential conflicts of interest can be effectively cured 15 by disclosure and by efforts to insulate proxy advisory 16 recommendations from a firm's consulting business. 17 However, as the Commission has acknowledged, it 18 is important to note that proxy advisory activities are 19 already subject to various regulations which may already 20 provide a framework for protecting investors from 21 conflict of interest and from other potential risks 22 related to the proxy advisory relationship. For example, 23 some of the activities of a proxy advisory firm can 24 constitute a proxy solicitation governed by our own 25 rules. 0013 1 In addition, some proxy advisory firms are, in 2 fact, registered as investment advisers and as such these 3 firms bear certain fiduciary duties to their clients. 4 Ultimately, voting rights belong to the shareholder and 5 are an important aspect of the shareholder's investment. 6 As such, as we consider the role of proxy advisory firms 7 in the U.S. proxy system, it is proper to focus on how 8 such firms engage with investors and how their actions 9 benefit or hurt investor protection. 10 I look forward to hearing more from the 11 roundtable participants and from commenters as the 12 process unfurls about how investors and investment 13 advisers use proxy advisory firms, including hearing 14 about any steps proxy advisory firms may be taking, to 15 make sure that they meet their obligations to the clients 16 that rely on them. 17 In that regard, it would be helpful to 18 understand from the perspective of investors and 19 investment advisers whether proxy advisory firms are 20 substantively different from other advisors and service 21 providers engaged by asset managers, and if so, why. 22 In closing, I want to thank the panelists for 23 taking the time to be here today. Your input is 24 valuable, and we clearly and definitely appreciate your 25 varied prospective. I look forward to what I expect will 0014 1 be a very productive and interesting dialogue. 2 I don't want to close without thanking the SEC 3 staff who work hard to create these programs. They don't 4 just materialize in thin air. It takes an awful lot of 5 hard work. So I want to thank the staff who did that. 6 I want to particularly acknowledge Keith 7 Higgins and Norm Champ for taking on the task of 8 moderating today's panels. 9 Lastly, I should point out that I've had a 10 long-term speaking commitment which will require me to 11 leave shortly before lunch, but I hope to return as soon 12 as I possibly can, but rest assured my staff will be here 13 and they will be reporting in great detail about 14 everything that took place today. 15 So thank you, and I look forward to hearing 16 today's panel. 17 MR. HIGGINS: Thank you, Commissioner Aguilar. 18 Commissioner Gallagher. 19 COMMISSIONER GALLAGHER: So news of the day: I 20 don't have any formal remarks on proxy advisory firms. 21 (Laughter.) 22 COMMISSIONER GALLAGHER: For the first this 23 year I don't have formal remarks on proxy advisory firms. 24 I'd much rather get to the discussion. 25 So I'm thrilled to be here. I want to extend 0015 1 my sincere thanks to Chair White for fitting this 2 roundtable into what is an insane agenda at the 3 Commission these days. We just have a lot going on at 4 year end, and so I very much appreciate the effort that 5 she and her office had made to fit this in. 6 I appreciate my colleagues, you know, working 7 this into their schedule, too. We're all very busy, and 8 I think for all of you out there it should illustrate 9 just how important this issue is that we have fit this 10 into a very busy schedule. 11 Thanks to the panelists for being here. Thanks 12 to the audience, everyone who wrote their comments. I 13 think this is going to be a really good discussion. 14 One small point before I cede all my other time 15 to Commissioner Piwowar here. I think that the 16 Commission is uniquely poised right now to address an 17 issue that most agree there is some need to address. 18 Now, how we address it, that is up in the air, and 19 hopefully this roundtable will help us get there. 20 We do have analogues that we can look at, some 21 that I've pointed out in other formal remarks, I think 22 the most, you know, exacting of which would be with 23 respect to credit rating agencies where we provided 24 privileges to certain entities in the capital markets, 25 and strange enough through a no-action letter process. 0016 1 We did that with rating agencies. We did not address it 2 even though we knew it was an issue. 3 You know, in fact, in the mid-'90s there was a 4 proposed rule to address that issue. It never went 5 anywhere, and look what happened in the financial crisis. 6 I'm not saying that the role of proxy advisors would be 7 the same with respect to the financial crisis, but I 8 think for this agency, for our core programs, the role is 9 of that sort of substance. 10 And so I think we're uniquely poised to address 11 an issue before it becomes a bigger problem, and I hope 12 we do so. 13 Thanks very much for being here. 14 MR. HIGGINS: Thanks, Commissioner Gallagher. 15 Commissioner Piwowar. 16 COMMISSIONER PIWOWAR: All right. Thanks. 17 Thank you, Keith. 18 Good morning, everyone. Thank you all, all of 19 our distinguished panelists, for joining us today to 20 discuss the role of proxy advisory firms and our capital 21 markets. 22 Thank you, Chair White, for convening this 23 roundtable, even with such a busy schedule that we have 24 here. I won't say "insane," but I'll just say "busy." 25 Thank you to the staff for all your hard work 0017 1 in putting this together as well, too, and I'm also 2 grateful for Commissioner Gallagher for his determined 3 efforts to return this important subject to the forefront 4 of our agenda. 5 As Chair White mentioned, in July 2010, we 6 sought public comment on the role of proxy advisory firms 7 within a broad concept release on the proxy system, but 8 subsequent consideration was pushed aside after the 9 passage of the Dodd-Frank Act later that month. Yet 10 Dodd-Frank provisions such as mandatory Say-on-Pay votes 11 make proxy advisory firms potentially even more 12 influential and, thus, the time is right for us to engage 13 in today's discussion. 14 During my first tour at the Commission, I first 15 became aware of the role played by proxy voting advice 16 from a research project conducted by four Commission 17 economists, including one of our distinguished panelists, 18 Mark Chen, who returns to the Commission today from 19 Georgia State. 20 Welcome back, Mark. 21 From their research I learned that a proxy 22 advisory firm vote recommendation is a strong predictor 23 of vote outcome. Since that time I've become 24 increasingly concerned that proxy advisory firms may 25 exercise outsized influence on shareholder voting. 0018 1 As an economist, my concern is heightened by 2 the lack of competition in the proxy advisory market, 3 which appears to be a stable duopoly preserved by near 4 impenetrable barriers for new entrants. 5 In addition to the lack of competition in this 6 market, I am concerned by the potential overreliance on 7 proxy advisory firms. Like Commissioner Gallagher, I see 8 many similarities between the current situation with 9 proxy advisory firms and the pre-crisis situation with 10 credit rating agencies, including an unhealthy 11 overreliance on the recommendations by investors. 12 I look forward to hearing our panelists' views 13 on the extent to which the Commission's own actions have 14 unintentionally led to this overreliance. In particular, 15 I hope participants will express their views on two 16 related Commission actions in this area. 17 First, the Commission issued a release in 2003 18 stating, "The duty of care requires an adviser with 19 voting authority to monitor corporate actions and vote 20 proxies," which may have created a regulatory compliance 21 mandate absent extraordinary circumstances to vote every 22 share. 23 Second, Commission staff subsequently issued 24 no-action letters that seem to have had the unintended 25 effect of institutionalizing the use of proxy advisory 0019 1 firms to vote shares in compliance with this perceived 2 mandate. By requiring advisers to vote on every single 3 matter irrespective of whether such vote would impact the 4 performance of investment portfolios, our previous 5 actions may have unintentionally turned shareholder 6 voting into a regulatory compliance issue rather than one 7 focused on the benefits for investors. 8 If so, this is an unfortunate result not merely 9 because it may have served to entrench an anti- 10 competitive duopoly, but more importantly, because it is 11 inconsistent with our investor protection mandate. 12 For these reasons, we should rectify the 13 situation immediately. Today's roundtable and the public 14 comment file that will be opened in conjunction with it 15 will provide key facts to inform our future decision 16 making regarding needed reforms in this area. 17 I would like to work with my fellow 18 Commissioners and the staff to continue our momentum on 19 this topic and other important topics even if not 20 mandated by Dodd-Frank. 21 Thank you. 22 MR. HIGGINS: Thanks, Commissioner Piwowar. 23 I'd like to now turn it over to Norm Champ, 24 who's going to moderate the first panel. 25 MR. CHAMP: Thank you, Keith. 0020 1 I'd also like to echo my thanks to everyone for 2 being here today at our roundtable on proxy advisory 3 services. We are pleased to see the interest that the 4 topic of proxy advisory services has generated among our 5 participants and audience members and those who are 6 joining us by Webcast from their homes or offices. 7 Also, as Commissioner Aguilar mentioned, 8 putting together an event of this magnitude is no easy 9 feat, and I want to recognize the staff members from my 10 division, Sara Cortes and Bridget Farrell, and from the 11 Division of Corporation Finance, Raymond Be, who have 12 worked to organize today's roundtable. 13 In putting together the roundtable we made an 14 effort, and I believe a successful one, to bring together 15 representatives from a wide variety of interested groups 16 to share their perspectives and insights on the issues we 17 are examining today. We are fortunate to have so many 18 esteemed and distinguished panelists, all of whom are 19 steeped in the issues, participating in the roundtable 20 today. 21 And I expect that, given the wide range of 22 views that are represented here. We will have a highly 23 engaging, informative, and constructive dialogue about 24 the issues surrounding the proxy advisory services. 25 We are undertaking this discussion just over 0021 1 ten years after the adoption of Rule 20646 of the 2 Advisers Act that requires investment advisers to have 3 proxy voting policies and to disclose proxy voting 4 information to advisory clients. The adoption of these 5 rules and staff interpretive guidance that followed has 6 paralleled the growth of the proxy advisory firm 7 industry. 8 The Commission addressed the growth of this 9 industry in the 2010 concept release that Chair White and 10 other Commissioners referred to. The concept release 11 asked whether proxy advisory firms serve the best 12 interests of the ultimate investors and how to improve 13 the usefulness of such firms. 14 The response to the questions posed by the 15 concept release had been vast from all corners of the 16 business and academic communities both in terms of 17 comment letters submitted to the Commission and 18 discussions generated at gatherings such as today's 19 roundtable. 20 In this first session we will look at the use 21 of proxy advisory services, including the factors that 22 have contributed to their use. We also plan to explore 23 institutional investors and investment advisors use these 24 services and how the use of services differs among market 25 participants. 0022 1 Finally, we would like to spend some time 2 discussing competition in the marketplace for such 3 services. We will begin that discussion momentarily, but 4 before we do so, I want to introduce today's 5 distinguished roundtable participants. They have 6 generously offered their time and expertise to help the 7 Commission's understanding of an important topic for 8 issuers as well as for investment managers and 9 institutional investors. 10 Starting on my left we have Jeff Brown, head of 11 Legislative and Regulatory Affairs from Charles Schwab. 12 Yukako Kawata, partner at Davis Polk & 13 Wardwell. 14 Former Chair Pitt, current CEO of Kalorama 15 Partners. 16 Gary Retelny, President of Institutional 17 Shareholder Services, Inc. 18 Trevor Norwitz, partner at Wachtell, Lipton, 19 Rosen & Katz. 20 Anne Sheehan, Director of Corporate Governance 21 at CalSTRS. 22 Eric Komitee, General Counsel, Viking Global 23 Investors. 24 Nell Minow, co-founder and board member, GMI 25 Ratings. 0023 1 Lynn Turner, Managing Director of LitiNomics. 2 Mark Chen, Associate Professor of Finance, 3 Georgia State University. 4 Hoil Kim, Vice President, Chief Administrative 5 Officer and General Counsel of GT Advanced Technologies. 6 Jeff Mahoney, General Counsel of the Council of 7 Institutional Investors. 8 Darla Stuckey, Senior Vice President of Policy 9 and Advocacy at the Society of Corporate Secretaries. 10 Damon Silvers, Director of Policy and Special 11 Counsel of the AFL-CIO. 12 K.T. Rabin, GEO, Glass Lewis & Co. 13 Michelle Edkins, Managing Director and Global 14 Head of Corporate Governance and Responsible Investment 15 at BlackRock. 16 Michael Ryan, Vice President, Business 17 Roundtable and former President and COO of Proxy 18 Governance, Inc. 19 And Karen Barr, General Counsel, Investment 20 Adviser Association. 21 Before we dive in I want to make one technical 22 announcement. Feel free to light up your mic to make 23 your comments, but if you're finished with your comments, 24 please turn off your mic. Otherwise we might get some 25 unfortunate feedback. 0024 1 So thank you all again for taking the time to 2 be here. I'd like to begin this session by turning to 3 former Chair Harvey Pitt who can set the stage for us, 4 and I'll ask him: what are some of the factors that have 5 contributed to the use of proxy advisory services by 6 institutional investors and investment advisors? 7 MR. PITT: Thank you, Norm. 8 First, let me say I think this is a very 9 important and wonderful initiative by the Commission and 10 my gratitude and esteem for all the hard work that went 11 into putting this program together. 12 I think it's probably fitting that I talk a 13 little bit about this particular issue because Rule 14 206(4)-6 was adopted during my tenure. So as people in 15 my family always say, it's all my fault. 16 (Laughter.) 17 MR. PITT: A question on the agenda number 18 1(d)(2) asks if any market failures were identified, and 19 I read "market failure" to mean any compelling impetus 20 for the rule, and there were several. 21 The Commission was concerned about pressures on 22 portfolio managers by portfolio companies to vote shares 23 in other than investors' best financial interests. The 24 amount of institutional equity shareholdings, 25 particularly as a proportion of the entire market, had 0025 1 increased significantly and, therefore, the Commission 2 was at least mindful of the fact that portfolio managers 3 had a significant effect both on corporations and their 4 governance as well as the value of their securities. 5 In addition, the Commission was concerned about 6 recurrent issues involving the personal or business 7 relationships that some investment advisors might have 8 with proxy contestants, and many of these things harken 9 back, as an example of just how old I am, to the 1971 SEC 10 Institutional Investor Report, which I had the privilege 11 of working on back when I was a lot younger. And the 12 Commission stated that the goal was to ensure that 13 portfolio manager votes would be in the best financial 14 interest of their clients. 15 In response to one comment by Commissioner 16 Piwowar about fiduciary duties, in the adopting release 17 and Footnote 7 the Commission said, "We do not mean to 18 suggest, however, that an adviser that fails to vote a 19 proxy would thereby violate its fiduciary obligations to 20 its client under the Act." 21 The reason I remember this is it was a point of 22 real concern. The issue wasn't whether or not investment 23 advisors and portfolio managers had to vote. The 24 question was how did they vote and on what basis did they 25 vote. Indeed, the adopting release for 206(4)-6 0026 1 contained a single sentence regarding the possible use of 2 proxy advisory firms. So it was not itself on the 3 horizon. 4 After I left, and I stress those words, there 5 were two no-action letters which have been raised. In 6 the Egan-Jones no-action letter, the staff said that a 7 proxy advisory firm recommendation "may cleanse" any 8 portfolio manager's conflict, and then added for good 9 measure the mere fact that a proxy advisory firm is 10 compensated by the issuer for other services presumably 11 doesn't render the proxy advisory firm to be interested. 12 Thereafter, a few months later, the staff 13 issued a no-action letter to ISS in which it clarified 14 that although portfolio managers had a duty to look and 15 exercise due diligence about the independence and 16 procedures of proxy advisory firms, there was no need for 17 portfolio managers to do due diligence with respect to 18 specific voting issues, but rather it could relate to 19 generic conflict procedures of the proxy advisory firm. 20 If you read the two no-action letters, they are 21 not typical of no-action letters. They effectively gave 22 additional Commission sanction that wasn't in the 23 original rule. They do not interpret the rule. They 24 actually extend the rule, and the result of that, but 25 it's not the only reason, but the result of that was to 0027 1 encourage portfolio managers, in particular, to use proxy 2 advisory firms. 3 In addition, the Commission's approach and the 4 marketplace at the time effectively entrenched an 5 existing duopoly with two firms, ISS and Glass Lewis, 6 which was akin to the credit rating agencies' issues. 7 Ninety-seven percent of the proxy advisory firm business 8 is handled by two firms, and as has been referenced, 9 control of voting decisions, at least a large percentage 10 of shares, can be attributed and has statistically to the 11 recommendation of proxy advisory firms. 12 Couple that with a very rapid increase in 13 shareholder proposals since 2000, from 2000 to 2003, the 14 number of shareholder proposals increased by 87 percent, 15 and since 2003, the trend is exponentially higher in 16 terms of an increase. Much of that is due in part to 17 Dodd-Frank, but there are other factors as well, and what 18 we have seen is that portfolio managers with large 19 portfolios in particular having to keep up with so many 20 votes either would have to expend a great deal of energy 21 or find some means for assistance, and that is how I 22 think we have gotten to where we are today. 23 MR. CHAMP: Thank you, former Chair Pitt. 24 Others wish to weigh in on how we got where we 25 are today? Go ahead. 0028 1 MS. MINOW: Thank you very much. 2 I'm Nell Minow. I was the fourth person hired 3 at ISS back in 1986. I was ISS' first General Counsel 4 and second CEO. So I wanted to provide a little bit of 5 context. 6 We began with a completely different business 7 model. I'm not even going to tell you what product we 8 were intending to sell. I'll just say that it didn't 9 work. 10 (Laughter.) 11 MS. MINOW: So we spent a year visiting the 12 people who vote proxies trying to sell this other 13 product, and we didn't make a single sale. However, many 14 of them said, "You know what I would like? I'd really 15 like some advice on how to vote proxies." 16 Most of them were subscribers to the IRRC, 17 which had kind of accidentally gotten into the business 18 of analyzing corporate governance issues. Of course, 19 IRRC was created to look at South Africa and other social 20 responsibility issues, and back in 1986 when all of this 21 was going, you have to remember that this was the heyday 22 of the takeover era, and so for the first time there were 23 items on the proxy that created a real conflict of 24 interest between the executives, who were paying 25 Greenmail and taking other entrenching actions, and the 0029 1 investors. 2 So for decades it had been vote for the board 3 of directors, approve the auditors, go home, and these 4 had been a pretty ministerial task. All of a sudden 5 there were big, complicated issues that people wanted 6 some guidance on. 7 So Bob Monks and I went to IRRC, and we made 8 what I thought was -- I still think -- was an outstanding 9 offer to them. We said, "You guys are doing really good 10 analysis. Because you're a nonprofit, you've decided 11 that you cannot make recommendations. How about if we do 12 kind of a peanut butter and jelly thing where you do the 13 analysis and we tack on the recommendation? Anybody who 14 wants to buy it can buy it or they don't have to buy it." 15 And they said, "No, we don't want that kind of 16 a partnership." 17 We said, "Well, you understand that means that 18 we're then going to have to compete with you by doing 19 analysis and recommendations." 20 And they said okay. So that's what we did. 21 For the first year we just did issues that we thought 22 were material basically as a way that we could control, 23 you know, how much time we had and how much resources we 24 could devote to it, but they came back to us. The 25 clients came back and said, "We really want you to cover 0030 1 everything." 2 So the second year we did the S&P 500, and we 3 did every proxy issue on the S&P 500, and then one of our 4 clients came to us and said, "We will underwrite 100 5 percent of your expansion to cover our entire portfolio 6 of 6,000 companies if you can do it within the next three 7 months." 8 And we said, "Sure," and my first call was to 9 the landlord to get some additional space, and that was 10 an exciting process. 11 The reason that this product has become so 12 popular, so universal is that there are now these very 13 complex issues, particularly with regard to executive 14 compensation, where, you know, if you want to talk about 15 conflicts of interest, one thing the SEC understands is 16 that the issuer wants to make it obscure. The investor 17 wants to understand it. There is a way to create a 18 product that arbitrages that distance, and that is why it 19 is a popular product. 20 At every stage it was market driven. We got 21 sophisticated investors who are not required to purchase 22 anything, who to have a choice you can say it's two, but 23 there have been other entrants into the field. Mike Ryan 24 can talk about that. They've failed. They had a great 25 product. They failed. 0031 1 And so you have sophisticated investors who 2 want independent advice about issues where the company 3 has a conflict in disclosing it, and please stop 4 comparing it to the ratings agencies. The ratings 5 agencies are paid by the people they rate. That is a 6 conflict of interest. These products are paid for by the 7 people who buy them. That is not a conflict of interest, 8 and I would hope that the SEC would support independent 9 analysis to protect investors. 10 Finally, I just want to say that the reason 11 that they are so influential is that they provide advice 12 that people think is important, and as I'm sure you will 13 hear in great detail later today, the more complex and 14 controversial the issue, the less their clients vote the 15 way they recommend. People like the analysis, and then 16 they like to make their own decisions, and 17 overwhelmingly, most of their votes, of course, are pro 18 management. So if they are influential, then issuers 19 should be happy about that. 20 COMMISSIONER GALLAGHER: Can I just jump in 21 real fast? 22 Just to clarify, I don't think the comparison 23 with the rating agencies is about the nature of the 24 conflict. I think it's about the regulatory privilege 25 given to them both at a staff level, not even a 0032 1 Commission level through Commission guidance, just to be 2 clear. 3 MS. MINOW: I understand that, but when you 4 say, you know, we could maybe perhaps if we could have 5 addressed a conflict, we could have prevented the 6 financial meltdown, I think you're talking about two 7 completely -- 8 (Microphone malfunction.) 9 COMMISSIONER GALLAGHER: Is it working now? 10 Yes, I thought I had made that clear as far as 11 the financial crisis comparison, but it's not a conflict- 12 to-conflict equation that we're making here or that I am 13 or others that I've heard already today. It's that where 14 we privilege market participants, especially at a staff 15 level guidance, I think we need to think -- 16 MS. MINOW: I understand that. I'm saying I 17 don't think there is any privilege when people are not 18 obligated to buy it and they have a choice and they're 19 sophisticated financial -- 20 COMMISSIONER GALLAGHER: Okay. On that we can 21 disagree. 22 MS. MINOW: All right. Fine. 23 MR. CHAMP: Damon. 24 MR. SILVERS: I wanted to follow up on the 25 little exchange we just had about regulatory privilege 0033 1 because as I think about analogies to this circumstance, 2 the one that I think of is not the credit rating 3 agencies, but -- 4 (Microphone malfunction.) -- 5 MS. RABIN: Yes, it's on. Go ahead. Now it's 6 on. 7 MR. SILVERS: Well, maybe it's on. All right. 8 Start again. 9 The exchange between Commissioner Gallagher and 10 Nell Minow about analogies, as I heard the opening 11 remarks, the analogy that I thought of here that I think 12 is most apropos is auditors. I don't think there's any 13 more profound instance of -- what was the phrase you 14 used, Commissioner? -- regulatory privileging or the like 15 than the audit, and the same conflict, although it does 16 not have the conflict that Nell was describing because, 17 as Nell pointed out, auditors are paid and overseen to 18 some degree by people whose interests are in conflict 19 with them as opposed to proxy advisors. 20 But the same basic notion of duopoly or 21 quadropoly in the case of auditors is present. If we are 22 here today discussing issues fundamentally of a regulated 23 gatekeeper where there is a problem of concentration, 24 it's undoubtedly true in my mind that that is the case 25 here. There is a problem with concentration. 0034 1 There's also a problem of concentration in 2 auditors and a problem of concentration in rating 3 agencies, and in the case of auditors, I've been deeply 4 involved in thinking about this on a bipartisan both with 5 the Obama Administration and the Bush Administration for 6 ten -- for many years now, and it's really not clear to 7 me at all what the solutions are as long as we're 8 operating within the box of gentle nudges, but what I 9 would urge very strongly on the Commission in this matter 10 is that if you're going to start going heavy at these 11 issues of concentration and gatekeepers, this is about 12 the last place to start; that the really serious problems 13 lie elsewhere, and because in those other areas you not 14 only have concentration, but you have a profound and very 15 difficult to manage conflict about who's paying for what, 16 and in this case that's not the issue. 17 You know, the issue of concentration though is 18 very real. It's just it's extremely challenging to deal 19 with. 20 (Microphone malfunction.) 21 COMMISSIONER AGUILAR: That is on so we can 22 take the time to listen to what Damon had to say and 23 think about that before anyone else speaks. 24 MR. CHAMP: Shall we move? Is that also 25 blinking? 0035 1 (Microphone malfunction.) 2 COMMISSIONER AGUILAR: Mine always works. 3 Trevor, I've got an empty seat here if you just want to 4 come. 5 (Microphone malfunction.) 6 MR. NORWITZ: Thank you. Thank you for 7 inviting me to be here, and Trevor Norwitz from Wachtell, 8 Lipton. 9 I would just like to add one thing to what 10 Harvey described about sort of how we got here. I 11 interpret this question number one as how did we get here 12 and then the second part of it is where we are a problem. 13 The here, I think, can be described, and some 14 people may think I'm saying this in a sort of tenacious 15 manner, but the here is where we have a staggering amount 16 of power, you know, devolved on one organization that is 17 essentially unaccountable, unregulated, and one of two 18 organizations and has no actual skin in the game. And I 19 strike that as a structural problem. It is not anything 20 personal. 21 I mean, I know these people. They're very good 22 people. They work very hard. They try to do the right 23 thing, but that's the structure that we have. I think 24 that's just a factual statement. 25 The other thing that led to this enormous 0036 1 creation of power in addition to these regulatory events, 2 I think it was actually finding out a very innocuous 3 thing. It was the shift from majority voting from 4 plurality to majority voting, which essentially gave, you 5 know, a very large stick, if you like, to the proxy 6 advisory firms to essentially dictate things that had 7 traditionally been within the purview of the board of 8 directors, and really over the last few years created a 9 sea change, a fundamental shift from the more board 10 centric model of corporate governance that we've had in 11 this country for, you know, decades or maybe a century 12 that, frankly, you know, may have had some failings. 13 But over the whole, I think most people would 14 say has done pretty well to a situation where essentially 15 now the decisions on fundamental things, including 16 directors, including, you know, pay of executives, 17 including the degree to which board can adopt bylaws, and 18 most fundamentally including, you know, whether a company 19 gets taken over or not are not issues within the ambit of 20 the board of directors, but have been shifted to a very 21 large degree to the shareholders. 22 I think that is an ideological thing. Some 23 people may think that's good and not a market failure. 24 You know, from our perspective I think representing 25 corporate America, you know, the fact that companies no 0037 1 longer have any takeover defenses and essentially are as 2 vulnerable as they is not necessarily a good thing. But 3 I recognize people could debate that. 4 I'm going to go back to my seat now. 5 (Laughter.) 6 MR. CHAMP: Great. Thank you. 7 Maybe just quickly as I need to move us along a 8 little bit, but go ahead. No, go ahead. 9 MS. RABIN: I just wanted to pick up on the 10 timeline where Nell left off because we joined, you know, 11 this world in 2003, and similar to the story that Nell 12 described of ISS, we had an idea for a business. Lynn 13 Turner remembers that, too. That was going to be our 14 core business that we're not doing anymore either. 15 And it's actually such a similar story. I had 16 never heard the ISS story in the sense that we went 17 around after having assembled a team of former, you know, 18 bankers and lawyers and accountants and CFAs with the 19 relevant experience to do the kind of work that we had 20 intended to do with the business. 21 They said, "You know, what we would really like 22 is to have you take that group of people and apply them 23 to the job of helping us implement our custom policies." 24 So, you know, 2003 was sort of the beginning of 25 an era where the job of voting proxies was sort of moving 0038 1 from the back offices within the institutional investor 2 world into the sort of front office, right? Into client 3 service and portfolio management. You had a lot more 4 sort of, you know, development of really kind of robust 5 proxy governance programs within these institutional 6 investors, and what they were looking for was help from 7 advisors, and of course, ISS does this as well, with 8 helping them develop and implement their custom policies. 9 And proxy advisors, like Glass Lewis and ISS, 10 can collect the data. You know, we're writing research 11 on 23,000 companies and in 100 markets, and that data, 12 you know, the U.S. does one thing better than anybody 13 else in the world, which is they do disclosure very well, 14 but in other markets it's pretty crazy, you know, in 15 terms of where you get the information, how the 16 information is provided, the fact that, you know, you're 17 analyzing research that's in -- I don't know -- 30 18 different languages. 19 So helping our clients kind of get all of that 20 data together and normalize it and present compensation 21 data from different countries sort of in the same formats 22 they know because really they're doing a lot more work 23 than the critics seem to be giving them credit for doing. 24 Thanks. 25 MR. CHAMP: Thank you. 0039 1 So as we think about where we are now, another 2 question that has been put to us is: what does the data 3 show about these proxy advisory firms and the impact on 4 proxy voting? 5 For instance, recently we had the ESMA final 6 report, and the question of whether there is a high 7 correlation between proxy advice given and voting 8 outcomes. So I'll pose the question: is there a high 9 correlation between the advice and the outcomes? And 10 does that correlation change given different types of 11 proposals being considered, i.e., shareholder proposals, 12 contested proposals, proposals on where there has been a 13 negative recommendation? 14 And I'll ask Professor Chen to take a shot at 15 that one. 16 We now have the mobile mic, hopefully. 17 MR. CHEN: Okay. Thank you. 18 I want to thank the Commissioners and the staff 19 for inviting me to this discussion, and I look forward to 20 what we learn today. 21 Let me try to briefly summarize some of the 22 evidence in the existing empirical literature on the role 23 of vote recommendations. So, first of all, there's a 24 group of studies that examines the role of ISS vote 25 recommendations in uncontested elections and voting 0040 1 situations, and so it turns out that for the case of 2 management sponsored proposals, a negative ISS vote 3 recommendation is associated with about 13.6 to 20.6 4 percent fewer votes for management. 5 For individual directors in uncontested 6 elections, a negative vote recommendation translates into 7 14 to 19 percent fewer votes for that individual 8 director, and it recently was found that the vote tally 9 for nonbinding shareholders' Say-on-Pay proposals was 10 about 24 percentage points lower if there's a negative 11 ISS vote recommendation present. 12 So I think there's plenty of evidence to 13 suggest that there's a high correlation between the proxy 14 advice and voting outcomes, but I would also suggest that 15 it's worthwhile to think about the interpretation of 16 these data. To my mind there are two sort of 17 interpretations. 18 On the one hand, it could be that this high 19 correlation is the result of total outsourcing. So you 20 have, you know, maybe a mechanical defaulting to the vote 21 recommendations, and this seems to be the interpretation 22 that has given rise to concern among commentators. 23 The other interpretation though is that voting 24 advice really does bring new information to the markets. 25 This may be useful information that influences the 0041 1 decisions of institutions on how to vote. 2 At the current time, I don't believe we have 3 the data to sort out these two interpretations, but I 4 would also say that, you know, with regard to the first 5 interpretation, free riding is not in and of itself a 6 problem. You know, free riding may not be a problem if 7 the entity on which one free rides is doing the right 8 thing. 9 So I think maybe the real question to be 10 considering is how informative are these recommendations. 11 How informative is the proxy voting advice? 12 Thank you. 13 MR. CHAMP: Mike. 14 MR. RYAN: I also want to thank you for 15 including me on this panel. 16 Most of the times the discussion is precisely 17 the question you just asked, which is the influence that 18 proxy advisory firms have on vote outcomes. I think it's 19 really important as the Commission goes through this 20 process to think deeply about the impact the proxy 21 advisory firms have on board decision making; that 22 there's a lot sort of under the water. 23 Think of it as an iceberg. The impact on the 24 voting decision is what's above the water, but the impact 25 on board decision making is below the water, and you 0042 1 can't see it. 2 Now, if the policies and the recommendations 3 are good and they're having a positive influence on 4 boards, that's great, but I think there's a lot of 5 question about whether these policies are as good as 6 they're made out to be, and I think it also causes one to 7 question when boards are making decisions, if they're 8 changing and adjusting their judgment just to get a yes 9 vote and they think it's the wrong thing, that's not a 10 good thing I don't think, you know, assuming the boards 11 and directors are acting in good faith. 12 So I think there's a real hidden question here 13 that needs to be considered as you go through this 14 process. 15 MR. CHAMP: Thank you, Mike. That's a great 16 bridge to our next question. 17 Wait. Sorry. Yes, sure. 18 (Pause in proceedings.) 19 MS. STUCKEY: Thanks again, and I reiterate 20 everyone else's thanks for being here. 21 I just want to give a quick anecdote -- and I 22 agree with what Mike just said -- one what happens in the 23 board room directly related to an ISS policy that I think 24 is harmful. 25 A small, mid-cap company, S&P 500 company in a 0043 1 niche organization had on its audit committee a board 2 member that used to be the CEO. Now, this person has 3 been out of the position for five years and satisfied all 4 the listing standards, or three years, whatever the 5 listing standards are. But the proxy advisory firms, in 6 their wisdom, believe that a sitting CEO should never be 7 on a board because he or she is not independent, 8 specifically not on an audit committee because an audit 9 committee is somebody that's got to mind the store. 10 Because of the negative recommendations, they 11 were faced with, you know, the guy not getting elected to 12 the board. So they took him off the audit committee. 13 This person, who is my member and who I can't tell you 14 who she is, but she said the real shame of it is that the 15 nature of the dialogue and the questions asked in the 16 audit committee are now worse and not as rigorous because 17 the former CEO is not sitting there, and you don't have 18 the same level of knowledge to ask the tough questions 19 and to really grow management. 20 So, again, it's a one size fits all policy 21 that, you know, audit committee members should be former 22 CEOs because they're not independent. This is how it 23 plays out in real life. 24 MR. CHAMP: Thank you. 25 So if we could turn maybe to stay off -- I'm 0044 1 sure we'll have a chance to work in others -- but if we 2 could turn to users of proxy firms. So we have been 3 talking about how we got here and the regulatory 4 framework and some of the issues with the data. But 5 turning to consumers of the proxy advisory services, I 6 would like to talk a little bit about how are they being 7 used by the consumers of the services. You know, what 8 types of services are being used? How are they being 9 engaged? How do the consumers then oversee the proxy 10 advisory firms and the provision of that services? And 11 are there differences among the consumers, large and 12 small firms, institutional investors, investment 13 advisers? 14 How do the answers to these questions change 15 perhaps depending on the vote that the consumer is 16 consuming the services to think about? 17 So I'd like to ask Michelle Edkins from 18 BlackRock to kick off on that point. 19 And we have another portable mic. We're going 20 to start doing a Donahue type thing where -- 21 (Laughter.) 22 MS. EDKINS: I'll try not to sing or do 23 anything like that. 24 Thank you. 25 So I will obviously speak on behalf of 0045 1 BlackRock, but my experience of discussions I have with 2 other institutional investors and investment advisers, 3 especially the large ones, is we take pretty similar 4 approaches to how we use the proxy advisors, but sort of 5 back in our offices we do have different processes in 6 terms of how vote decisions are taken. 7 So BlackRock typically uses research and other 8 data services from proxy advisory firms as one of many 9 inputs in our proxy voting decisions. We use the firms 10 primarily to synthesize the vast array of data that you 11 get in proxy statements, and more than just synthesize 12 it, to put it in a consistent format. 13 Now, you've all probably read more proxy 14 statements than you care to. We get to read a lot as 15 well, and it can be very hard to find the pertinent 16 information. I think it is also important to recognize 17 that because so much of the voting, so many shareholder 18 meetings are held in the second quarter of the year, we 19 are all under time pressure, huge time pressure. There 20 are days when we are voting 25, 30 meetings across our 21 team. 22 And so having that information synthesized and 23 accessible is hugely important to us being able to take 24 an informed decision. 25 We then within our team take a view on whether 0046 1 we need to go beyond the proxy research because there are 2 unanswered questions or there might be concerns that the 3 advice has highlighted for us whether we need to go 4 beyond that research, refer back to the proxy statements, 5 perhaps speak to the company, talk with our portfolio 6 managers, look at our track history with the company. 7 Did they promise a change last year that hasn't been 8 delivered in the past 12 months, that sort of thing? 9 And all of that feeds into our view on how we 10 might vote. Now, our voting decisions are taken in the 11 context of our published policies. We have market 12 specific policies for every major market in the world 13 there on our Web site so issuers can review those. They 14 should be able to anticipate what our position on an 15 issue is going to be. 16 We review those policies every year, and we 17 also work with the proxy advisors in terms of feeding 18 into their process, their policy formation processes, our 19 views on developments in the past proxy season and what 20 we anticipate might be issues in the coming proxy season, 21 and we think that's an important feedback loop because 22 although they're providing advice on every one of these 23 companies, we're engaging with them and we're taking the 24 decisions in the context of our policies as a long-term 25 investor on behalf of our clients. 0047 1 The underlying principle in our policies is 2 that we take our decisions on a case-by-case basis. So 3 we try to take into account the unique circumstances at a 4 particular company. 5 That said, every single company tells you that 6 their independent directors are all independent and 7 they're all fabulous and they all work the hardest of any 8 directors they've ever known, and yet sometimes the track 9 record of that doesn't seem apparent from the outside as 10 a shareholder, and so that is what we're trying to drill 11 down into in our own analysis. 12 We don't follow a single proxy research 13 provider's advice. We take both ISS and Glass Lewis 14 research globally, and in markets where there is 15 additional market specific research, we'll also subscribe 16 to that because in different contexts local advice can 17 add color that's very helpful. 18 The underlying principle in all our voting 19 decisions is trying to achieve an outcome, a voting 20 outcome, that we believe best supports and promotes the 21 economic interests of our clients. So it's an economic 22 decision, not a compliance decision, and that's really 23 important, and that is why we work very closely with our 24 portfolio managers particularly on the governance issues 25 that are more closely related to value. 0048 1 We also use one proxy advisory firm, ISS, for 2 helping us implement the voting. The operating 3 environment, as you'll know from the research you've done 4 yourselves into the proxy plumbing process or system, is 5 highly complex, terribly inefficient, and prone to error. 6 And we really need the technology they provide to be 7 able to execute the number of votes that we execute every 8 year. 9 So in the U.S. we vote at about 3,700 company 10 meetings a year. Now, globally we vote at about 15,000. 11 Without a very efficient process, that is just not 12 possible. Yet if we don't vote, we could be missing 13 providing feedback to a company that is pretty critical 14 from a shareholder perspective. 15 In our view, one of the big issues in this 16 debate is there is publicly a lack of understanding about 17 how shareholders of every kind use proxy advisors, and 18 our recommendation would be that investors put in the 19 public domain on their Web site perhaps an explanation of 20 how they implement the policies that they already 21 publish, how they use the proxy advisors in that 22 implementation, and what in-house resources they have 23 because at the moment I think there's a lot of smoke and 24 mirrors. Everyone or a lot of people, a lot of investors 25 will say, "We do everything in house." Now, if you own 0049 1 10,000 companies and you have one person in your back 2 office, you're not voting in house. You're just not. 3 It's not feasible. 4 I think people resource or investment firms 5 resource this area to the extent they can afford to. 6 Now, if it is perceived to be an issue which needs to be 7 properly resourced may be because investors are 8 commercial entities. We need to also recognize that 9 clients might need to pay for it. 10 Now, BlackRock has major index business as do 11 other investors. You cannot get indexing investment 12 nearly for free and expect a deluxe proxy voting and 13 engagement service. That's just an economic reality and 14 I think a little bit more openness about some of that 15 would probably help in dispelling some of the myths about 16 what's going on. 17 I think another thing that could be very 18 helpful is in addition to the filing of N/PX forms or for 19 N/PX filings that those of us who are subject to that have 20 to do would be providing high level summary statistics of 21 your voting patterns. So, for instance, BlackRock votes 22 against one or more resolutions in the U.S. at roughly 36 23 percent of meetings a year. Now, that represents about 24 five percent of all the proposals that we vote on in the 25 U.S. 0050 1 Now that's a little bit of color on how we 2 vote. I don't know how that compares to the 3 recommendations of ISS and Glass Lewis. We don't 4 benchmark ourselves against them, but one benchmarking we 5 did do was that, say, on pay last year we voted against 6 four percent of the proposals and the recommendations 7 from the proxy advisors roughly averaged out in our scans 8 to about 16 percent of the proposed rules, and I think 9 others could provide more color in how their voting 10 patterns come through on an annual average basis. 11 And it will differ. There is no right way to 12 vote, and I would really caution about looking at votes 13 against as a sign of engagement or strength as an 14 investor, influence as an investor. It has to be looked 15 at in the context of how much engagement you do with 16 companies, what your perspective is, whether you're 17 looking for a change this year or are willing to wait and 18 take a longer term approach. 19 Just very briefly on how we oversee our 20 relationship with our proxy advisers, as I mentioned, we 21 always participate in the policy reviews that they do. 22 Even if there isn't a policy review we provide feedback 23 where we think an analysis might be subpar or where we 24 spot errors, and with the operational aspect of the 25 service that ISS provides, we do an annual due diligence 0051 1 into which we look at the performance that ISS has 2 delivered. We look at conflicts of interest and reassure 3 ourselves that those are being properly mitigated, and we 4 look at performance enhancements or service enhancements 5 that we would like to see in the coming year. 6 We have been, you know, partnering with them as 7 our primary service provider for many, many years in that 8 way to try and keep things evolving because I think we 9 all recognize there's always room for improvement. 10 Thank you. 11 MR. CHAMP: Thank you, Michelle. 12 Lynn. 13 MR. TURNER: Thank you. 14 I find Michelle's comments to be very similar 15 to my experiences at Colorado PERA and our process, although 16 I might note my comments are my own and not those of my 17 board. We only do that after we take a vote like the 18 Commission. 19 So at any rate our experience is very much the 20 same. We put our proxy guidelines up on the Web page, 21 very transparent. We post our votes 30 days afterwards, 22 which is very transparent, timely. We turn around and I 23 chair a committee at the board that reviews our proxy 24 voting guidelines, and we make changes on an annual 25 basis. About this time of the year we start to process. 0052 1 So we have it done before we get into proxy voting 2 season. 3 We find that we vote with management about 85 4 percent of the time, the vast majority. I really think 5 this whole issue is about 100 contested, highly contested 6 elections once a year. That's what this is and the fact 7 people get no votes and people don't like no votes at the 8 end of the day, which is one can appreciate why they 9 don't like a no vote, but that's in essence what the real 10 issue here is because if you look out on the Web pages, 11 the 15 largest institutional asset managers -- and that's 12 what they are; they're asset managers. They're not the 13 people putting up the capital themselves -- they all 14 have, as Michelle very aptly described, a proxy voting 15 guideline that they vote or direct the proxy advisors to 16 vote in accordance with. 17 We actually do our own voting. We use the 18 Glass Lewis platform, but we actually do the voting 19 ourselves. We will vote, like I said, with management 85 20 percent of the time. One of our guidelines is that where 21 companies are not performing, and we define that as a 22 company that's been underperforming for three years in a 23 row and underperforming as in in the lower quartile of 24 their own industry group. So if you've been in your 25 lower quarter three years as an executive -- I'm a former 0053 1 executive. I know you've been down there a lot longer, 2 in essence -- and we do vote against the directors in 3 that situation, and to date in 2013, for example, there's 4 been 40 such companies identified. 5 We voted against 193 directors in those 6 situations, and if the company is taking steps to fix the 7 problem, we don't put them in that category. That's why 8 there's only 40 of them, but we voted against 193 9 directors. During that time period we voted against 10 Glass Lewis 52 percent of the time and against 11 management. Glass Lewis actually voted with management a 12 lot more often than we did on these terribly performing 13 companies which is kind of an amazing statistics because 14 we are a long-term investor, and we're looking for people 15 to oversee companies that will get us performance in the 16 long term. 17 As far as the correlation issue on votes, there 18 is a reason for correlation, and it is because of the 19 fact that if you look at those, go do your homework and 20 look at those 15 top asset managers, and you have to get 21 their votes to get a majority outcome in an election, you 22 absolutely have to pick up some of those votes, the 23 BlackRocks, the Vanguards, the Fidelities. If you can't 24 get those, you aren't going to get over 50 percent. 25 But if you look at their voting guidelines 0054 1 which they have set up, not Glass Lewis, not ISS, then 2 you will find that those policies are very consistent 3 with policies like what we have at Colorado PERA and are, in 4 fact, very consistent with the policies at ISS and Glass 5 Lewis, but it isn't because they're ISS or Glass Lewis. 6 It's because, voila, people have some common views on 7 corporate governance. People have views that poison 8 pills don't benefit investors. They may benefit 9 corporate management and some who represent them, but 10 they don't benefit investors, and that's where the 11 correlation comes from. It doesn’t come from the fact 12 that in a very smart move we look to others to get 13 research on an issue. Why wouldn't you? Why wouldn't 14 you want us as asset managers to reach out to an ISS or 15 Glass Lewis or others and get the best possible research 16 we could get before we make a vote. 17 I would hope that you would encourage that. 18 Now, I do have some sympathy with comments of 19 Commissioner Gallagher that you don't want to create a 20 situation where you off-load the fiduciary obligation, 21 and we think this is not so much a compliance issue as it 22 is really a fiduciary issue as I think Michelle outlines, 23 and that's what this is all about. 24 And I disagree with the notion that asset 25 managers should be able to offload any fiduciary 0055 1 obligation simply because they've gone and hired an 2 advisor. I think it should be very clear that the 3 fiduciary obligation remains with people like us at Colorado 4 PERA, Michelle at BlackRock and all, and you can't 5 offload it, but you're encouraged to go get those view 6 because it may better inform you, which we want informed 7 people voting. 8 MR. CHAMP: Thank you, Lynn, and I think you've 9 posited the larger firms, and Michelle you've talked 10 about what the larger firms are doing. Maybe just pause 11 and think about we do have smaller advisors that are, you 12 know, well outside that top 15, and maybe turn to Karen 13 Barr from IAA as far as how does a small adviser look at 14 this and think about these issues. 15 MS. BARR: Well, thank you, Norman. I also 16 appreciate being invited to participate in this important 17 roundtable. 18 Just by way of background, the Investment 19 Adviser Association represents investment adviser firms 20 registered with the SEC of all sizes. Our membership is 21 broadly representative of the universe of advisors, and I 22 do want to provide a little context because we are 23 hearing from the largest asset managers in the world, but 24 investment advisers register with the SEC. There are 25 10,000-plus of them, almost 11,000, and more than half of 0056 1 them have ten or fewer employees. 2 So most of the investment advisers out there 3 are really small businesses, and I think that's important 4 context to bring to this discussion, and there is a great 5 deal of asset concentration in the industry. The 99 6 largest firms, those that manage 100 billion or more, 7 manage more than 50 percent of all the total assets 8 managed by investment advisers. 9 So with that background, I do want to start by 10 agreeing with both Michelle and Lynn on how larger 11 advisors use proxy advisory firms. That is the 12 experience of our larger members as well. They use proxy 13 advisory firms both for the voting mechanics, for 14 research, for voting analytics as one element in their 15 total mix of the research that they get, and some of 16 them, in fact, subscribe to more than one proxy advisory 17 firm, and they weigh all of the research similar to the 18 methodology they use in their investment decision-making 19 process using, for example sell side research as just one 20 input. 21 Smaller advisors tend to rely more heavily on 22 the research and recommendations of proxy advisory firms. 23 However, and to Lynn's point, those firms retain 24 ultimate fiduciary responsibility for proxy voting, and 25 they retain the overall right at any time to override or 0057 1 disagree with any decision or recommendation of the proxy 2 advisory firms. 3 I do agree with some of the comments made that 4 investment advisers have a duty to look at the proxy 5 advisory firms and exercise due diligence in selecting 6 the firms and in selecting the guidelines within those 7 firms that they choose to follow. Those guidelines must 8 be designed to further the economic value of their 9 clients' holdings and be in the best interest of their 10 clients. 11 And in fact, I guess one thing I want to note 12 is that people have kind of said, "Oh, outsourcing, it 13 sounds like a dirty word." Outsourcing is perfectly 14 acceptable. It's perfectly acceptable to delegate duties 15 to a third party. Investment advisers do it all the 16 time. They hire, for example sub-advisers to manage 17 parts of their portfolio's core asset management duties, 18 but what advisers do is retain the ultimate fiduciary 19 responsibility to select those third parties, those sub- 20 advisers, those proxy voting recommendations and then 21 ongoing exercise oversight regarding the performance and 22 the recommendations and the outcomes of the proxy 23 advisory firms. 24 I also don't want to over-generalize here. 25 Thousands of investment advisers do not use proxy 0058 1 advisory firms at all for recommendations. They develop 2 and vote in house based on their own guidelines. Some 3 firms that do use proxy advisory firms also develop their 4 own custom policies and procedures, even firms as small 5 as with ten or 15 employees. 6 So I don't want to over-generalize here, but 7 there are some smaller advisers who do rely more heavily 8 on the proxy advisory services of ISS and Glass Lewis. 9 I also do -- I'm sorry, Damon -- want to take 10 one minute to talk about the effect of the no-action 11 letters that former Chairman Pitt mentioned, and I agree 12 with you about the growth of the complexity and number of 13 ballots and the need for small firms, in particular, to 14 leverage their resources. It's a huge number of actions 15 that they have to follow and take, and they really need 16 these proxy advisory firms. 17 But our members' experience is not that they've 18 increased their use of proxy advisory firms because of 19 the no-action letters. They've increased the use because 20 of the complexity and number of votes. 21 From our perspective, the no-action letters 22 didn't give advisers anything other than what they were 23 already entitled to do. They were already entitled to 24 hire third parties. The release adopting the proxy 25 voting rule discussed advisers' conflicts of interest, 0059 1 and gave a list of four ways that advisers could address 2 their conflicts. 3 One of those ways was the use of an independent 4 third party. So the first no-action letter, as Harvey 5 pointed out, said, "Okay. We're going to interpret the 6 word 'independent.'" 7 Independence does not mean the independence of 8 the proxy advisory firm in the context of that proxy 9 voting release. Independence means the adviser's 10 independence. So the adviser can't hire an affiliate, 11 for example, to vote in the event of a conflict because 12 that would further the conflict, but then the SEC staff 13 went on to say even though you didn't ask us about the 14 issuer's conflicts, we're going to tell you that you 15 advisers have to really look carefully at the proxy 16 advisor firm's conflicts with issuers, and here's an 17 extra set of steps that you need to take to make sure 18 that those proxy advisory firm are giving you advice free 19 from conflict. 20 And in effect that ratcheted up and specified 21 the duties of the advisers and looking at proxy advisory 22 firms' conflicts; from our point of view, it didn't give 23 the advisers a free pass, if you will. 24 MR. CHAMP: K.T. 25 MS. RABIN: I just want to add to what Karen 0060 1 said. I had my team put together some statistics last 2 night that I thought you guys might find relevant, and 3 first of all, of our client base, we have 1,000 clients, 4 roughly I'd say 900 institutional investors that are 5 voting. Eighty percent of our clients have custom 6 policies. 7 Now, some of those custom policies for some of 8 the smaller members of Karen's organization it might be 9 that they customize just a subset of the issues that 10 they're voting and they're usually pretty critical 11 issues. It might be just as much as saying for mergers 12 and contests we refer that so that it doesn't get voted 13 according to the Glass Lewis recommendation. We're going 14 to review that before we, you know, and we're going to 15 come up with our own recommendation. 16 But I did some analysis for those that actually 17 use Glass Lewis as the source for their -- you know, as 18 their policy essentially and follow our recommendations, 19 and I looked at three different issues: the separation 20 of chair and CEO; majority voting; and political 21 contributions. 22 And the first one, which is the biggest number, 23 that for meetings from January 1, 2013 through June 17th, 24 2013 where the client's policy was to vote following the 25 Glass Lewis recommendation, in the case of 21 percent of 0061 1 the shares that were instructed according to the Glass 2 Lewis recommendation the client who was following our 3 recommendation chose to override our vote and vote 4 differently. 5 In the case of majority voting, 11 percent of 6 the shares that were instructed according to the Glass 7 Lewis recommendation were overridden and voted 8 differently by somebody who follows the Glass Lewis 9 recommendation, and in the case of separation of chairman 10 and CEO, the same thing. 11 So what this says is that not only are the 12 clients that are developing their own policies sort of 13 taking ownership of the job of voting proxies, but even 14 the ones who follow the proxy advisor are not abdicating 15 the responsibility for making sure that they are being 16 voted in the way that makes sense to them. 17 Thanks. 18 MR. CHAMP: Damon. 19 MR. SILVERS: I just wanted to add some 20 observations from the perspective of the underlying 21 clients in many of these cases. This area is an area of 22 the law where you have an intertwining of underlying 23 state law, of securities law the Commission oversees, but 24 then also ERISA plays a major role in this area. 25 And for funds subject to ERISA or to state law 0062 1 that essentially mimics ERISA or the parallel IRS 2 statutes that impose similar duties, it has been clear 3 for decades now that proxy voting is a plan asset and as 4 such has to be managed under a prudent expert standard. 5 That means that most ERISA funds, I think, have some 6 concern that they may not have in-house resources to meet 7 that standard, and much as they don't have in-house 8 resources to meet that standard in many other areas of 9 investment management. Again, I think this has been 10 pointed out. There's nothing terribly exotic about this. 11 And thus, there's a real serious need outside 12 of the securities laws and for good reasons for those 13 funds to have expert advice. Now, that doesn't 14 necessarily mean that they cede ultimate fiduciary 15 judgment. Different funds do different things, I think, 16 based very much on their own sense of what their capacity 17 is. 18 But the proxy advisory service has played an 19 indispensable role here in providing expertise. There's 20 an aspect of this conversation I find somewhat puzzling 21 in that it seems that there's sort of an implication that 22 maybe something is wrong if votes follow advice, at least 23 as a statistical matter, Professor Chen's analysis. 24 I was heartened to hear Professor Chen talk 25 about how, well, maybe that's because information is 0063 1 flowing. I think the Commission would have great concern 2 if votes were not following advice, meaning if 3 essentially investors -- and I think this would be a DOL 4 concern as well -- investors and fiduciaries were 5 spending money on services and then essentially find no 6 value to them. One would hope that expertise is of 7 value. 8 My own personal experience, which is now a 9 little dated because it's been some time since I've 10 reviewed individual recommendations; my own experience is 11 that Glass Lewis, ISS and their smaller, less better 12 known competitors produce extremely detailed analyses of 13 things that in many cases have been essentially rendered 14 intentionally obscure in the proxy process despite the 15 Commission's best efforts. This is particularly true 16 around executive pay as Nell began with. 17 And I've often found the most informative 18 analyses coming in circumstances where I deeply disagreed 19 with the recommendation, but I think universally the 20 typical investor, the typical pension fund, perhaps the 21 typical investment adviser -- I wouldn't pretend to speak 22 for them -- when they see the recommendations from the 23 firms they advise, they are definitely getting new 24 information, information that they don't have. 25 And I would conclude by saying something that's 0064 1 actually broader than this, but it has come up several 2 times in this session, which is that we seem in part to 3 be having a discussion here not about proxy advisors, but 4 about the corporate governance system as a whole and 5 whether we think the way in which the corporate 6 governance system as a whole has moved over the last 7 several decades is good or bad, and I think we've had 8 that conversation in a kind of dichotomy that I'm not 9 sure is really the right way to think about it, and I 10 want to come back to something Harvey Pitt said at the 11 beginning of this session. 12 He said following 2000 and the 2003 period, 13 there was a vast increase in shareholder proposals. I 14 don't have the date in front of me. I assume he's right. 15 The reason why that happened in that period was because 16 of an awareness, I think, pretty much across the investor 17 community, the regulations, the public, that corporate 18 governance had really mattered and had mattered in a bad 19 way in the events leading up to Enron and WorldCom, and I 20 certainly remember former Chairman Pitt speaking to this 21 himself at the time, and that if there had been more 22 shareholder proposals on things like auditor independence 23 during 1999 and 2000, perhaps outcomes might have been 24 better. 25 Now, that speaks to the attempt or the 0065 1 evolution of the possibility in this period we are in now 2 of a corporate governance system which is not simply a 3 dichotomy between a board dominated or honestly a 4 management dominated system, on the one hand, and a 5 system governed by short-term players and takeovers. 6 If you think we need to have something other 7 than those two things, it has got to be a system with 8 some kind of interaction through the corporate governance 9 system around some sorts of specific issues with investor 10 involvement, and that is in play here. 11 I'm unhappy with the degree of concentration in 12 proxy advisors. I'm unhappy with the issue of conflicts 13 that some advisors have, but I don't see how we have a 14 system of corporate governance that is in that middle 15 ground without the role of independent experts. 16 MR. CHAMP: Trevor had signaled me. 17 MR. NORWITZ: Thank you. 18 I would love to engage Damon in that debate at 19 some point. I have a feeling this is not the time. I 20 would really just like to agree very strongly with both 21 of what Michelle and Lynn said. 22 I mean, I think we, speaking for sort of 23 corporate American people, represent them, like that 24 system. We like companies, you know, managers who take 25 the very useful proxy advice that they get and use it as 0066 1 an input, but not simply as sort of an outsourced 2 automatic result. I think I'd particularly like to 3 emphasize what Michelle said about not looking at the 4 number of no votes as the degree of engagement because, 5 frankly, the decision to invest in a company is a 6 decision that you trust this management, that you like 7 this management. Selling is a way of displaying, you 8 know, your disapproval. It doesn't have to be a negative 9 vote. 10 Obviously, I think shareholders at Airgas and 11 Vulcan and other companies might disagree as to whether 12 shareholder rights plans add any value, but we can have 13 that debate outside as well. 14 I think the last point I'd like to make is, you 15 know, I mean, it's a fact that ISS' recommendation 16 particularly, Glass Lewis as well, swings a significant 17 percent of the votes in any significant contested or even 18 uncontested election. I mean, one of the top proxy 19 advisors talks about 20 to 30 percent coming from ISS and 20 five to ten percent coming from Glass Lewis. 21 Yes, there will be some amount of that that is 22 just coincidence because they happen to think the same 23 way, but there's certainly a big chunk of that which is 24 simply outsourced votes and, you know, let's give the 25 power to ISS, and it's that that we have a problem with 0067 1 and we think is kind of the quirk in the system that, you 2 know, wasn't designed that way. 3 MR. CHAMP: Harvey. 4 MR. PITT: Thanks. 5 I have spent a fair amount of time looking at 6 BlackRock's policies on their Web site, and I think they 7 are excellent. That was, in fact, the purpose of 206(4)- 8 6, was to get firms and advisers to adopt a policy and 9 make that policy known to shareholders. 10 In listening to the discussion, however, I 11 think we're conflating certain concepts. The issue isn't 12 whether proxy advisory firms can serve a very useful 13 purpose. They can and they do and particularly given the 14 increase in the number and complexity of proposals. They 15 can be exceedingly valuable as a factor that those with 16 responsibility for voting consider. 17 And so the issue isn't should they follow the 18 advice they get or shouldn't they follow the advice they 19 get. The issue first is how is the advice formulated. 20 Is there transparency in the way it's formulated? 21 Second, are the recommendations tailored to the 22 investment purposes that advisers are rather obligated to 23 pursue based on their stated investment objectives? Is 24 there an adequate opportunity for those whom the 25 recommendations have dramatic consequence for to have 0068 1 input? 2 We have instances of public companies that have 3 had to suspend annual meetings because of misinformation, 4 and anyone can wind up with some misinformation or 5 misunderstand anything. So that's not an attack on 6 anyone, but if the Commission can observe in the 7 marketplace that annual meetings of shareholders where 8 the vote is so crucial may get suspended because of 9 misinformation, inadvertently or what have you, that was 10 put out, then that is a real concern because, after all, 11 the beneficiaries of this advice and the fiduciary duties 12 are supposed to be the shareholders, and if they can't 13 even vote on these issues because of mistakes, mistakes 14 will occur invariably when there is not enough 15 transparency so that those companies that see a problem 16 can call attention to factual errors, not to have a 17 debate about whether the recommendation about who should 18 be approved as a director or not is a good one, but 19 whether or not, for example, on compensation issues the 20 advisory firms have properly calculated what the net 21 impact is of these very complex formula that many 22 companies use. 23 And so the issue isn't should people follow 24 advice or not. The issue is how is the advice rendered. 25 How does it fit in with the kinds of investment policies 0069 1 the adviser has? How is it developed with respect to the 2 input that can make the advice be factually correct? 3 No one can dispute somebody's approach to an 4 issue. That's very subjective, but it ought to be based 5 on objectively ascertainable facts that have gone through 6 the process of being vetted appropriately. And what 7 occurred with the no-action letters and the not action 8 letters were an effort by the staff to respond to 9 specific problems that were presented to it, but the 10 initial reason for the rule was because advisers were 11 voting when they were conflicted. 12 If an adviser then relies on a proxy advisory 13 firm that itself is conflicted as to a specific security, 14 that doesn't remove the conflict. It only means it has 15 been shifted, and the question then becomes what kinds of 16 protections are there to prevent against that and 17 shouldn't firms deal with that. 18 One of the issues that the Commission faced 19 back in the early 2000s was brokerage research 20 recommendations, and in many cases unfortunately those 21 research recommendations were actually marketing 22 materials. They weren't true research, and there was a 23 disclaimer at the bottom on every brokerage research 24 report which said, "We may have a position. We may have 25 an economic interest. We may perform other services," 0070 1 may, may, may, may, but of course, anyone reading the 2 report had no idea whether, in fact, the conflict existed 3 or not. 4 And the Commission, with the help of the SROs, 5 put a stop to that. We said it was important for people 6 to know when they look at a recommendation whether there 7 is, in fact, a conflict in how you deal with it. 8 The problem with the no-action letters, whether 9 it was intended or not, is that it has effectively 10 encouraged people to shift their potential conflicts, if 11 they have them, and now doing it even more so for other 12 reasons of convenience to someone else where the other 13 person rendering the advice may also have a conflict. 14 And that is not the kind of thing, if it should be done 15 at all, that should be done at the staff level. That's 16 the kind of thing where the Commission should make the 17 policy and then let the staff implement it. 18 MR. CHAMP: Thanks, Harvey. 19 I think both Nell and Eric had asked to speak. 20 So maybe we could have the mic down there. 21 MS. MINOW: Thank you very much. 22 I hope that the Commission can obtain some hard 23 data on the number of annual meetings that had to be 24 postponed and this avalanche of takeovers because 25 apparently companies don't have takeover protections 0071 1 anymore as a result of this power that the proxy advisory 2 services have. 3 I'd like to also mention something about 4 Professor Chen's research and posit a third option for 5 interpreting his data. Sometimes companies propose 6 things that are not good, and I think unless we're going 7 to assume that 100 percent of the time companies propose 8 things that shareholders should approve, we have to say 9 that sometimes shareholders vote against proposals by 10 management because they don't them. They don't agree 11 with them. They're wrong. 12 I also want to point out that I believe as of 13 this week in 2013 71 companies have failed Say-on-Pay 14 proposals this year, including two which were repeats. 15 Okay? So what we take from that is very, very tiny 16 percentage, and I think fair to assume that those are the 17 outliers, the most egregious cases, and then in two cases 18 the pay was so bad that they chose to vote against it 19 twice. The company hasn't done anything about it. 20 So I think it's hard to talk about the word. I 21 know that Trevor likes to use the word "fact." Sometimes 22 it's not really applicable. To say that it is a fact 23 that these entities are so powerful is to ignore the 24 actual number. 25 I also want to say one thing about the no- 0072 1 action letters. Proxy voting is unique in the field that 2 is overseen by the SEC because of the collective choice 3 problem. Because the amount of money, the amount of 4 resources that any individual investor can, including a 5 large institutional investor can put into voting a proxy 6 may be less than the return. So even voting down, say, 7 an outrageous pay plan, that's just -- to make the system 8 work, you have to somehow require. You have to somehow 9 remind fiduciaries that proxy voting is a fiduciary 10 obligation. 11 I would be fine with the SEC ever prosecuting 12 an investment adviser who, say, takes a million dollar 13 side payment to switch a vote at the last minute, which 14 did occur, and which I met with then Chairman Pitt to 15 discuss. That would be great. That would be one way of 16 making that clear. But until the Commission feels like 17 prosecuting people who go into the tank because of 18 conflicts of interest in the way they vote their proxies 19 violating their obligations as fiduciaries, I think a no- 20 action letter is a good way to go. 21 MR. KOMITEE: So I'm Eric Komitee from Viking 22 Global. 23 I'll start with a short disclaimer that I'm 24 here to give my views and not those of Viking necessarily 25 or any other organization. 0073 1 I'm listening from the perspective of the 2 consumer, you know, the investment adviser who was a 3 consumer of the services of proxy advisory firms, and 4 hearing the articulation of the problem and wondering how 5 would it be solved, and what would the real world 6 implications of that be for investment advisers like us. 7 And you know, the two aspects of the no-action 8 letters that people seem to think are controversial are 9 (a) this notion that there was a no-action letter that 10 said that one can ameliorate conflicts perhaps by looking 11 to the views of an unconflicted third party, assuming 12 they are unconflicted. 13 You know, I would humbly suggest that that was 14 the rule as the proxy advisory services and all kinds of 15 other third parties before the no-action letter came out 16 and it will ever be thus. I mean, if we have a conflict 17 of interest potentially with respect to the valuation of 18 a given position, we may go get advice from a third party 19 valuation firm because we believe that the valuation 20 decision we make will be less subject to criticism once 21 we have looked to the expertise of a third party that is, 22 you know, intended to think about these issues. 23 People do that with respect to outside counsel. 24 In-house lawyers look for the advice of outside counsel 25 because they may be viewed as potentially less 0074 1 conflicted, and so no-action letter or not, I don't know 2 that that reality necessarily changes. 3 And then the second aspect, I guess, is this 4 notion that advisers have a fiduciary duty perhaps to 5 vote proxies. Perhaps that was understood to create an 6 obligation to vote every proxy, you know, no matter what 7 the degree of one's interest. 8 I think investment advisers generally speaking 9 have a duty of good corporate citizenship in the United 10 States the same way ordinary citizens have a civic duty 11 to vote in elections, you know, where the outcome is 12 potentially important to corporate America and the 13 companies in which they invest. You know, that duty 14 though has to be balanced in the investment adviser 15 context against all the other time consuming aspects of 16 our fiduciary duties. There are only so many hours in 17 the year, and every hour spent evaluating proxies is 18 potentially an hour spent not evaluating alternative 19 investments that could go into the portfolio. It's an 20 hour not spent evaluating counterparty risks and 21 custodial issues and all the other aspects of an 22 investment adviser's fiduciary duty that compete for, you 23 know, the most scarce resource that everybody has, which 24 is time. 25 And to the extent that an investment adviser 0075 1 has rigorously reviewed the practices of a proxy advisory 2 service and believes that generally speaking the proxy 3 advisory service is sort of oriented towards good 4 governance, generally speaking is transparent about the 5 reasoning and the process by which they come to their 6 recommendations, and generally speaking is decent at 7 policing its own conflicts, I do think that an investment 8 advisory should be at liberty to rely and in some cases 9 rely heavily, on the recommendations of those services. 10 That having been said, there are certainly 11 times where we disagree with the proxy advisory services. 12 I mean, to respond to the anecdote that was raised 13 earlier, we surely realized that there can be a tension 14 in electing directors between true independence, on the 15 one hand, and director quality on the other hand, and you 16 know, we override the recommendations from our proxy 17 advisors constantly, but we do need to balance the 18 demands on our time in a way that I think gives rise to 19 reasonable and appropriate reliance on those 20 recommendations. 21 CHAIR WHITE: I just a question that arises out 22 of, I think, your comments, Eric, and Harvey's, too. I 23 mean, in terms of exercising the fiduciary duty by 24 investment adviser, what's the duty to determine that 25 that third party is actually unconflicted? 0076 1 MR. KOMITEE: So that I know was covered in 2 some of the no-action letters. The way I understand it 3 is that our duty is satisfied if we've made a searching 4 assessment of their policies and procedures for policing 5 their own conflicts. We understand what their rules are, 6 and we understand how they implement the process around 7 those rules and that once we've done that, we don't have 8 to make a specific inquiry in the case of each individual 9 vote about any particular conflict that they might have, 10 but you know, to the extent that there's a contested, 11 heavily contested matter, I mean, we tend to invest in 12 large public companies. 13 I do think that even if you put aside all the 14 work that we do to understand the general policies and 15 practices of our proxy advisory service, if they did have 16 a specific conflict with respect to a contested matter, 17 the companies we invest in are big enough and the matters 18 under controversy get enough attention that we would 19 probably hear about that conflict either from the company 20 or from other sources or our portfolio managers would 21 just learn about it in the ordinary course of their 22 research. 23 MR. CHAMP: Let me just go to Jeff Brown from 24 Schwab and then Yukako on no-action letters and the 2003 25 release. 0077 1 MR. BROWN: Thank you. 2 First, just to touch on the company, we do 3 believe it's part of the due diligence obligation of the 4 investment adviser at the time of contracting, you know, 5 really with the proxy advisory firm to do the due 6 diligence, to make it a best estimate of the conflicts 7 that may exist and make decisions based on, you know, a 8 small sample size of alternatives. Which of the two best 9 fit the needs of the investment adviser and the service 10 of those shareholders? 11 Now, at Schwab we're both an issuer of 12 securities and, therefore, have a view about the impact 13 of proxy advisors and certainly they have a dramatic 14 impact. 15 We also have an affiliated investment adviser 16 who has its own board, its own policies and procedures, 17 its own duties with respect to their shareholders, and 18 they engage proxy advisors and rely on them, and really 19 we think of it as almost two functions. There's the 20 advice function related to formulation of policies and 21 analyzing both ballot measures that may exist in the U.S. 22 or internationally, which they bring the data together 23 that's very valuable to that investment adviser to make a 24 decision. 25 Now, the other part though is really 0078 1 operational, which is the voting of all these securities. 2 You know, at Schwab in 2012 for the investment adviser we 3 had 27,000 ballots and about 270,000 separate votes. 4 Those would take an enormous amount of time for an index 5 shop to manage if you didn't outsource that process. 6 So in fact, you know, again, here's a conflict 7 within our firm. Some believe that like the adviser 8 would say the no-action letters aren't as relevant as the 9 need to do operationally what needs to be done to vote 10 the shares. So they didn't necessarily drive that 11 movement, that growth because you would still have to 12 vote the shares. You'd have to deal with the operational 13 issues. 14 But from an issuer perspective, we think what 15 it did was it made the default so much easier because it 16 kind of says to investment advisers here's a way for you 17 to manage this and to deal with your fiduciary 18 obligation. And so we would support removing those no- 19 action letters. 20 MR. CHAMP: So we've had a lot of discussion 21 about the no-action letters and what impact they had. Of 22 course, they also were following on the 2003 adopting 23 release of Rule 206(4)-6, and so I want to turn to Yukako 24 Kawata who advises a lot of investment advisers as they 25 think about the issues that Eric and Jeff are raising, 0079 1 and others. 2 You know, what have you seen in the ten years? 3 What have you seen as you advise advisers about their 4 voting duties? Are you seeing -- did you see changes in 5 behaviors? How are people interpreting the no-action 6 letters in the rule? 7 We did, as a couple of folks mentioned, 8 including former Chair Pitt, there were examples given in 9 the adopting release about advisers not having to vote 10 every share, although obviously it seems like a consensus 11 now that most people feel like they do have to vote every 12 proxy. How about that issue as well? 13 MS. KAWATA: Yes, okay. Is this on? 14 Okay. Thanks, Norm, and thank you also for 15 inviting me to participate on this panel. 16 I do think it's sort of interesting to go back 17 to the 2003 release and, in fact, you know, one comment 18 that Commissioner Piwowar had raised at the beginning, 19 which was there were any unintended consequences arising 20 from, you know, this rule that appears to be one of the 21 shortest rules adopted under the advisery -- 22 (Laughter.) 23 MS. KAWATA: I mean literally, you know, you 24 pick it up and you sort of say, "What does it say?" And 25 it sounds very commonsensical, and you know, you read it 0080 1 and you say to yourself, "How can I object to any of 2 that?" Okay? I mean, it all seems to say adviser has a 3 fiduciary duty. 4 We knew that all along. There's a duty of 5 care. So that means you can't just, you know, not pay 6 attention to voting your proxies. I mean, that's 7 something you should do for your client, and you have a 8 duty of loyalty. So you're supposed to act in the best 9 interest of your client. 10 For a lawyer like me, I'm in the investment 11 management area. You know, this is, yes, this is what we 12 all do and say investment advisers are supposed to do, 13 you know. Respect that and do the right thing. 14 The issue of unintended consequences though, I 15 think, you know, it's not that what was said was so bad 16 in terms of, you know, implementing written policies and 17 procedures reasonably designed to ensure that the adviser 18 votes securities in the best interest of the client. You 19 read that and you say that makes sense. 20 And so I agree with, you know, former Chairman 21 Pitt in terms of, you know, how important a statement 22 that is, but what it went on to say, which we haven't 23 talked about yet, is it specifically required procedures 24 about how an adviser would address material conflicts of 25 interest that could arise between the adviser and the 0081 1 client. Okay? 2 And this whole rule came up in the context of 3 bad facts. We all know what those bad facts were, and we 4 know that it was a terrible thing that was done, and so 5 yes, you know, try to address that. 6 And I always think that sometimes the devil is 7 in the details. So you say to yourself, "Okay. Fine. 8 I'm going to do written policies and procedures. Now, 9 how do I got about designing something that meets the 10 requirements of this rule? 11 And this release, I think it's not the no- 12 action letters. It's the release said that -- 13 (Laughter.) 14 MS. KAWATA: There must be a reason why I'm 15 sitting right next to him. I saw the placement, you 16 know, of the name tags, and I said to myself, "This may 17 not be the right place to sit." 18 (Laughter.) 19 MS. KAWATA: You know, but the release said 20 specifically that the adviser must take steps to ensure 21 and must be able to demonstrate that those steps resulted 22 in a decision that voted shares in the client's best 23 interest, and that's the part that's really hard. 24 And I had a lot of clients call me up and say, 25 "How do I demonstrate this?" Okay? And so then you say 0082 1 to yourself what does the release tell us we can do. 2 Well, there weren't that many options. I mean, 3 the first option was disclose to your client and get your 4 client's consent. Yeah, right. We're really going to be 5 able to do that with all of the clients that we manage. 6 We can really go one on one and get disclosure and 7 consent. That's not going to work. Okay? 8 The second one was they said, "Well, you can 9 just say to your client, 'I can't vote these shares. 10 Maybe you should engage another party to vote those 11 shares.'" Yeah, right. You know, let's be practical. 12 You know, can you really imagine calling up your client 13 on a client by client basis and saying, "Hi. I don't 14 think I can vote these shares so you should engage 15 somebody else"? 16 So what ended up happening was pressure came 17 down on the two remaining suggestions. The one 18 suggestion was that, you know, that there should be a 19 predetermined policy. If the adviser adopts 20 predetermined policies, you know, they give the adviser 21 very little discretion. They, in fact, made the point of 22 very little discretion, and the adviser votes in 23 accordance with those predetermined policies. Even if 24 there's a conflict, the adviser is okay because the 25 adviser can say, "I had these predetermined procedures, 0083 1 policies and procedures. I followed them. It wasn't 2 because I had this conflict that I voted a particular 3 way. I did it because I was following my predetermined 4 procedures." 5 The problem with that was the little tag line 6 that said you couldn't have a lot of discretion, and we 7 all know what these policies look like. I mean, I think, 8 in fact, if you try to hardwire every issue that is going 9 to a vote and have a predetermined policy, you can have a 10 policy that goes on for hundreds of pages, and it's not 11 going to cover the issue. 12 So ultimately the one you always fell back on, 13 I think, was the one that basically said, "Okay. You can 14 have a predetermined policy, and if you base your 15 decision on the recommendation of an independent third 16 party, then you'll be okay." 17 So I don't think it's such a mystery as to why 18 we ended up where we are. Okay? I mean, you know, you 19 look at those options and you say to yourself, "Well, 20 where am I going to go?" And, you know, the independent 21 third party option is right there. 22 I think if you asked me what did advisers do 23 before this rule came out, what advisers did before this 24 rule came out was if they had a conflict, they thought 25 deep, hard thoughts about the conflict, but look. 0084 1 Advisers, most, 99 percent of the advisers are very 2 cognizant of their fiduciary duties. They're all trying 3 to do the right thing, I think. Okay? And as a result, I 4 think that at the end of the day they weigh deep 5 thoughts. They recognize the conflict. They think about 6 what makes the most amount of money for their clients 7 because there is this concept of, you know, if you're an 8 adviser you want the value of your -- of the security to 9 go up, and so you say to yourself, "Okay. I've thought 10 deep thoughts, and I think, you know, at the end of the 11 day I know there's this conflict issue, but I think it's 12 still in the best interest of my client to vote this 13 way." 14 And you could do that. I'm not sure you can do 15 that anymore after this release came out, and I think 16 that's what caused a lot of concern, and then the 17 no-action letters were great because the no-action 18 letters came out and they said here's what you have to 19 think about when you hire an independent third party. 20 So I think, you know, if you look at what the 21 releases say and where -- the only other option for an 22 adviser not to vote shares, by the way, specifically 23 cited was if it's permitted a cost-benefit analysis in 24 the context of non-U.S. issuers, where they pointed out 25 that, oh, yes, if you have to have the proxy translated 0085 1 from a foreign language and perhaps you have to bring 2 your body over there to vote those shares, you might 3 decide to abstain from voting those shares. Thank you 4 very much for those statements. I mean, that's sort of 5 common sense. 6 But that was an instance that was cited, and 7 again, some of these examples are great, but I think a 8 lot of times if you're -- if you don't want a whole lot 9 of risk, if you're an adviser and you're conscious of 10 your fiduciary duties and you really also don't want to 11 be sued and you don't want people second guessing you, 12 you['re going to say, "Well, what's the way that I can 13 fulfill my fiduciary duties and at the same time also 14 protect myself?" 15 And so you know, here we are, and giving us 16 some examples that seem sort of common sense, and then 17 you say to yourself, "Wait a minute. Are they saying 18 these are the only times that, you know, that we can 19 abstain from voting? You know, and how do we do our 20 cost-benefit?" 21 Because I do think, by the way, the people 22 would do a cost-benefit analysis. You would think about 23 does it make sense to vote, you know. Maybe it doesn't 24 in this context. And I think in some ways this release 25 and the rule, you know, again, as I say, makes a whole 0086 1 lot of common sense, and there's really very hard to 2 object to it, but just in practice I think it can be 3 challenging, and I think advisers have faced those 4 challenges. 5 And I think if you talk to the big advisers and 6 you read those, you know, policies and procedures, just 7 think about the amount of time that went into creating 8 those policies and procedures, and I would not, by the 9 way, recommend that you read the cost-benefit analysis 10 part of that rule, especially in terms of the cost it 11 would take to comply with that rule. That would not be - 12 - it just doesn't make a whole lot of sense. 13 But, anyway, did I answer your question, Norm? 14 (Laughter.) 15 MR. CHAMP: Very well. Thank you. 16 Harvey, since the mic is right there. 17 MR. PITT: I now understand why you charge so 18 much per hour. 19 (Laughter.) 20 MR. PITT: The issue of how one votes when one 21 is conflicted is not restricted solely to investment 22 advisers. It's a fiduciary concern throughout corporate 23 activities. In a boardroom the usual way, because there 24 are more people who can vote, is that a conflicted 25 director will recuse himself or herself and will not vote 0087 1 in the face of a conflict or the conflicted director will 2 disclose to the other board members and the board itself 3 will decide. 4 One of the predicates that's missing here and 5 it was also missing in a sense in what I thought was a 6 very excellent response by Eric is the notion that in 7 order to deal with a conflict you have to know there's a 8 conflict, and what the no-action letters did was it said 9 you don't need to know whether there's a conflict on a 10 specific issue. All you have to do is decide that the 11 general policies are fine, and then it doesn't matter 12 anymore if the advice you're getting is conflicted. 13 What I agreed with in a sense, very strong 14 sense of Eric's response is if somebody tells me, "I want 15 you to know I have an interest in this and here's what it 16 is," I can still decide to follow that advice because I'm 17 making a rational, economic decision. I've heard the 18 information. 19 But if I don't get that information, if I don't 20 know whether what I'm hearing represents a conflict, then 21 I can never exercise my fiduciary duty at least as I see 22 it because I'm committing other people's money in making 23 a judgment without knowing one of the most essential 24 facts, and as a result of that, I think, the rule was 25 simply designed, and as you know, Commissioners don't 0088 1 actually write the entire release, but they're 2 responsible for what's in it. 3 My own impression was that these were options 4 that were available. They were not exclusive, and there 5 are other options. The important issue was to get people 6 to understand that they were fiduciaries and that if they 7 had conflicts or if the person that they were taking 8 advice from -- and the key word that was sort of shall we 9 say skimmed over was "independent third party." 10 So if the fundamental premise, that is, that 11 the third party is not independent, then everything else 12 goes by the boards, and that's the real issue. Now, if 13 you have an adviser that devotes the kind of resources 14 that some of the representatives here do, they don't care 15 whether there's a conflict because they are making 16 essentially their own judgments. They're using the data 17 and information and they don't really make a voting 18 decision based solely on what the proxy adviser says. 19 But before somebody can delegate out this kind 20 of fiduciary responsibility, which I think under 21 fiduciary principles is very, very hard to do, the law 22 takes a very dim view of that, but even assuming you 23 could do it, you must know what the facts are. You must 24 have a good faith reason for not allowing the conflict to 25 deter you from listening to the advice, and if you 0089 1 satisfy all of that, there's nothing in this rule that 2 would prevent that. 3 And the purpose of the rule wasn't to change 4 fiduciary duties or law. It was to make people sensitive 5 to fiduciary duties and what their obligations were. 6 MR. CHAMP: Thanks, Harvey. 7 I think Gary would like to add to that. 8 MR. RETELNY: Thank you. Again, thank you very 9 much for inviting ISS and allowing us to participate. 10 I know we're always pressed for time. So I'm 11 going to just keep my comments very brief to this one 12 issue of conflicts, and I just want to clarify one thing 13 that I think is part of the myth of what I hear many 14 times about ISS, and that is access to our client list. 15 So our clients, the clients of ISS, have access 16 to all the clients of whatever other affiliate exists 17 within ISS, the corporate side so to speak, and every 18 client of ISS has complete, unfettered access to that. 19 We do not disclose the names of who those 20 clients are specifically in the reports that we write to 21 protect the Chinese wall and to prevent our research 22 organization to know that others are clients of ISS, but 23 the ISS clients do, in fact, have access to the names of 24 these companies, and they, in fact, take advantage of 25 that access very frequently. 0090 1 Many of them receive the lists on a monthly 2 basis at their request. Many of them receive it on a 3 quarterly basis. Many of them receive it on an annual 4 basis, and many of these institutions do very significant 5 due diligence with regards to our walls, our barriers, 6 our information protection, our data rooms, our data 7 centers, and they spend a good deal of time in diligence 8 with regards to many of the things that we have discussed 9 here today. 10 And I'm more than happy to address any and all 11 of them, but I just wanted to highlight that the 12 institutional clients of ISS that we are talking about do 13 have access to that information any time they want it. 14 MR. CHAMP: Thanks, Gary. 15 I think that is a good jumping off point. 16 Yeah, go ahead. 17 MS. STUCKEY: Thanks. 18 This doesn't actually got to what Gary said 19 just now, but before we leave the sort of conflict of 20 interest discussion with respect to how -- 21 MR. HIGGINS: Darla, I was just going to say 22 we're going to talk about conflicts in the second panel. 23 I mean, there will be opportunity. 24 The interesting thing about the discussion 25 here, I think, has been there's really two conflicts 0091 1 going on. 206(4)-6 was addressing the 2 conflict of the adviser in making sure that the adviser 3 didn't have a conflict in voting shares that would be for 4 the benefit of the adviser or an affiliate of the 5 adviser. The question that Gary went to was the conflict 6 of the person from whom the proxy advisory services 7 sought and whether that conflict -- I mean, obviously 8 it's still a conflict, and I guess the question Yukako 9 was talking about, is it okay for an adviser to rely on 10 an outside, a, quote, independent third party? What's 11 the conflict there, and what sort of diligence does the 12 adviser need to do on that conflict? 13 So but we'll talk about the sort of advisory 14 services conflicts in the next panel. 15 MS. STUCKEY: Okay, but this kind of goes to 16 also how investors use proxy advisory services as well. 17 It's just a really short point. 18 We had a member company who had a Say-and-Pay 19 vote, two recommendations. One was for and one was 20 against by each of the firms. One was based on an 21 erroneous analysis, and truly erroneous, I think, 22 according to the media. You know, it became clear that 23 one of them was wrong. 24 So the company did outreach to its actual 25 shareholders because it didn't want to lose the vote, and 0092 1 it didn't want to take just what the one proxy advisory 2 firm said. In that context, the company said call the 3 investor and was told -- it was a mutual fund, a large 4 shareholder, this company, a mutual fund -- it was told 5 under its conflict of interest requirements it had to 6 vote based on the lower of Glass Lewis or ISS 7 recommendations, and even though this particular person 8 understood the erroneous analysis and agreed actually 9 with the company representative, he couldn't change it. 10 It was a very rigid policy, and this did have a 11 significant impact because it was a larger shareholder. 12 It did have a significant impact on the vote results for 13 the Say-and-Pay proposal. 14 So again, it's just one place where sort of the 15 rubber meets the road, and we had never heard anybody say 16 that. I don't know if that's a policy on someone's Web 17 site that we're going to vote. If you get a vote for and 18 a vote against on any given thing, if we believe we're 19 conflicted, we're going to always vote with the one that 20 goes against management. Maybe that's the policy. It's 21 just was surprising. 22 MR. CHAMP: Thank you, Darla. 23 And I think that's a good jumping off point. 24 We have only about ten minutes to go. I just wanted to 25 try to open up the competition point. We've had some 0093 1 references earlier to, you know, the duopoly and, you 2 know, whether we do have two main firms obviously in this 3 business. 4 You know, do we have barriers to entry in this 5 business? If so, what are they? Would it be feasible 6 for competitors to get in? 7 I was reading a lot of the comment letters for 8 the 2010 release, and obviously there's arguments both 9 ways, and so I just wanted to ask Mike Ryan, who has 10 first-hand experience with this, about competition and 11 barriers to entry in the industry. 12 MR. RYAN. Thanks, Norm. 13 Norm referred to my -- is this on? -- Norm 14 referred to my interest or my background on this. As he 15 mentioned earlier, I was President and Chief Operating 16 Officer of Proxy Governance. I served in that position 17 from June of 2008 until we ceased operations in December 18 of 2010. 19 That was obviously a very different operating 20 environment than we have today. I have since spent some 21 time just on my own looking at this very issue and 22 thinking about the capacity for standing up a proxy 23 advisory firm. So my comments are my views as they exist 24 today. It's not really necessarily the specifics that I 25 had with PGI, but that's obviously very much informed by 0094 1 that. 2 I would say that it's almost virtually 3 impossible to stand up a proxy advisory firm today in any 4 meaningful way that's going to attract, you know, 5 reasonable market share. Could you stand up a small 6 proxy advisory firm and provide services around the 7 edges? Yes, but to stand one up today is virtually 8 impossible, very difficult. 9 Some of the reasons for that are, first of all, 10 there's roughly 40,000, I think, securities globally. I 11 would say that to be able to attract any just even medium 12 size investor, a proxy advisory firm day one would have 13 to be able to cover about 10,000 securities. That's 14 probably about 4,000 in the U.S. and maybe another 6,000 15 outside the U.S. 16 We have had plenty of people here today say how 17 complicated that is outside the U.S. The U.S. is 18 dramatically easier to deal with than outside the U.S., 19 but there are no institutions to speak of that are long 20 securities only in only U.S. securities. So you'd have 21 to start with a real critical mass. 22 A second problem is that these business, you 23 know, are very low margin businesses. You can look at 24 ISS' financial results for the last six, seven, eight 25 years. I think their net income is about ten percent of 0095 1 revenues. EBITDA is probably about 25 percent. Revenues 2 are 150 million or so. That's not a business that's 3 going to attract quality risk capital to stand up a firm. 4 One of the points that I hope to make later on 5 if we have the opportunity is, you know, sort of what are 6 the barriers to entry. One of the things we think should 7 happen is that these proxy advisory firms should be 8 registered with the SEC and they should be registered 9 under sort of specialized rules because they are not the 10 traditional investment adviser and they should be subject 11 to special rules and special inspection programs. 12 I raise that now because I don't see that as a 13 barrier to entry. If that regulatory structure is done 14 in a thoughtful, cost effective way, that is not a 15 significant issue for a proxy advisory firm. 16 Just to drill down a little bit, some of the 17 real challenges here are to stand this firm up you need 18 to have significant technology, and that technology is on 19 the research side, having technology that will take in 20 the quantitative information that's available about a 21 company and analyze that, present it to an analyst who 22 then has to factor in qualitative information and make a 23 decision. 24 A number of people, a number of the investors 25 around the table have already said there's no way you can 0096 1 do this without having a third party voting platform to 2 get this job done. I think it's 75 percent of the 3 proxies at least in the U.S. are held in the first six 4 months of the year. So the crunch is so critical that 5 you need to have a third party voting platform. 6 And that voting platform is not just to be able 7 to go in and say, "I want to vote this way." It's has to 8 be a very, very robust voting platform. In most cases 9 for medium to large size institutions it has to have a 10 capacity for the institution to put in their own proxy 11 voting policy because, as has been alluded to, you know, 12 very rarely do they follow the proxy advisory firm across 13 the board. Some rely more and some rely less, but that 14 custom policy application has to be very robust and is 15 very expensive to develop. 16 I've mentioned internationally just the 17 complexity there is just staggering. When I was at PGI, 18 we used another firm, but it was a real challenge to do 19 that. 20 Another point here, and this actually goes to 21 we've spent a lot of time talking about the conflicts of 22 interest and sort of the fiduciary duties of 23 institutional investors. I think there could be more of 24 a dialogue about the role and responsibilities of 25 institutional investors doing due diligence on proxy 0097 1 advisory firms. It's not just limited to the conflicts 2 of interest, but it's the capacity for these firms to do 3 the job that they're going to do. 4 And one of those that I think is really, really 5 critical and is very difficult given the low margins is 6 having experienced and qualified and well trained staff 7 to make the judgments that need to be made to implement a 8 recommendation. Unless you're going with a one size fits 9 all approach, and I think everybody agrees that that is 10 not a good thing for our economy for promoting 11 innovation, for promoting dynamic boards, you need to 12 have qualified people taking that information and making 13 a judgment, and that is expensive. So that's a real 14 challenge for proxy advisory firms. 15 The other hurdle in all of this is if you do 16 stand this firm up and you do have everything I've just 17 described, now you've got to attract clients, and most of 18 the -- certainly all of the large clients and most of 19 even the medium size clients have developed their own 20 internal technology to match up and plug into the firm 21 that they have selected. 22 So the idea of somebody switching from Firm A 23 to Firm B is a real project, and when I was at PGI and we 24 had the opportunity to do that, and it took six to nine 25 months to get that whole process done. All of these 0098 1 institutions use multiple custodians. You have to go to 2 the custodians and have them shift where the proxy notice 3 is going to go to. All of those custodians have 4 different policies and procedures about getting 5 authorization to make that shift. It's not just 6 necessarily one simple letter. It's spending a lot of 7 time with the client going into your system and putting 8 in their proxy voting policy, even if they're going to 9 follow your firm on a number of issues. 10 K.T. mentioned earlier about often there will 11 be referrals back to the client. So there's a lot of 12 details that have to be overcome, and for most 13 institutions the people that are responsible for this 14 have three, four, five, six other jobs. Most of the 15 people are not in the position Michelle's in. So they 16 are going to be very reluctant to go from one firm to 17 another if they don't feel like sort of the mechanics are 18 a problem. 19 So I think the longer we go here and the more 20 things that are on the corporate proxy and the more 21 technology that's developed internal at these firms and 22 the more integrated they get, the more difficult it is 23 for a firm to enter this marketplace and have a real 24 meaningful impact. 25 MR. CHAMP: Thanks, Mike. 0099 1 And I think we've hit the 11:45 mark, and I 2 want to keep us on time. We're also going to try to 3 repair the microphones at the break. 4 So if everyone could be back in their seats at 5 12 and we'll continue on with the second panel. 6 Thanks so much. 7 (A brief recess was taken.) 8 MR. HIGGINS: All right. A hush falls over the 9 crowd. While we're getting assembled, I'm told by the 10 audiovisual -- audio people, I guess, that part of what 11 might have caused the power surge that caused our mikes 12 to get -- was if everybody reaches at the same time to 13 press a button it can, you know, cause -- so instead of, 14 yeah, instead of hitting the button, just kind of raise 15 your hand or try to get my attention or Ray's or Norm's 16 attention, and we'll make sure that everybody gets to 17 talk and we'll press the bottom at the right time. 18 So anyway, this morning we explored some of the 19 history and how we got to where we are today, and we're 20 now going to turn to two of the more prevalent concerns 21 that have been raised on this topic, namely conflicts of 22 interest and this time focusing not on the advisers, the 23 adviser conflict per se, but the alleged conflicts of 24 interest that the proxy advisory services have in the 25 recommendations they render and, second, the accuracy of 0100 1 the facts underlying their recommendations and the 2 transparency of the methodology they use to arrive at the 3 voting recommendations. 4 We also hope to spend a little bit of time at 5 the end gaining some understanding and insight into how 6 our friends in Europe have addressed issues in the proxy 7 advisory services business. 8 So we'll kick off by turning first to Trevor 9 Norwitz to set the table about conflicts of interest and 10 tell us what conflicts of interest he sees currently 11 existing in the proxy advisory firm industry. 12 MR. NORWITZ: There you go. How about that? 13 In fact, it works well. 14 Yeah, so I think that there are a couple of 15 categories of conflicts that I think it's worth putting 16 on the table. I'll express my personal views. 17 I think in a way the conflicts are secondary to 18 the primary structural concern that we have discussed in 19 the first part, that unintentionally because clearly it 20 wasn't intended, you know, the things are falling into 21 place where we have sort of created this, you know, 22 enormously powerful group without accountability in the 23 ways that one would normally sort of expect such group to 24 have. 25 But the conflicts sort of exacerbate that, and 0101 1 I think they're easier to focus on and, frankly, easier 2 to attack than sort of structural concerns. The one 3 category is, of course, the sort of most well documented, 4 most obvious one, which is the working both sides of the 5 street argument. You know, the proxy advisors -- well, I 6 think Glass Lewis doesn't have a corporate advisory side. 7 ISS does, but in a sense they're the judge. They're the 8 umpire, but they also have a business telling people how 9 they can avoid the wrath of the judge, and you know, that 10 is an obvious conflict. 11 But a lot of effort has been made to mitigate 12 this. I think the firewalls that are in place I have no 13 reason to believe are not holding up and I would hope 14 that they do, and then there is a certain amount of 15 disclosure. I think disclosure is one area where 16 probably a lot more improvement could be made. 17 I mean, if you have a dispute between Company A 18 and Activist B, it seems difficult to contest that 19 ideally the person who is making a very powerful 20 recommendation on that contest should disclose how much 21 they've been paid by Company A and Activist B in the 22 past, you know, year, two years, whatever the right 23 period is. 24 I understand that there are limitations under 25 the Advisers Act from their ability to announce that, but 0102 1 I think that doesn't seem logical, and to the extent 2 they're registered as an investment adviser and that 3 prevents them from making that obviously important 4 disclosure, that surely could be fixed I would think. 5 There are some people who have a much firmer 6 view and say that that side of the business should be 7 banned altogether. I don't think I'm necessarily of that 8 view, although certainly it would remove sort of the 9 unbecoming nature, just sort of the feel of it that 10 companies sometimes feel they're being -- I hate to use 11 the term -- sort of shaken down when they're approached, 12 you know, by the governance side to say, well, let us 13 tell you how you can do better with our advisory side. 14 So that's one, you know, general area. The 15 second sort of area is that they're passing judgment on 16 proposals which are made by their customer and by, you 17 know, people who are sort of promoted by their customers. 18 It's endemic, I guess, to the structure, and perhaps 19 that's one that disclosure, again, is the best that you 20 can do. 21 I think sort of a related one that's less 22 obvious but in some ways sort of more insidious, I think, 23 is that the customers have a tremendous amount of 24 influence over these proposals, and I think this is in a 25 way part of being a for-profit entity in this line of 0103 1 business. 2 I think, you know, Mike has previously made a 3 case for having this type of business housed in a public 4 utility type which doesn't have these sorts of problems. 5 That's obviously a different world. Right now these are 6 for-profit businesses, and you know, when they are, you 7 have to listen very closely to what your customers tell 8 you. 9 I mean, we've had situations where 10 recommendations have been changed, and when the question 11 was asked kind of why, the answer was because our 12 customers told us to. Now, I mean, Damon would probably 13 say that shouldn't be a problem because, you know, 14 customers should be able to tell the person, but I think 15 it goes to independence and really sort of, you know, 16 raises questions on that front. 17 And also I think there is -- I mean, ISS has a 18 policy of a lot of consultation with their customers, 19 which is good, but my understanding -- and I haven't seen 20 all of the statistics on that. I'm not sure they're made 21 public -- is that really is only a minority of customers 22 who actually do respond to the questionnaires, et cetera. 23 So in a way the policy is being guided by sort 24 of the squeaky wheels, the people who want to make their 25 voices heard and very often that's people who have their 0104 1 own sort of special interest and they dictate, as I say, 2 these very powerful policies. 3 I think there are a category of conflicts that 4 sort of arise from the ownership structures within both 5 two big advisors, the one owned by Ontario Teachers and 6 the one, you know, owned by a public company. I think 7 people raise questions about that, and I think to the 8 extent specific issues arise, those tend to be addressed 9 by recusal and not passing on certain votes, but you 10 know, that is another sort of general category. 11 And then the last category that I think I would 12 like to raise is sort of, again, a structural point. 13 It's a funny sort of conflict, but it's inherent in 14 having this as a for-profit business model, and that is 15 that it's necessary for the proxy advisors to basically 16 be in continuous motion, to keep moving, to keep changing 17 the goal post, to keep adopting new standards at CGQ, its 18 grids, its quick score. We have to keep doing new stuff 19 because otherwise, frankly, you know, once people have 20 done everything that they need to do, we don't have a 21 business anymore. 22 So, you know, that is, I think -- it's a type 23 of a conflict, and you know, the question arises whether 24 that's good or bad for our corporations. 25 MR. HIGGINS: Let me stop you right there, 0105 1 Chairman. 2 MR. HIGGINS: And just welcome Commissioner 3 Stein who has joined us this morning. Thanks a lot for 4 coming. 5 COMMISSIONER STEIN: Thank you for the welcome. 6 MR. HIGGINS: Great. Let me turn for a second, 7 Anne, if I might turn to you. As a consumer, in Trevor's 8 words, of proxy advice, how do you think about conflicts 9 and what concerns you about conflicts? 10 MS. SHEEHAN: Well, and I want to lend my 11 thanks to the Commission for having this. 12 I do want to associate myself with the comments 13 of Michelle and Lynn in terms of being a big 14 institutional investor, we are users. We subscribe to 15 both of them. We think the work that they do is good. 16 They are always trying to improve. 17 I guess in response to your last comment about 18 new models or whatever, any for-profit business out there 19 is trying to improve their models all the time. I don't 20 care if it's a car company or an airplane company or 21 whomever. So I applaud them, and I think that's part of 22 the free market process, to entice additional customers 23 to refine their process. 24 So I don't see that at all a conflict. I see 25 it as part of the free market and trying to improve the 0106 1 product that we, the customers, want to buy. Many times 2 it's we, the customers, who are asking them to do these 3 additional services for us because we are the big 4 customers. 5 I guess for any of us where there's a conflict 6 on these issues, we have to learn how to manage with 7 them. I mean, I'm in a roomful of lawyers. You all have 8 to deal with this all the time. I think disclosure helps 9 cleanse people of that process. 10 We have conflicts when we put up shareholder 11 proposals, and these two firms have to opine on those. I 12 wish they did what their customers said all the time, 13 Trevor. Oh, do I ever because I've had discussions with 14 both K.T.'s staff and Gary's staff, people sitting in the 15 room, about how we want them to come out on our 16 recommendations, and they are very fair and impartial, 17 and they take input from all sides. 18 So I don't want anyone to think that because we 19 are a large customer that they will do whatever we want 20 on our shareholder proposals. 21 In terms of disclosure, I work for a public 22 agency. So everything is out there. I mean, if somebody 23 wanted to know what we pay to both of these, they could 24 file a Public Records Act request and get the 25 information. So I don't have a problem with greater 0107 1 disclosure. 2 I do think some of it could be more transparent 3 and more prominent in terms of where the disclosures are 4 made by both of these. I think one probably may do a 5 better job than the other, but I think perhaps a little 6 more, not a footnote, a little more prominence in terms 7 of how conflicts are disclosed. 8 In terms of -- 9 MR. HIGGINS: If I can interrupt for a second, 10 you know, on the conflict question on the proponent 11 question, I guess a question I'd raise to the group is 12 the exemption in the proxy rules for proxy advice not 13 being a solicitation depends on the advisor, the advisory 14 firm, disclosing to the recipient of the advice any 15 significant relationship with the issuers -- we'll set 16 that aside -- or a security holder proponent. 17 Now, it's a significant relationship. I guess 18 I'd ask: is the fact that CalSTRS happens to be happens 19 to be a client, a customer of ISS or Glass Lewis a 20 significant relation? 21 How do we talk or think about significant 22 relationship in the context of that rule? 23 MS. SHEEHAN: Well, I guess one of the issues, 24 I mean, I'd have to defer to K.T. and to Gary in terms of 25 that, but I think -- 0108 1 MR. HIGGINS: Or maybe ask a lawyer. 2 MS. SHEEHAN: Yeah, exactly. I think, yeah, 3 I'm going to give a lawyer answer as a non-lawyer. 4 Significance in the eye of the beholder, but -- 5 (Laughter.) 6 MS. SHEEHAN: -- in terms of that, but I think 7 from our perspective the appearance of a conflict 8 sometimes that can affect people's views on this. So it 9 has put it out there in terms of that. Is it a bright 10 line in terms of what is significant? I don't 11 necessarily believe so. I think it can be a moving line 12 in terms of what's going on. 13 So our issue is put it out there that we're the 14 proponent and we are clients of both of them, and let 15 people take that information and sort of digest it as 16 they will. I think everybody around this table is 17 obviously intelligent and I trust them to sort of take 18 that information and use it accordingly, but I think the 19 disclosure of that information is what's important. 20 MS. RABIN: And I'll just chime in that rather 21 than trying to figure out what's significant, we just 22 disclose in any situation where a shareholder proposal 23 proponent or a dissident shareholder in a contest is a 24 client, and we put that either -- you know, we're sort of 25 -- we've moved the note around, but I think back to the 0109 1 Canadian Pacific Railway meeting where there was a 2 suggestion that we didn't have a note about the potential 3 conflict in our ownership with Ontario Teachers, and 4 historically we had always put the conflict note right 5 after the board table, and in the case of contests it 6 might have gotten a little bit buried because that was a 7 really long board table. 8 So now there's a reference to the conflict on 9 the cover of every one of our reports any time there's a 10 conflict, and I'm sure that I'm going to get feedback not 11 only from our clients but also from members of the 12 Society of Corporate Secretaries to tell us, you know, 13 "You could do a bit better with that." 14 We're always sort of -- I swear that in the 15 last, you know, three years we've sort of adjusted where 16 it is, what it looks like in response to client feedback. 17 MR. HIGGINS: Hang on. I want to turn to Gary 18 because we talked about the conflicts and procedures, 19 and, Trevor, you alluded to the firewall and, Gary, I 20 think you talked about it earlier. Can you tell us just 21 a little bit about the conflict procedures that you have 22 to deal with because you've got consulting on one side of 23 the house and also your disclosure practices with respect 24 to conflicts, both where you have a proponent who's a 25 client as well as where you have provided consulting 0110 1 services? 2 MR. RETELNY: Sure. Thank you, Keith. 3 In terms of our corporate business which is run 4 completely separate from our institutional business, I'll 5 just refer to it as the corporate business for shorthand. 6 It's a separate affiliate, wholly owned separate 7 affiliate. 8 Again, ISS is a registered investment adviser, 9 and we believe that what we provide is part and parcel of 10 investment advice. 11 The corporate side of the business is run 12 completely independently from the institutional side of 13 the business. We have very strong Chinese walls, both 14 physical barriers as well as significant compliance and 15 rules, a code of conduct, code of ethics. We have the 16 corporate team in a separate floor. The keys to open the 17 doors to get into that only work for the corporate team. 18 There really is no communication between that team and 19 the institutional side of the business. 20 We monitor thoroughly, intensely, and very 21 aggressively, and the reason -- and I mentioned this 22 briefly before -- we have clients that are issuers. 23 They're not only consulting clients. We provide other 24 services that are purely data related that helps them 25 prepare their proxies or study their peer groups or other 0111 1 things, but what we want to do to make sure that the wall 2 is firm and works is that we want to make sure that the 3 research organization does not have access to the clients 4 who are the clients of the corporate business. 5 So everything that we do in terms of a wall is 6 meant to protect that separation because what we want to 7 make sure is that there is no, again, actual conflict 8 between those two groups. 9 So clients of the institutional side of the 10 business have absolute access to the list of clients of 11 the corporate side of the business. So all they have to 12 do is ask, and many do, and we provide them on a very 13 frequent basis, again, sometimes monthly, sometimes 14 quarterly, sometimes annually. It comes up in many of 15 the yearly due diligence sessions that our institutional 16 clients do. 17 So there is essentially free access to that 18 information. We do not publish it publicly. We only 19 provide it to our clients, but the reason is that we want 20 to make sure that the research organization does not have 21 access to that information. So that's how we try to 22 protect or they say to maintain the separation. 23 And, by the way, we do this globally because we 24 provide the services on a global basis. 25 COMMISSIONER GALLAGHER: Just to follow up, 0112 1 Gary. 2 MR. RETELNY: Sure. 3 COMMISSIONER GALLAGHER: So I think that 4 cleanly lays out your controls with respect to the 5 corporate versus the -- 6 MR. RETELNY: Yes. 7 COMMISSIONER GALLAGHER: But I think Anne teed 8 up something interesting that we really haven't talked 9 about yet, which is what are the controls about with 10 intra-advisory side, some advisory clients trying to 11 influence your recommendations to the way they want to 12 see it, which may be to the detriment of the other 13 advisory clients. 14 So within the advisor piece, what are those 15 controls? 16 MR. RETELNY: We have -- I was going to talk 17 about this later -- but we have a fairly robust process 18 where we go about both in drafting policies and in taking 19 feedback from many, many constituencies, not only our 20 clients, but essentially all constituencies that care 21 about what ISS does on a daily basis literally globally. 22 So we have, again, policies and procedures 23 internally to make sure that whatever feedback is coming 24 in goes into I'll call this a policy review board where 25 we actually discuss ourselves what it is that our opinion 0113 1 or recommendation is going to be. 2 So we make sure that we bring everybody into 3 the table with the information, and we bring out the 4 feedback that we do get from a multitude of sources, 5 including our clients. 6 MR. HIGGINS: Gary, if I can say -- 7 MR. RETELNY: Sure. 8 MR. HIGGINS: -- I think, Commissioner 9 Gallagher, if I'm right, we're going to talk a little bit 10 later, you're right, about developing your policies 11 generally in the outreach. I think if I'm right, the 12 question had to do with in a specific instance on a 13 specific vote where Anne's firm is a proponent. Are 14 there procedures in place to wall off, not hear from 15 them, not be influenced by them or maybe not; maybe you 16 shouldn't be? 17 Why should they be disabled just because 18 they're a client? Commissioner Gallagher, is that -- 19 COMMISSIONER GALLAGHER: Yes, I guess. I mean, 20 if I'm one of your advisory clients, you're saying that I 21 have access to the list of all corporate clients. 22 MR. RETELNY: That's correct. 23 COMMISSIONER GALLAGHER: But if you're being 24 influenced potentially by another advisory client, do I 25 know that? 0114 1 MR. RETELNY: You don't know specifically who 2 our clients are. 3 COMMISSIONER GALLAGHER: Right. 4 MR. RETELNY: But we have -- and that's what 5 maybe in a poor way I was trying to say -- but we do get 6 calls on most everything that we do from many 7 constituencies, including many of our clients, including 8 those who are proponents. 9 So I believe that we do not specifically say 10 that this policy that is being recommended by this client 11 is an ISS, institutional clients. We have 1,200 12 institutional clients, but depending on the proper 13 constituency, I don't think we'd have an issue raising 14 that or disclosing that. 15 MR. HIGGINS: I want to make sure. Jeff, we 16 haven't heard from you. You represent the institutional 17 investors. Tell us some thoughts you have on conflicts, 18 you know, from an institutional investor standpoint. 19 MR. MAHONEY: Thank you. I appreciate the 20 opportunity to appear here today. We have several of our 21 members around the table, including the chairman of our 22 board, Anne Sheehan. 23 We do believe that there is a lot of concern 24 around conflicts. So we would not oppose having more 25 information being disclosed than there currently is 0115 1 today. I think I understand the firewall issue and that 2 resulting in this generic disclosure that they may have a 3 consulting relationship, but we would like to see the 4 actual disclosure of any relationship that they have that 5 may be of a conflict. 6 Again, this may have some issues with respect 7 to the firewall, but we think more transparency in this 8 area would be helpful and would cure some of the concerns 9 that are out there right now. 10 MR. HIGGINS: And let me, just following up on 11 that and really going to the second kind of conflict I 12 think that Commissioner Gallagher was talking about, if 13 Anne's organization, for example, was a proponent and a 14 report came out from either of the firms with a 15 recommendation on the CalSTRS proposal and CalSTRS was a 16 client, what should the disclosure be? 17 Should the disclosure be in the report that, 18 you know, CalSTRS is a client of Glass Lewis or ISS? 19 MR. MAHONEY: Some of our members around the 20 table may disagree with me, but -- 21 MR. HIGGINS: I hate to put you on the spot. I 22 apologize. 23 (Laughter.) 24 MR. HIGGINS: But why not? 25 MR. MAHONEY: But, in general, we would not 0116 1 oppose that disclosure. 2 MR. HIGGINS: And just to throw this out, how 3 extensive does the disclosure have to be? I mean, I 4 think about the Delaware cases where on investment 5 banking fees a lot of investment banks like to say, "We 6 provided service to the issuer for which we received 7 customary fees." 8 Other people in the cases have said, "Gee, we'd 9 like to see the number so that we can decide what's 10 customary." 11 How extensive does the disclosure need to be 12 and mindful that we don't want to get into disclosure 13 overload? Thoughts on that? Lynn. 14 MR. TURNER: Strange you should ask, but I've 15 got some of those disclosures right here in front of me. 16 In one case that was brought up this summer in 17 congressional testimony, Canadian Pacific, where there 18 was a tremendous battle, the disclosure that was actually 19 made by Glass Lewis specifically states that they're 20 providing coverage on a company in which the Ontario 21 Teachers has an investment. They disclose that the 22 investment is 1.33 percent. So they do give you some 23 fair amount of data. 24 The only thing I think that's missing in that 25 is they probably should have said that Ontario Teachers 0117 1 was a proponent of the change. 2 Now, having said that, ISS did not have a 3 conflict on that particular one, and on the 22 directors 4 that were voted on, the vote was the same between the two 5 in 21 of the 22 cases. So it appears that the conflict, 6 in fact, if you view that as a conflict -- I'm not sure I 7 would because they're in essence voting. Their parent is 8 someone who's voting as an investor and going to vote in 9 the best interest of investors. But anyway, that was the 10 disclosure. 11 There was also another one that I found, Keryx 12 Biopharmaceuticals. In this particular case they voted 13 on half a dozen directors. One of the directors is on 14 their advisory board. They note that. They still voted 15 though, but the disclosure doesn't mention that that 16 director was one of their founders and one of their 17 former executive officers. 18 So I think there is disclosure in the case of 19 Glass Lewis. It does tee up the issue. You can't say 20 the issue isn't teed up so that you couldn't ask 21 questions if you wanted to, and then in the case of ISS, 22 to their credit, ISS did go out and get a review of their 23 policies by Sullivan & Cromwell, who came back and 24 specifically stated in a letter that's out on their Web 25 site that their firewalls work, albeit Sullivan & 0118 1 Cromwell said they did not. They just relied upon data 2 that was provided to them. 3 So you guys since they're a registered 4 investment adviser, I assume you guys haven't found any 5 problems either. So at any rate, I think that the 6 disclosure needs to be fulsome if there's a conflict. I 7 also believe, as is Glass Lewis' policy, is that the data 8 you use should be publicly available data. 9 I as an investor in one of these funds, I want 10 to know if someone is voting because they're being 11 influenced by someone. So, for example, I'm aware of a 12 large state pension fund that a year ago had voted 13 against Jamie Dimon at J.P. Morgan. This year Jamie 14 Dimon gave the executive Director of that fund a call 15 just before the vote, and they flipped their vote. 16 I think it's important for an investor to know 17 in that scenario what happened in that phone call with 18 J.P. -- with Jamie Dimon that caused them to flip their 19 vote, and I as an executive at Glass Lewis, I can tell 20 you I got lobbied by people on the business side and 21 people on the adviser's side extensively. 22 MR. HIGGINS: Let me just ask you a question. 23 Where would that disclosure -- who would make that 24 disclosure and where would be it be? 25 Would it be the issuer having to disclose when 0119 1 it spoke with investors whose votes it changed? 2 MR. TURNER: Let me tell you what we did at 3 Glass Lewis which I think is the right idea, and that is, 4 one, we used publicly available data at the time. Okay? 5 It's been six and a half years since I left. So I 6 assume it's the same because they say they're doing about 7 the same thing out on their Web site. 8 The other thing is if we all of a sudden got 9 inundated with calls from both sides, and it usually 10 comes from both sides, our policy was we weren't going to 11 have those conversations in private. We would force 12 those conversations into public, into what’s a public 13 telephone call between the business executives, on one 14 side, and the institutional asset managers, on the other 15 side, and make that public in a very public, transparent 16 forum so our customers as well as the business community 17 all had a chance to ask questions of one another and 18 discuss it. 19 And I found that was by far and away the best 20 way to do it. If you're not going to do it, then somehow 21 you've got to get disclosure out there about potential 22 influences going on that may impact, and it comes from 23 both sides. It's some people think, well, it's the 24 business community trying to influence them or it's the 25 adviser. It's both of them. You know, they've all got 0120 1 skin in the game, and they all want a yes vote. 2 MR. HIGGINS: Let's move on only because that 3 didn't relate specifically to the conflict on advisory 4 service. 5 Mike wanted to say something, but I also, Gary, 6 want to come back to you on the form of your conflict 7 disclosure. You mentioned that all of your customers or 8 clients have access to who your clients are on the 9 business side. So if I were one of your customers -- 10 sorry, Mike. I'll come back to you after this -- if I 11 were one of your customers and I asked for a client list, 12 what would it show? Would it just be a list of clients? 13 Would it say specific things you've done? 14 Because I might be interested, for instance, in 15 knowing whether you provided consulting services on a 16 stock plan that was the subject of a vote versus 17 providing data services, you know, that allowed me to 18 help put my proxy statement together. 19 So what does the disclosure look like? 20 MR. RETELNY: The disclosure is a list of names 21 of clients as well as I believe what we get paid. So an 22 institutional client would be able to say, "Ah-ha, this 23 issuer is a client of the corporate business of ISS, and 24 they get X amount of dollars from that business." 25 That, I believe, is what the list says. Having 0121 1 said that, we are more than happy to answer any specific 2 question with regards to any issue or any name that is on 3 that list, and we do get them, but the disclosure itself 4 doesn't include more than that, I believe. 5 MR. HIGGINS: Anne. 6 MS. SHEEHAN: Yeah. Lynn, I'm not quite sure 7 on your example of Jamie Dimon and the pension fund. I 8 guess speaking as a, you know, large institutional 9 investor, we get called -- I'm sure Michelle does -- by 10 all sides, you know. I mean, we get called by everybody. 11 We are transparent in putting up four votes. We try and 12 post our votes beforehand, and one of the things that we 13 did last year is we actually on a few instances we into a 14 bit of a competition with these two funds and put out our 15 own recommendations two or three weeks beforehand in 16 terms of how we analyzed proxies and how we were voting 17 on certain companies, and they were companies that we 18 really had been engaged with deeply and so put out for 19 many people in this room how we saw these things. 20 And that's something that CalSTRS has done, and 21 I know some of the other large pension funds are 22 beginning to do in terms of this is how we're voting. 23 People may want to look to see how CalSTRS, but on the 24 Jamie Dimon thing to me there's nothing wrong with 25 that. I mean, you know, we're a large investor. They 0122 1 want to call us up and give us their opinion, if somebody 2 wants to change their mind, then you can call me up and 3 say, "Why did CalSTRS change your mind on this? You 4 know, what information?" 5 But I think the issue on the advisory firms, 6 you know, is a little different than the pension funds or 7 the institutional investors and what they do, and so I 8 think the issue is when they're getting, you know, 9 remuneration from us and we are a proponent, which we 10 have been, and they've come out opposed and supporting 11 the bars, like on our majority vote proposals, which we 12 do a lot, we know where the advisory firms are going to 13 be because the shareholders like this. I mean, they're 14 not supporting them because they're saying. Their 15 customers like that policy. 16 So, Harvey, I think with the growth or whoever 17 mentioned the growth of majority voting, it's because the 18 shareholders are supporting this. It isn't because ISS 19 told us to vote this way. 20 But when we do other ones, I do think they 21 should disclose. If we're a customer, we have no problem 22 with people knowing that we buy those services, and they 23 are very good about the firewall when we're a proponent 24 and how they set up those discussions and come up with 25 their recommendations. 0123 1 And I think Trevor was the one who suggested 2 that the customers have undue sway over this, and I have 3 to say as a long-time customer of both of these, I have 4 yet to find us having undue sway. 5 MR. HIGGINS: Duly noted. 6 Mike, you've been patient. 7 MR. RYAN: Thank you. 8 This really doesn't actually go directly to the 9 conflict issue, but, Gary, I do want to address your 10 firewall issue, and I'm happy to provide this to you, but 11 I have an email exchange between your corporate services 12 people and an issuer. This issuer received a negative 13 recommendation on a Say-on-Pay vote from ISS. 14 So the corporate services side sends an email 15 saying due to the 2013 negative recommendation for -- and 16 they actually put in the wrong ticker name of the 17 company. So this email went out to others -- advisory 18 vote on executive compensation, ISS' Research Division 19 will be subjecting your next executive compensation 20 proposal to a greater level of scrutiny. 21 That's not a surprise, but what was a surprise 22 is I did want to offer you a chance to talk with one of 23 our senior corporate advisors in order to better 24 understand what this scrutiny will entail. And so what 25 that says to me is that the corporate advisory side knows 0124 1 what the special sauce is for your Say-on-Pay analysis, 2 which is not public, and to me that's very troubling. 3 So it may not be a conflict, but it suggests 4 that the wall that you described lets more information 5 through than you suggested. 6 MR. HIGGINS: Gary, you're entitled to a 7 defense. 8 (Laughter.) 9 MR. RETELNY: I'm disappointed they used those 10 words, but there's absolutely nothing in terms of 11 communication between the corporate side and the 12 institutional side, and anybody we would get breaching 13 that wall in any way, shape or form would be fired. 14 So maybe those aren't the right words. They 15 are, in fact, trying to drum up business, I believe. 16 They are in the consulting business, after all, and ISS 17 is the other side of the business, but that to me does 18 not mean that they're talking to each other in any way, 19 shape or form, and they're not. 20 MR. RYAN: Obviously the language suggests 21 otherwise. I'll share this with you, but it's an issue. 22 MS. RABIN: So it's interesting, the discussion 23 about whether or not proxy advisors are talking to 24 issuers or proponents of shareholder proposals or 25 dissident shareholders in a contest because we do get 0125 1 accused. Glass Lewis probably for years was accused of 2 being kind of a black box or, you know, ivory tower, 3 whatever you want to say. We were not accessible to the 4 issuer community. That was probably one of the biggest 5 criticisms lodged at Glass Lewis. 6 And now I think, you know, if you look not just 7 in the United States but in Europe really probably more 8 so than anywhere, this issue of whether or not proxy 9 advisors should open up their research reports to the 10 companies they're writing on prior to publishing them to 11 their investors, right? 12 So there's all this talk that really would 13 suggest that the direction that the issuer community 14 wants to go is to have us be sort of more available, more 15 accessible, et cetera. And we've always had a policy in 16 terms of, you know, managing conflicts which is to, you 17 know, eliminate them, avoid them, and disclose them to 18 the greatest extent possible. 19 And the proxy talk series, which Lynn talked 20 about, really was his brainchild when he was at Glass 21 Lewis, has evolved where we're probably doing those proxy 22 talk calls where we're talking to both sides in a proxy 23 context, and it doesn't have to be a contest. There 24 could be other issues, right, with shareholder proposals. 25 I'm sure we've done calls with CalSTRS on certain 0126 1 shareholder proposals for which they've been a proponent. 2 And those calls, as Lynn said, are open to our 3 clients, but they are also recorded, and the recording of 4 those calls I made publicly available on our public Web 5 site. So it's not a limited audience that gets to see 6 those. 7 In the case where we do meetings with issuers, 8 that often triggers some sort of subsequent disclosure if 9 something material comes out that they feel meets the 10 standard that's there, and that's why we think honestly, 11 you know, we do engage literally with hundreds of 12 companies. I think that our reputation -- and I suspect 13 Darla will support me on that -- has gotten a lot better 14 around our openness to talk to issuers outside of the 15 proxy season has changed dramatically in the last few 16 years. There is no season for us. We're either, you 17 know, recommending on proxies or meeting with companies. 18 We still hold hard and fast to the view that 19 during the proxy, what I call the solicitation period, 20 the period after which the proxy is issued and prior to 21 the vote cutoff, that we will not be having private 22 conversations, you know, with companies or dissidents or 23 shareholder proposal proponents; that if we're going to 24 have a conversation, ideally it's with clients on the 25 phone, but short of that, it will be recorded in its 0127 1 entirety and made available immediately in its entirety 2 to the public, not just to our clients. 3 And it's also cited in the report, too. 4 MR. HIGGINS: Great. I'd like to switch gears 5 now and sort of move to the -- oh, I'm sorry. Damon, one 6 thing and then I want to switch gears. 7 MR. SILVERS: I wanted to speak in part because 8 at the beginning of this conversation Trevor had 9 characterized my views, and he characterized them upside 10 down. 11 I think that -- and this has been a view that 12 I've expressed for more than a decade -- I think that the 13 business model of having consulting services provided to 14 issuers and at the same time providing proxy advisory 15 services to investors, recognizing that ISS is doing, I 16 think, as diligent as job as managing that business 17 model, as Gary has articulated, I think that business 18 model is inappropriate, just as I don't think that type 19 of model is appropriate for an auditor. 20 And this is a longstanding view that the AFL- 21 CIO has expressed for a long time, and the reason is -- 22 and let me also add that I'm completely comfortable with 23 the recommendations that Jeff suggested, that where a 24 proponent is a client of a resolution, that that ought to 25 be disclosed. 0128 1 But I want to add. I want to add a reason for 2 that, but then also a sort of caveat around these 3 matters. The reason for it, frankly, is that, you know, 4 funds that are in one way or another that AFL-CIO members 5 participate in and are offering proponents, and we want a 6 level playing field. We like what Glass Lewis does, but 7 let me also say in case anybody thinks I'm taking sides 8 between Glass Lewis and ISS that we also think that this 9 is an investor advisery function, and that proxy advisors 10 ought to be registered investment advisers. 11 But we'd like an open, transparent process 12 where we can have it out on the merits. We are almost 13 never -- the funds affiliated with the labor movement are 14 almost never in a position to be able to in any 15 conceivable universe have an influence on either of these 16 firms. We're just not big enough. All right. We just 17 want an open process. 18 Now, I do want to, I think, caution folks 19 though here about double standards because this is very 20 similar, this question of when you have different 21 clients. This is very similar to the basic broker-dealer 22 problem. Our funds are going to want to buy some stock, 23 right? They don't tell us whether CalPERS or John 24 Paulson or somebody else is on the other side of that 25 trade. 0129 1 Now, I'm not necessarily saying that, you know, 2 one bad thing justifies another, but I think that the 3 fundamental issue here because so much of the complaints 4 that the Commission is hearing are from people who ought 5 to be complaining if these services are doing their job. 6 All right? If Wachtell or Davis Polk or their clients 7 or the BRT is unhappy, that tells you that independence 8 actually exists here. 9 And so in that context, you've got to be really 10 careful around double standards, and I particularly think 11 that this is heightened when we start hearing complaints 12 about how somebody got a fact wrong. It is not -- 13 MR. HIGGINS: We're going to get to that. 14 MR. SILVERS: Right, right. It is not the 15 standard in securities regulation that anybody is 16 responsible for getting all their facts right. 17 (Laughter.) 18 MR. SILVERS: Let me tell you something. The 19 times that I have seen someone go into a Delaware court 20 or a federal court and allege a cause of action because a 21 CEO got a fact wrong by mistake and that they lasted more 22 than five minutes, that's just not the law in any 23 respect. Nobody is responsible for being perfect all the 24 time, no one. 25 MR. HIGGINS: Well, that's actually a great 0130 1 segue because the next thing we wanted to talk about 2 actually is accuracy and transparency, which was another 3 of the things that we wanted to cover in this panel. 4 And I want to turn it actually over to Gary to 5 talk about how your firm formulates its policy 6 recommendations. And let's try to keep it relatively 7 short because I'm sure this group will have a lot of 8 interest in that. 9 Thanks. 10 MR. RETELNY: No question. I'll be very -- by 11 the way, in terms of actual recommendations per se, we 12 only use public information. I know the question was out 13 here. So when we actually talk to whether issuers or any 14 other party, if that is not publicly disclosed in terms 15 of companies, we do not use it in our own 16 recommendations. It has to be publicly disclosed, and 17 that's why you see a number of 8-Ks coming after 18 conversations with us and, I'm sure, Glass Lewis. 19 In terms of formulating our policies, Keith, 20 I'll be very brief. We tried to run a process that is as 21 inclusive and as global as possible, and I'll give you 22 just a little bit of statistics. We have a policy board 23 that is comprised of a number of experts, all internal, 24 that are knowledgeable in various matters, various 25 securities matters, proxy matters, around the globe. Our 0131 1 head of research sits at Rockville; head of research that 2 sits in London, the head of research that sits in 3 Singapore covering Asia. 4 We actually go out every year at the end of 5 proxy season and put out a survey that we send and 6 distribute widely not only to our clients, but we're 7 trying to go even wider than that. So anybody who is 8 interested and is a constituent, so to speak, of ISS is 9 more than welcome to fill out the survey. 10 And we try to pick out in the survey the issues 11 that are relevant that have been relevant in the past 12 proxy season or that we believe are relevant given the 13 feedback that we have been receiving from a whole host of 14 sources. 15 In terms of the survey in 2013, we had over 500 16 respondents to it, and again, we cannot make the clients 17 or anybody else respond to it, but we encourage as many 18 voices as possible to do so, and they take us up on it. 19 So we get over 500 of those. 20 Parallel to that, we also hold roundtables 21 around the world. I believe we held over a dozen. We 22 want to hold a lot more, and we open it up to as many 23 constituents as possible, whether they're issuers, 24 whether they are clients, and now maybe a pet project of 25 mine, I want to bring corporate directors into the mix a 0132 1 lot more, and we're doing particular engagement and 2 outreach trying to get the voices of corporate directors, 3 not only companies, because many times they don't see eye 4 to eye with management, but we want to hear directly from 5 corporate directors as well. 6 So we have a number of panels now that are 7 targeting that group. Of the 500 respondents, by the 8 way, about 130 were institutional and about 350 were 9 actual companies, corporations. From those roundtables 10 and comments and responses to the survey we actually then 11 come up with our draft policies, and we put them out 12 publicly and then go through another process of getting 13 feedback on what those new policies or changes to the 14 policies we believe to be getting further comment, and 15 then eventually we finalize them and put out our 16 guidance. 17 So that's in a very abbreviated way what we do. 18 We also have on our Web site disclosed summary policies 19 of all our policies on an accumulated basis. So if you 20 were to go to our Web site, you could see what the 21 policies of ISS are generally on all matters, again, in 22 summary form. 23 MR. HIGGINS: I'm curious about that, you know, 24 the constituencies going out. I mean, if Darla got all 25 of her members to fill out forms and say, you know, 0133 1 "Don’t' even think about majority voting, you know." 2 MR. RETELNY: Yes. 3 MR. HIGGINS: "Don't think about" -- you know, 4 how would you -- how does that factor into your analysis, 5 the policy board's analysis? 6 I mean, we had, I guess, in our comment letter 7 process. 8 MR. RETELNY: No. Yes, so we read everything, 9 and we grade them, and we bring it to our policy 10 committee, and we discuss the various point of views. So 11 we are trying to represent all constituencies that have 12 an interest in what ISS does. 13 So it's a little bit art, a little bit science. 14 MR. HIGGINS: Let me just -- 15 MR. RETELNY: Sure. 16 MR. HIGGINS: Let me press you on that a little 17 bit. 18 MR. RETELNY: All right. 19 MR. HIGGINS: How can you do that? I mean 20 represent all the constituencies. What does that really 21 mean? I mean, I'm just -- 22 MR. RETELNY: To us it's very simple. It's 23 giving them a voice. It's giving them a chance to 24 express their opinion. And that's what we're trying to 25 do. So obviously we have a client base that we care very 0134 1 much about and they care about what we do, but we are 2 interested because of the role that we play in listening 3 to as many voices as we can. 4 So I know that we sometimes get accused of just 5 following and doing what our clients want blindly. I 6 think Anne has mentioned that a number of times, that we 7 just don't do that, but we also keep our eye on other 8 important constituencies. 9 What is the impact of what we are doing on 10 issuers? What is the impact of what we are doing on 11 directors? What is the impact on shareholders? 12 So we're always thinking about those issues all 13 the time when we're formulating our policies. Again, 14 it's both art and science. 15 MS. STUCKEY: I just want to say for the record 16 that we are appreciative that we're a part of the survey 17 process, and we remain ever hopeful that our voice will 18 be heard, but we are appreciative because, you know, not 19 everybody does that. 20 MR. HIGGINS: And the policies are published, 21 correct? I mean, the policies are very transparent and 22 people read it. 23 When we hear about transparency, you know, with 24 the advisory firms, can somebody maybe from the issuer 25 community talk about what is it that's not -- is it about 0135 1 the policies that aren't transparent? 2 What is it? Darla, can you? 3 MS. STUCKEY: Well, just following along that, 4 so we are thankful to be part of the process. We do 5 wonder, like he said, how the sausage gets made because 6 you do have competing voices. I don't know who's on your 7 policy board. Maybe it's public, and that's just my 8 ignorance. So if you have some corporate type people on 9 your policy board and it's a consensus -- 10 MR. HIGGINS: It sounds like it was all 11 internal people. 12 MS. STUCKEY: Yeah. 13 MR. RETELNY: The policy board is all internal. 14 We do not disclose the names for many reasons, including 15 trying to minimize the ability of lobbying, right? 16 (Laughter.) 17 MR. RETELNY: But more than welcome to contact 18 me. I actually created a mechanism internally, something 19 we call the feedback review board, but if you have an 20 issue, right, just come straight to me and I'm going make 21 sure your voice is heard. 22 MS. STUCKEY: Well, I'll make this plea again. 23 We want to converge on your policy board. 24 MR. RETELNY: Yeah. We don't any external 25 folks on our policy board. The chair of the policy board 0136 1 actually is not me. It's Martha Carter who runs our 2 global research team, and we really don't disclose the 3 names because they change depending on the issue and 4 depending on the expertise, as well as we want to make 5 sure that we try to prevent others from trying to 6 specifically reach out and lobby any one individual. 7 So we want all the information to come to 8 everyone, but that's really the primary reason why we 9 don't disclose the names. 10 MS. STUCKEY: Okay. Well, so it is 11 transparency around the policy making, but the other part 12 of the transparency question is how do they come to -- 13 and this I think would apply to both proxy advisory firms 14 -- how do you really come to the recommendation that you 15 come to? 16 MR. HIGGINS: Now, is that the recommendation 17 on a specific matter or how they -- I mean, -- 18 MS. STUCKEY: Yes, it could be -- 19 MR. HIGGINS: Because they post their policies. 20 MS. STUCKEY: They do. 21 MR. HIGGINS: And you can see that they're for 22 a majority board voting there against poison pills, et 23 cetera, et cetera. So everybody knows that. 24 MS. STUCKEY: Yes. 25 MR. HIGGINS: So the question then is the 0137 1 transparency you're talking about is on a particular 2 ballot on a matter. 3 MS. STUCKEY: Yes, and there are greater levels 4 of transparency on some things than others. A lot of 5 what happens goes back to one size fits all. They do 6 have the policies and they do apply them, and it's in the 7 application sometimes that things get lost in the 8 shuffle. So that is where I see issuers that have 9 problems and they want to call up and they want to say, 10 "Well, why are you doing this?" or, "yes, I know your 11 policy says this, but what about XYZ fact over here? Did 12 you take this into consideration?" 13 That part, and I understand that's difficult 14 and time consuming. That's some of the lack of 15 transparency that we had trouble with other than the 16 initial policy. 17 MR. HIGGINS: Hoil. 18 MR. KIM: So I think certainly accuracy and 19 transparency are extremely important in this area. I was 20 very interested to hear about the views regarding the 21 modest views about the impact, what the proxy advisory 22 firms are doing, may be having as indicated by the number 23 of companies who partly as a result of negative 24 recommendations failed the Say-on-Pay votes, for example. 25 But I think the number understates the impact 0138 1 that it's having on issuers. You know, I speak to many, 2 many -- I'm in contact, you know, with my counterparts in 3 many, many companies, and every minor signal that comes 4 out of ISS or Glass Lewis is completely over read, and so 5 the compensation committees in particular are looking 6 over their shoulders at every possible indication that 7 comes out, and the rationale, and it's not the 8 transparency of what the policy is but what the process 9 is and what the rationale might be. 10 And I think it's very important because not to 11 overstate it, but to echo Mike Ryan's comments from 12 earlier in the session, I think there are some high 13 stakes at issue here about the competitiveness of the 14 American economy, whether the business people find this a 15 jurisdiction in which you want to try to innovate and 16 grow a business, and we have to ask whether the way we 17 collectively have caused the system to operate is 18 encouraging that or discouraging that. 19 And so with regard to going beyond what the 20 policies and the rationales are, I do have some concerns, 21 and I've had conversations with, you know, a number of 22 companies where they have a similar concern that given 23 the impact that the recommendations of the proxy advisory 24 firms and whether there are adequate resources to apply 25 the policies that are put in place because particularly, 0139 1 you know, the time scale involved, and I think somebody 2 mentioned a bit ago about the number of situations that 3 have to be analyzed and reacted to during proxy season, 4 and you know, you really have to ask yourself, you know, 5 are there sufficient resources and sufficient quality of 6 resources to do the job. 7 MR. HIGGINS: Let me just, Hoil, when do you 8 find out how ISS or Glass Lewis has applied their 9 policies to your Say-on-Pay vote, for example? When and 10 how do you find that out? 11 MR. KIM: So we mail our proxy out, and then we 12 find out within probably a couple of weeks, and so we 13 have, you know, two weeks plus, maybe 20 days to react to 14 it either by preparing some kind of, you know, responsive 15 filing should there be an issue or certainly taking it 16 into account in outreach to our investors. 17 MR. HIGGINS: Any comments on that, on sort of 18 the -- I mean, everybody has pointed out how much happens 19 during the first quarter of the year, and now to hear the 20 issuers really, you know, become aware of how the 21 policies are going to affect their votes two, maybe three 22 weeks before the actual vote occurs? 23 Is there a way to make that -- well, is there a 24 problem there? 25 Mike. 0140 1 MR. RYAN: Yeah. One of the concerns that we 2 have is the amount of time -- and I think it's ISS that's 3 providing the report to the company before they provide 4 it to investors, to their clients, to make sure that -- 5 and to their credit, they are trying to make sure that if 6 there are factual errors in the report, that there's an 7 opportunity to correct them. 8 The problem is, quite frankly, that time frame 9 is way too short, and we've heard it's as short as nine 10 hours, 24 hours. Regularly here it comes in on Friday 11 and it has got to be back by Monday. 12 MR. HIGGINS: I mean, I assume they can't do 13 the report until they've gotten your proxy statement. Do 14 you give them the draft proxy statement so they can do 15 the report on the advance? 16 MR. RYAN: No, no. That's true. That's true. 17 They can't complete it, but they certainly can do a lot 18 of -- there's a lot of data collection, a lot of work 19 that can be done throughout the year in preparation for 20 that. 21 MR. RETELNY: And we do. So we collect data on 22 companies -- 23 MR. RYAN: And that doesn't surprise me. 24 MR. RETELNY: We collect data on -- in other 25 words, we could not do it in the limited period of time 0141 1 that we have. So we collect data on companies, on 40,000 2 companies around the world on an annual basis. We could 3 not do it only during proxy season, and we try to keep 4 those up to date as much as we can. 5 We have two constraints. We have the 6 constraint from the issuers. The time that the proxy is 7 filed, it comes to us, and we start analyzing. In the 8 time that our clients need in order to do what they do to 9 give them a chance to take our report and then go through 10 their own process to make sure that the data and to some 11 degree and some instances the recommendation is used the 12 way that they themselves see fit to use it. 13 So we have those two constraints to think 14 about, and in the middle is the company. So we try hard 15 and we're doing it now with the S&P 500, as you just 16 noted, of giving the companies the report. Our target is 17 24 to 48 hours. 18 Do we do it all the time in 24 to 48? No, but 19 we do it with every S&P 500 company. I wish we could do 20 it with more, and that is something that we want to work 21 on. We're not there yet, but again, we only give them a 22 limited amount of time, but we do give them, the 23 opportunity, and afterwards, by the way, we do give them 24 the report. 25 So if there is an issue after our report and we 0142 1 have missed something factual and it's not a judgment 2 issue, although we're more than happy to talk about 3 those, too, but if we have made a factual mistake, the 4 company points it out. We verify it, and we send out a 5 note to all our clients with an update saying this is a 6 correction. 7 So we do highlight that with any -- with all 8 our clients in terms of corrections if we have made 9 mistakes. 10 MS. RABIN: I would just say we do the same 11 thing on the error and omissions that are brought to our 12 attention, the same process as ISS. 13 MR. RYAN: We recognize and appreciate that. 14 It's just the time frame. It's tough for companies to 15 respond that quickly. 16 MR. HIGGINS: Michelle. 17 MS. EDKINS: I just wanted to make a point 18 about the formation of policy, which I think is an 19 intrinsic difficulty here. Firstly, as others have sort 20 of intimated, it is impossible to synthesize the views of 21 everyone into a single policy. It's just not doable. 22 We struggle with that in house, and we're 23 trying to prevent one BlackRock view. So I think it just 24 is important, I think, to be honest about that. 25 But the thing that we hear from companies all 0143 1 the time, and I'm not here to speak for companies, but I 2 think it is a very valid point because we struggle with 3 it ourselves and our own policy formation is where is the 4 empirical evidence that any single policy feature or any 5 single type of governing structure necessarily enhance 6 shareholder value. 7 And I think the lightning rod for that here is 8 the separation of the roles of chairman/chief executive, 9 which is obviously not the common model in the U.S. If 10 you look at Europe where I've had a fair bit of 11 experience during the aftermath of the financial crisis, 12 a lot of sort of sour searching and review was done of 13 exactly this role. What board model, what board 14 structure protected shareholder value and which board 15 structures did not, and the basic outcome of that kind of 16 soul searching was it depends on who was on the board. 17 It didn't matter if it was employee representation model, 18 political representation model, split boards, you know, 19 dual boards with a supervisory board and a management 20 board. No single model showed through to consistently 21 have protected shareholder interest. 22 And I think it's very difficult to ever 23 demonstrate that any single governance factor is 24 contributing to shareholder value until you look at 25 governance as the quality of leadership at a company as 0144 1 represented by the board and the management and how they 2 execute the strategy that's been provided to them, which 3 brings us back to the importance of shareholders having 4 their own policies that reflect their investment context, 5 their client sort of philosophies, and then taking their 6 own decisions. 7 Because we don't agree with ISS' policy of 8 splitting the role of chairman and chief executive in the 9 U.S. We have a different policy, and that's again in the 10 public domain, but we took that view based on our own 11 analysis of what we believe is in our client's interest. 12 Now, our clients might disagree with us, and 13 that's a dollar we have with them, but that's the policy 14 that we apply, and I think we don't have necessarily 15 empirical evidence that I's a better approach, but we 16 look at each case to try and work out whether there's a 17 justification for voting with our policy or voting 18 differently to it in that context. 19 MR. RETELNY: Keith, if I may, just quickly. 20 So I know we've used the term here in some 21 instances. We don't really have a one size fits all 22 policy. We have an ISS home view policy, which we're 23 asked to provide, but many of our clients have their own 24 custom policies, which is what Michelle is describing. 25 We implement those for them, whether it's through the 0145 1 voting system that I think we've covered, the platform 2 itself, or us helping them develop those policies for 3 themselves so that they come up with their own policies. 4 ISS itself though has its own what we call the 5 home view policy that's also available. So I just wanted 6 to clarify. 7 And in terms of chair and CEO, since Michelle 8 raised it, our policy is flexible. We don't have a 9 policy that says that the chair and CEO must be separate. 10 It's a case by case analysis. 11 Our preference is for them to be separate, but 12 we don't have -- actually if you look at the 13 recommendations, they're pretty much 50-50 in terms of 14 how ISS has come out on that. 15 MR. HIGGINS: Damon. 16 MR. SILVERS: I mean, this is a fascinating 17 little conversation because I think it indicates that the 18 Commission should inform the Commission as to what really 19 is in play here. 20 I'm sure that Larry Fink thinks it's a great 21 thing that he's both chairman and CEO of BlackRock. 22 Larry's a very talented guy, and maybe it is a great 23 thing, but what happens when fiduciaries -- and there are 24 many fiduciaries in this country who have come to the 25 conclusion that Larry is mistaken -- what happens? Who 0146 1 decides? 2 What happens, given the relative power of a 3 firm like BlackRock in the securities markets? Proxy 4 advising is not the only area of the financial system 5 where there is market power. The Commission needs to 6 think very carefully about what people are really asking 7 you to do around this table. 8 Larry Fink, Jamie Dimon, they're in this 9 room, and they're asking you to give them more power. Do 10 you want to? 11 MR. HIGGINS: Anybody want to take that on? 12 (Laughter.) 13 MR. HIGGINS: Or was that a rhetorical 14 question, Damon? 15 MR. SILVERS: That was most definitely not. 16 MR. NORWITZ: I'm not really going to respond. 17 The question really is whether, frankly, ISS which owns 18 no stock should have the power of a $4 trillion voter, 19 and I think, you know, that really is sort of the 20 question that these regulatory quirks that we've been 21 talking about have sort of led to. 22 The policies that ISS adopts become de facto 23 standards that everybody has to meet. I think Mike said 24 it very well. The voting recommendations are the tip of 25 the iceberg. What happens in the boardroom when 0147 1 everybody says, "Oh, ISS is not going to accept this so 2 we're not going to do it," is the iceberg itself, and, 3 yeah, I think that's a question that is, you know, on the 4 table. 5 While I'm holding the conch, if I can, I mean, 6 the question of transparency relates, again, quite 7 closely to the question of conflicts, and I think you 8 asked earlier, Keith, what kind of conflicts are 9 material. I think there are certain types of conflicts 10 which are per se material and should be disclosed, and if 11 you are the arbiter, the judge, but you're also getting 12 paid by one or both sides in that context, even if it's a 13 small amount, you should disclose. 14 It may well turn out that the corporate side 15 pays a lot more than the activist side because I think 16 I'm led to believe -- I don't know -- that the corporate 17 side essentially subsidizes the other side, the 18 institutional side of the business, which goes, by the 19 way, to Mike's point as well about whether it is possible 20 to create competition in this market. 21 And by the way, Damon, I actually agree with 22 you. Ideally you wouldn't have these two sides together, 23 but if you're going to have it in a for-profit business, 24 it sounds like unless basically the corporations are 25 paying to fund the stuff they're getting, you know, 0148 1 directed at them, you know, the whole thing wouldn't 2 really flow, which again is why I believe ideally, 3 ideally, it wouldn't be in a for-profit business. 4 I think the other thing, Keith, that you 5 mentioned is -- and we haven't really touched on it yet 6 except when you mentioned the question of these conflicts 7 goes to the availability of the exemption from the proxy 8 rules, and I think that's something that should be 9 considered, and frankly, I think there are broader 10 questions about whether the exemption from the proxy 11 rules is appropriate in a context where the advice is not 12 only being given to the person who is a client, but is 13 basically being published broadly and is setting the 14 standards for the market to adhere to and may be, just 15 may be applying the proxy rules. 16 I know it's tough in a for-profit business, but 17 maybe applying the proxy rules to ISS recommendations 18 would be the solution to all of these, given the right 19 level of disclosure, given the right level of ACC 20 oversight, and given the availability to companies so 21 they can correct mistakes, making the fiduciary duties 22 very clear. That may be, frankly, the best fix to the 23 problem we have. 24 MS. MINOW: Well, I think Trevor's point about 25 disclosure of conflicts is a legitimate one, and I think 0149 1 if you look around this table, we know who's paying for 2 Trevor to be here, and we know who's paying for the trade 3 associations to be here, and we know who's providing a 4 product that people want to buy. 5 You know, you may not think it's a great 6 product. You don't have to buy it. Trevor's clients 7 don't have to buy it, but people, they've got a product 8 that everyone wants to buy, and if we're going to put the 9 future of capitalism on the table, I will say that a kill 10 the messenger approach is not going to add to the 11 credibility of capitalism in this country, and lack of 12 accountability to shareholders is not going to add to 13 that either. 14 We're here on behalf of shareholders. We're 15 all here on behalf of shareholders. Even Trevor's 16 clients in theory are here on behalf of shareholders, and 17 if shareholders want this information, they should be 18 able to have it. 19 And it sort of bothers me that the SEC is 20 digging down so deeply into the question of whether 21 there's an error and, you know, is that really the SEC's 22 job, that once in a while there's a mistake that 23 everybody agrees, you know, gets corrected? 24 You know, what people should be focusing on 25 here is do shareholders have the information they need to 0150 1 evaluate the issues that are put to them and the ability 2 to respond. The reason that Say-on-Pay was included in 3 Dodd-Frank was that there was some expectation that there 4 might be some no votes and there might be some pushback 5 on pay plans where they said, you know, we might lose a 6 Say-on-Pay. 7 Well, good. That's the market responding. 8 MR. RYAN: I want to agree. Actually, I think, 9 mostly with what Nell said with the exception that from 10 our perspective we're not trying to kill the messenger. 11 We believe that the role the proxy advisory firms play is 12 very valuable. 13 Michelle has made the point before the 14 committee today or in a panel the other day that 15 corporate proxies are very complex. Everyone looks 16 different. One critical role the proxy advisory firms do 17 is they take and distill the information down. They 18 standardize the ability to read that so that you know on 19 page 3 of ISS' report -- I'm just making this up -- is 20 compensation information, and you don't have to be, you 21 know, flipping through this, you know, long proxy 22 statement. 23 What we think is really critical and what the 24 Commission should be worried about is the quality of the 25 work that's being done, the due diligence that's being 0151 1 done by institutional investors when they make their 2 initial decision, and it concerns conflicts of interest, 3 but it also concerns the integrity of the systems and the 4 data and includes the quality of the staff making final 5 determinations. It includes the process that they go 6 through for setting their policies. It includes when 7 they say that they have this policy or they're 8 implementing a custom policy for a client, that they're 9 actually doing what they say they're doing, and that's an 10 ongoing process. 11 MR. HIGGINS: Let me ask you a question, Mike. 12 I'm sorry to interrupt, but I mean, is that the question 13 for the users of the ISS and Glass Lewis? I mean, are 14 these questions that you ask? 15 I mean, I'd be interested to hear from them 16 whether those are concerns that they've asked about, that 17 they've been addressed. What are their concerns from 18 this standpoint? I mean, I hear what you're saying, but 19 I'd love to hear what the consumers, you know, the buyers 20 of the service have to say. 21 Eric? 22 MR. KOMITEE: Sure. You know, the short answer 23 is I think how much we care about conflicts depends on 24 how likely we are to be swayed by ISS' role in a given 25 case. 0152 1 I'm not sure that a lot of what are being 2 discussed here or proffered as potential conflicts are 3 necessarily conflicts. You know, I think of the proper 4 purpose of the proxy advisory firms as being to advise 5 shareholders as to what kind of a vote is in the best 6 long-term interest of the shareholders which should be 7 aligned with the company. 8 You know, to the extent that an activist who's 9 behind a particular vote is also a customer of one of the 10 proxy advisory firms, I'm not sure that knowing that 11 would necessarily sway us that much. I mean, if it's 12 possible for that activist investor to pay, you know, 13 many, many multiples of the subscription fee that we pay 14 on a per vote or whatever basis, you know, that would 15 certainly be interesting to know. 16 But ultimately the more contested the vote is 17 the less likely we are to be swayed in the end one way or 18 another by what the proxy advisor is recommending. I do 19 think it is an overstatement to refer to the proxy 20 advisory services as a $4 trillion dollar voter. You 21 know, they advise people. I think it is possible, to 22 return to the professor's comments, that a lot of the 23 statistics that show a correlation between their 24 recommendations and the outcome of a vote are because the 25 ultimate voters, you know, think in the same way that the 0153 1 proxy advisory services do about director performance and 2 other similar subjects, not because we're voting blindly 3 with them and not because we're even necessarily 4 persuaded by their reasoning so much as just because we 5 happen to think that way to begin with. 6 You know, I mean, just the J.P. Morgan example 7 has come up today. I mean, the proxy advisory services 8 everybody knows are very much in favor of splitting the 9 chairman role from the chief executive role. The 10 chairman role and chief executive role at J.P. Morgan 11 continue to be held by the same person despite that 12 recommendation, and you know, I think that's because 13 people think or lots of people think that Jamie Dimon 14 is a good executive, and the merits where they should win 15 especially with respect to the larger companies where 16 you've got a very informed electorate; I think the merits 17 do tend to prevail. 18 So that's my view. 19 MS. SHEEHAN: Yes, I would agree with Eric in 20 terms of that. You know, at times, and I know some of 21 the folks around the table. Some of the commentary made 22 by some of the folks not here but in other forums, I 23 don't know whether to be insulted or I feel patronized 24 that we just blindly follow the proxy advisory firms. We 25 don't. We have our own custom policies. 0154 1 It helps inform us. It helps give us some 2 details, as Michelle says, synthesizes it. You know, I 3 don't know how you legislate quality or regulate quality. 4 I think what it is is the customers have to talk to 5 these two firms about what we want and what we need, and 6 that's what we do, and we do it on an annual basis. 7 What Trevor said in terms of a small portion of 8 people responding, I can't help it if people don't 9 respond to the survey. I wish more people did. I 10 suspect the advisory firms wish more people would respond 11 to the surveys in terms of how they can improve things. 12 I have actually seen them make changes in their 13 recommendations in terms of peer groups on behalf of 14 Glass Lewis when there was a lot of complaints from the 15 issuers about how they did that, but I guess one of the 16 messages I would have to some of the folks here is just 17 come talk to us. It's our vote. We are the ones that 18 are the customers of these. 19 I'm happy for it to be disclosed that we're the 20 customers, but come talk to us because ultimately it 21 isn't ISS who controls the portfolio. It's the other 22 people sitting around this table who actually control the 23 vote in that instance. 24 I do want them to improve the quality. I think 25 if you look at from when Nell and others started, the 0155 1 quality has improved tremendously over the years. 2 (Laughter.) 3 MS. SHEEHAN: Sorry, but -- 4 MR. HIGGINS: A left-handed compliment. 5 MS. SHEEHAN: But I think the competition has 6 helped improve the quality because they keep them each on 7 their toes in terms of who does better. And I think as 8 Nell said, this is a market situation. Let the market 9 decide, and that competition has really improved it. 10 So that's really, I think, the issue here, and 11 in terms of the regulatory response, I'm not sure the 12 investment adviser register, I don't know if that's the 13 solution. I mean, it's sort of like trying to plug them 14 into a system you already have. 15 I do think you do play a role in making sure 16 that the things that they have said they carry out 17 properly in terms of correcting errors. What I have 18 found, that many times the errors are really differences 19 of opinion. So ... 20 MR. HIGGINS: I want to hear from Harvey, and 21 then we want to move to our last topic in the last 15 22 minutes. 23 MR. PITT: I'll try and be brief, although 24 congenitally it's not easy. 25 (Laughter.) 0156 1 MR. PITT: There are a couple of things. I 2 think, first, the Commission is very wise to look into 3 these issues. Looking into these issues is not the same 4 as deciding on the spot exactly what you're going to do. 5 It may well be that some form of regulation at 6 some point in time makes sense. I would say for a whole 7 variety of reasons today it's probably the last thing the 8 Commission itself needs to do. You've got a lot of 9 regulation and a lot of burdens, and the docket is just 10 enormous, but that doesn't mean that there aren't things 11 that can and should be done with respect to this. The 12 issue isn't whether someone makes a mistake. People 13 always make mistakes, and therefore, if a mistake is made 14 and it's not venal, the question then is how does it get 15 repaired because the ultimate beneficiary of what we are 16 talking about are the shareholders. 17 They are either voting or having votes made for 18 them based on the accuracy of information, and I put to 19 one side the sort of global types of issues for purposes 20 of this discussion and the specific company decisions. 21 One of the interplays -- I think it was between 22 Mike and Lynn -- about how much time each side gets with 23 whatever a recommendation is is a fascinating subject. 24 I'm not sure in the first instance it's for the 25 Commission to decide. I think it would be useful if 0157 1 people sat down and tried to figure out a methodology and 2 then got the Commission to bless whatever that approach 3 is to see how it works, to get a sense of whether that 4 could be useful. 5 But when you talk about accuracy, I can't help 6 but sort of smile at the ISS disclaimers at the end of 7 their corporate reports, and the first paragraph starts 8 by saying ISS' government services experienced research 9 team provides comprehensive analyses of proxy issues and 10 complete vote recommendations for more than 40,000 11 meetings in over 100 worldwide markets. More than 200 12 analysts fluent in 25 languages cover every holding. 13 Now, if you do the math and you think about 200 14 individuals dealing with 100 worldwide markets and 40,000 15 meetings, that's an incredible job. What it means is the 16 likelihood is that even systems like Glass Lewises and 17 ISSes that are trying to produce accuracy have got to 18 have some percentage of failure. There are just too many 19 issues even for them. 20 And so the question isn't do they make 21 mistakes. The question is how does one deal with that 22 before shareholder votes are influenced. We are 23 listening to a variety of institutional investors here 24 who I think on the whole are incredibly impressive. They 25 have given a lot of thought, and they've expended, I 0158 1 suspect, a lot of capital to developing their entire 2 systems. 3 What we have to be worried about though is the 4 universe of people who get it, and it's not to suggest 5 because I think Anne is 100 percent right that any 6 institutional investor is going to go out and either 7 willingly abuse its fiduciary duty or the like or be 8 stupid about issues. The question is: isn't there a 9 legitimate interest for the benefit of shareholders to 10 make sure that the process works in an accurate way, and 11 where inaccuracies crop up, however many there are, 12 there's a way that shareholders don't get adversely 13 affected? 14 And my view is in the first instance if you 15 could get this kind of view expressed by a lot of 16 different perspectives, perhaps with Commission observers 17 and so on and have people deal with concrete issues and 18 problems and think about whether there are pragmatic 19 solutions, it may well be, as Gary has said, that they 20 are trying to be responsive and they have solved that. 21 But I can assure you there's also a feeling on the part 22 of other segments of society that they're not responding 23 yet or that they haven't really been transparent. 24 The last thing I'll say is the rest of the page 25 of ISS' disclaimer does exactly what I had described 0159 1 earlier, and I won't read all of it, but it is constantly 2 maybe this, we may have that, we may do this, it might 3 happen, and so on, and at the end of the day, Eric is 4 right. If certain types of conflicts aren't of interest 5 to him, he can disregard them. 6 But what if it would influence another 7 investment adviser? Certainly as thoughtful as Eric's 8 views are, I don't think his views would necessarily 9 translate into the exact same types of conflicts that all 10 people would worry about. 11 So the goal really is what do you know about 12 the conflicts and then if you want to describe them, 13 that's great, but you at least should do the discarding 14 based on knowledge, and as nice as this is, I have to say 15 it does not reveal what the specific conflicts are, and 16 the Commission's own precedent with respect to research 17 analysts is identical to this type of approach, and the 18 Commission reversed that. 19 This is not something that requires a rule, but 20 it requires something more thoughtful so that people can 21 make the kinds of informed judgments that Eric is making 22 about what matters to them and what doesn't. 23 MR. HIGGINS: Thank you. 24 We want to move on. Sorry. Because we have 25 one last topic and K.T. Rabin is going to tell us a 0160 1 little bit about the recently recommended EU code of 2 conduct and how we might learn -- for the proxy advisory 3 industry -- and how we might learn from that in the U.S. 4 K.T. 5 MS. RABIN: Thank you. 6 And I probably jumped right inn with my first 7 comments and didn't thank the Commission for inviting me 8 here today. I really appreciated the opportunity to meet 9 with everybody here. 10 As you know, in addition to the SEC and the 11 concept release that they issued in 2010, other 12 jurisdictions, Europe, Canada and even Australia have 13 issued consultations that either focus on or touch on the 14 proxy advisory industry, and earlier this year in 15 February, the European Securities Markets Authority, 16 ESMA, published a report. It's called the ESMA Final 17 Report, on its findings and recommendations coming out of 18 that consultation. 19 And in fact, last year they had a meeting not 20 unlike this one at ESMA, a multi-stakeholder meeting that 21 also kind of -- you know, they provided feedback that was 22 really critical to the process. So this is really great 23 that we're doing that here today. 24 And the ESMA Final Report found, as a notable 25 conclusion, that there was no clear evidence of market 0161 1 failure in relation to how proxy advisors interact with 2 investors and issuers. And on that basis, ESMA said it 3 did not consider the introduction of binding measures or 4 regulations was required at this time. 5 However, the report did find areas where a 6 coordinated effort of the proxy advisory industry would 7 foster better understanding and assurance among other 8 stakeholders. Not surprisingly, the areas of concern 9 identified in the report mirrored those highlighted in 10 the responses to the U.S., Canadian and Australian 11 consultations, and really the topics of discussion here. 12 Particularly they focused on the transparency and 13 disclosure regarding research policies and methodologies, 14 conflicts of interest, engagement and communication 15 practices, and the quality and accuracy of the services 16 that we provide. 17 In its report, ESMA said it believed that the 18 understanding and assurance that an industry code would 19 provide would help to keep the attention focused on where 20 it belongs, namely, on how investors and issuers can from 21 their respective roles foster effective stewardship and 22 robust corporate governance and ensure efficient markets. 23 And at the time that the ESMA report was 24 published, they also announced the formation of a 25 drafting committee which contained proxy advisors, and so 0162 1 I was a drafting committee member. There was Jean- 2 Nicolas Caprase, who runs ISS Europe. There was a 3 representative from IVOX in Germany and representatives 4 from both of the U.K. proxy advisory firms, PIRC and 5 Manifest, who by the way write a fair amount of research 6 on U.S. companies as well for their European clients, and 7 then the representative, the principal Pierre-Henri Leroy 8 from Proxinvest in France. 9 And we met many, many times despite it being 10 sort of we kicked it off right at the beginning of proxy 11 season, both in person, a number of meetings, as well as 12 phone calls, and we developed a set of principles which 13 have been out for public consultation. They went out on 14 October 28th, and the consultation ends on December 20th. 15 The committee was an independent committee with 16 an independent chair. However, we did get some subsidy 17 to essentially fund the sort of expenses of our 18 independent chair, who's a professor of law from 19 Dusseldorf, Dirk Zetzsche. 20 And the principals in summary promote the 21 integrity and efficiency of processes and controls 22 related to the services we provide and foster robust 23 conflict management and a greater understanding of the 24 role of governance research providers in the vote 25 decision-making process. 0163 1 And I think it's interesting to note that the 2 principles are called the best practice principles for 3 governance research providers. Even though the 4 consultations, you know, talked about proxy advisors, the 5 reality is that there are other kinds of firms that 6 provide significant input into the proxy vote decision- 7 making process. Organizations that are industry 8 associations, such as the Association of British Insurers 9 in the U.S. that probably is the number one sources; I'm 10 sure that BlackRock subscribes to their service as it 11 relates to remuneration reports, which is the Say-on-Pay 12 in U.K., as well as engagement services providers. 13 So that name is not quite what you'd expect 14 because we really think that anybody that's doing 15 something that really is an input into the proxy vote 16 decision-making process should ultimately become 17 signatories to this set of principles. 18 It is a comply or explain model, not unlike the 19 stewardship code in the U.K. Interestingly enough, I met 20 with sort of the equivalent of Darla Stuckey in France 21 that represents the CAC 40 companies in France, and 22 they're just putting out an updated code for corporate 23 issuers and updating their comply or explain model 24 because they've had this code out there for a couple of 25 years, and they've realized that the comply or explain 0164 1 model needed a little bit more teeth to it. 2 And I basically said to her, you know, "Would 3 you mind if I took your comply or explain description and 4 translated it into English and just used it essentially 5 verbatim as our comply or explain model?" 6 So we took from a bunch of codes that are 7 already out there both on the investor side as well as on 8 the issuer side and applied that. 9 And so I think, you know, we plan to put it in 10 place once it's finalized in March. We hope that 11 everybody in this room that's interested will provide 12 comment to the code because, you know, the proxy advisors 13 that have participated in this have said that while it's 14 being done under the auspices of ESMA, we plan to apply 15 this code globally, to our conduct globally. So we 16 really would like everybody that, you know, would like to 17 have their opinions expressed on that to provide input to 18 it. 19 MR. HIGGINS: Thanks, K.T. 20 Anybody have any comments on the code or on 21 codes of conduct as a way of addressing the issues that 22 we talked about today? 23 Commissioner Gallagher. 24 COMMISSIONER GALLAGHER: Look. I think the 25 code is a good and positive step forward. You know, I'll 0165 1 point out I think my understanding in talking to ESMA 2 folks is that this was sort of the resolution in the E.U. 3 of what was originally a draft directive, which would 4 have been a registration and oversight regime which has 5 been heavily debated, and I think they decided to take it 6 down a notch. 7 You know, codes are great, like a said, a very 8 nice, positive step. I can't resist though another 9 parallel to the rating agencies in which, you know, in 10 2003 IOSCO came out with its code. It was comply or 11 explain. It gave everyone a little bit of comfort. We 12 didn't need to do anything with rating agencies. All the 13 while they were cooking up some pretty bad structured 14 finance ratings. 15 So I don't think that should be the end of the 16 debate, but I do think it's a positive step. It's good 17 for investors. 18 MS. RABIN: I think one of the things that we 19 thought was positive about the code, and this was echoed 20 among the investors that participated in the multi- 21 stakeholder meeting is that, you know, just in the ten 22 years that I've been in this business, I cannot believe 23 how quickly and just how dynamic the world of corporate 24 governance is. I mean, where we've come in terms of what 25 we do and how we do it, the needs that we're addressing 0166 1 for our institutional investor clients, the dialogue that 2 we're having with corporate issuers both on a one-on-one 3 basis as well as sort of on a group basis globally, it's 4 difficult for us to imagine regulations sort of putting a 5 box around something that's moving so quickly. 6 And I think that was part of what -- you know, 7 I don't have the sort of history or the background on 8 what you described in terms of what ESMA was thinking 9 about before, but it feels like, you know -- and I'll be 10 honest. The EC has made it very clear that, you know, 11 they were ready to legislate, and so that I did know, and 12 they were engaged with ESMA, and they basically told 13 after discussions and sort of feedback from, you know, 14 understanding of what we were doing, they said, you know, 15 "Let's give this process a little bit of time." 16 You know, in reality, you know, it's not like 17 we're putting a code of conduct to a large industry, 18 right? There are really basically ten of us globally, 19 and so to be able to see how we're doing and how we're 20 conducting ourselves is going to be difficult for people. 21 MS. EDKINS: Just one little point. ESMA has 22 reserved the right to review this approach in two years 23 and has made clear that they will act if it hasn't 24 worked. 25 MR. HIGGINS: Well, I think we've come to the 0167 1 end of our session, and I can't thank you all enough for 2 participating. We have heard the thought provoking, 3 lively, informative views that we anticipated we would at 4 the beginning of the program. I feel a little bit like 5 Gary's folks, synthesizing a lot of different views, and 6 I'm not sure what will come out. 7 (Laughter.) 8 MR. HIGGINS: But the dialogue is very useful. 9 It's useful, I think actually for all the participants 10 in the room to understand where the friction in the 11 system is, and we really appreciate you coming today. 12 So thanks a lot and safe travels home. 13 (Whereupon, at 1:26 p.m., the roundtable was 14 concluded.) 15 * * * * * 16 17 18 19 20 21 22 23 24 25 0168 1 PROOFREADER'S CERTIFICATE 2 3 In The Matter of: PROXY ADVISORY FIRMS ROUNDTABLE 4 File Number: OS-1205 5 Date: December 5, 2013 6 Location: Washington, D.C. 7 8 This is to certify that I, Nicholas Wagner, 9 (the undersigned), do hereby swear and affirm that the 10 attached proceedings before the U.S. Securities and 11 Exchange Commission were held according to the record and 12 that this is the original, complete, true and accurate 13 transcript that has been compared to the reporting or 14 recording accomplished at the hearing. 15 16 _______________________ _______________________ 17 (Proofreader's Name) (Date) 18 19 20 21 22 23 24 25 0169 1 REPORTER'S CERTIFICATE 2 3 I, JENNIFER O'CONNOR, reporter, hereby certify that the 4 foregoing transcript of 167 pages is a complete, true and 5 accurate transcript of the testimony indicated, held on 6 December 5, 2013, at Washington, D.C. in the matter of: 7 PROXY ADVISORY FIRMS ROUNDTABLE 8 9 I further certify that this proceeding was recorded by 10 me, and that the foregoing transcript has been prepared 11 under my direction. 12 13 14 Date:__________________________ 15 Official Reporter:__________________________ 16 Diversified Reporting Services, Inc. 17 18 19 20 21 22 23 24 25