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has a large number of public company clients, also made a submission to the CSA. "Virtually everyone I've dealt with has had occasion to go correct a proxy report over the 20 years I've been doing this. It's hard to think of an issuer who hasn't had problems with a proxy advisory firm," he adds. With a greater recognition that anything governance related has to be conflict free, just about everything involved in corporate governance is getting a second look these days and proxy advisory firms are not exempt. Despite a general reluctance for more regulation, Tuzyk says it's in everyone's interest there be as much accurate disclosure as possible to bolster efforts towards good governance. "If we can minimize errors and inaccuracies and do it on a cost-effective basis, that seems to make sense and has to be a good thing," he says. The question of whether the proxy advisory industry should be regulated has been a polarizing issue for some time now. Depending on who you ask, there are strong opinions on both sides. Institutional shareholders are closely aligned with the proxy firms; law firms make their bread and butter from corporate management, while issuers and academics have concerns about many aspects of the process. The CSA, which acts on behalf of the provincial securities regulators in Canada, invited input from all parties — issuers, institutional investors, proxy advisers, and other market players — on concerns over the activities of proxy advisory firms. The concerns range from a perceived lack of transparency in how they operate to conflicts of interest and inaccuracy of their work. The activities of proxy advisory firms are unregulated in Canada.  The call for consultation follows similar steps by regulators in the United States and Europe, as the perceived power of proxy firms, such as Institutional Shareholder Services Inc. and Glass, Lewis & Co., which provide proxy voting advice and other services, has been debated in recent years. The U.S. Securities and Exchange Commission embarked upon a similar exercise in 2010, but it has not resulted in any changes to date. Some feel companies like ISS and Glass Lewis wield too much power and have too much influence. Insiders point to issuers who have been quoted in the press making comments along the lines of, "The proxy advisory firm is my number one shareholder because they control 50 per cent of my vote." That sounds good as a headline but it's not really true, says Brad Allen, of Branav Shareholder Advisory Services Inc. "People continue to reinforce this image that proxy firms have all this power. They do have influence but their primary influence is their ability to communicate to a broad range of shareholders that hold an equity interest." As one of many companies that submitted a written response to regulators last fall, Magna International Inc. indicated its key concerns included potential conflicts of interest, lack of transparency, and potential inaccuracies as well as limited opportunity for issuer engagement. It also has concerns about the extent to which institutional investors in Canada rely on proxy advisers' recommendations. "Our comments were directed to say, there has to be a level playing field so the issuers know exactly what is the basis on which we are being assessed," says Bassem Shakeel, Magna's vice president and secretary. "Right now that is one of the biggest problems; there just isn't enough transparency around the detail — the basis on which some parts of the analysis is being completed and/or overly broad subjective discretion which can be used to override voting guidelines." "For me personally, the primary concern is one of transparency — I need to know exactly what is the standard I'm being assessed on to which I will be held," says Shakeel. He acknowledges ISS is transparent. "Issuers may not like their policies, they may not agree with their methodologies, but at least you know the basis on which you are being assessed." Others argue the proxy companies aren't as powerful as the issuers make them out to be. "My view is these proxy advisory firms don't necessarily have as much influence as many people say they do because a lot of times when we speak to institutional investors, who are clients, they are proud to say, 'Yes we receive the information but we're not robots and we do spend some time on how we're going to vote,'" says Jonathan Feldman, a partner at Goodmans LLP. "They say, 'If we disagree with what the proxy advisers are suggesting, we won't just follow them blindly.'" Feldman disagrees with the conflict of interest accusation. While Glass Lewis is owned by the Ontario Teachers' Pension Plan, it take steps to make full disclosure. "They have a good reputation and I don't think they would jeopardize that reputation on the basis of owning this company. It's well known they own it but I don't think they influence it in a way that is in any way negative," says Feldman. The issues of conflict of interest, transparency, and lack of qualitative assessment of governance quality and predictive validity on shareholder value are all reasons why the proxy firms should be regulated, says Richard Leblanc, an associate professor of law, governance, and ethics at York University. "If I asked my students to pay me to help them with their score, it's a conflict," he says. He says ISS and Glass Lewis use a "mechanistic, quantitative, and volumebased" approach to their business and don't measure things that are important to the quality of corporate governance and to shareholder performance — essentially what happens inside the boardroom. "The assumption is what they are measuring matters but often what they're not measuring might matter more," such as individual people and the qualities and skills of directors, says Leblanc. "As a qualitative researcher I'm seeing this volume-based model that is conflicted because of the For me personally, the first part is one of transparency, of saying I need to know exactly how that voting recommendation is being developed so that I know exactly what is the standard I'm being assessed on. Bassem Shakeel, Magna International Inc. w w w. c a n a d i a n law y er m a g . c o m / i n h o u s E april 2013 • 29

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