Canadian COMPETITION LAW

Guest post by Jacob Kojfman (Vancouver Securities Law)

Ever year’s proxy-season brings about its share of drama, as reporting issuers fend off hostile take-over bids, or attempted changes in management.  One key player in all of this is the proxy advisory firm.

The Canadian Securities Administrators (“CSA”) have decided to take a much closer look at the role the ISS and Glass Lewis of the world play.  The Ontario Securities Commission (“OSC”) is leading a consultation paper on the possibility of regulating these proxy advisory firms.

Some of the concerns the consultation paper has raised include the potential for conflicts, a perceived lack of transparency, and potential inaccuracies and the limited engagement with issuers.  There are also potential corporate governance implications and the extent of reliance by institutional investors on the proxy advisor recommendations.

I believe that one of the potential areas of concern that the consultation paper raises is without merit.  The lack of transparency and lack of disclosure of how the proxy advisory firm determines its recommendation is not really an issue for the public.  When an institutional investor retains a proxy advisory firm to give it a recommendation, this is a private agreement between the two parties.  While  the recommendation is sometimes made public via news releases, that is often a tactic the investor may take as part of its strategy.  Forcing a proxy advisory firm to disclose its recommendation and the factors it considered could lead to a “free rider” problem – that other institutional investors or even individual investors would be able to take advantage of the recommendation, and more importantly, the reasons behind it, without having to pay for the service.

The New York Stock Exchange Commission on Corporate Governance believes that proxy advisory firms should be held to appropriate standards of transparency and accountability, and recommends that the Securities and Exchange Commission should study these firms for their impact on corporate governance and behaviour.

Proxy advisory firms provide a valuable service to their clients, the institutional investors.  Firms that advise such clients on securities are often exempt from most securities laws because of the sophistication of their institutional client.  I see no reason why proxy advisory firms should not be granted the same treatment.

More importantly, proxy advisory firms are not advising their clients to buy or sell securities, but rather to advise these institutions how to vote their securities in light of good corporate governance principles.

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