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