PROXY FIRMS

Egan-Jones Proxy Services

Glass Lewis

Investor Responsibility Research Center

Institutional Shareholder Services

Proxy Governance

Over the past year, Compliance Week has published numerous articles about proxy voting and its implications for public companies and institutional investors. However, public company executives know surprisingly little about the firms that are making voting recommendations to institutional investors. That's largely because many of the firms, including Egan-Jones Proxy Services, don't market services to the corporate market.

As a result, a silent cottage industry has emerged in a market once dominated almost single-handedly by Institutional Shareholder Services.

Heightened Interest, And Conflicts Of Interest

The emergence of the new firms, like Glass Lewis and Proxy Governance, was—not surprisingly—timed with the major accounting scandals. “The general trend—because of WorldCom and Enron—is to have better governance," says Steven Pruette of Egan-Jones, "which in turn improves returns.”

Taxin

“Voting proxies well can lead to long-term share-price appreciation," says Glass Lewis CEO Gregory Taxin, "so it matters to [companies’] futures, and it’s of great interest to the corporate sponsors of these funds.”

According to Cheryl Gustitus, senior vice president at market leader ISS, “After Enron, people jumped in because they saw that there was a market for it.” However, the truth isn't so simple. ISS had long been criticized for conflicts of interest related to its governance voting and rating services, and many saw the conflict as an opportunity for new, independent offerings.

In fact, ISS' competitors have increasingly used that conflict-of-interest issue as a selling point, emphasizing the fact that the newer firms do not sell consulting services to management or boards regarding any proxy-related issues. Those new firms stress the need for impartiality, purporting that ISS is biased because it markets services to public companies, and then charges mutual funds for advice on how to vote on issues at those same public companies.

Gustitus at ISS claims that the conflict-of-interest issue simply is not one. “85 percent of our revenue is on the institutional side," she says. "People don’t realize how little of our revenue is on the corporate side." In addition, Gustitus is quick to clarify that the firm does not provide advice for its corporate market. "We don’t consult,” she says. “We develop Web-based modeling tools to help companies look at 'what-if' scenarios and best practices on issues such as compensation.”

But the proxy voting market has heated up for other reasons, as well. Regulatory changes, for example, have fueled institutional interest in alternative proxy voting services. Last year, the Securities and Exchange Commission adopted new disclosure rules governing proxy voting by mutual funds and investment advisors, requiring asset managers to disclose to shareholders how they voted on issues at their portfolio companies. The disclosure requirements, coupled with the increasing complexity of some voting issues, have led to heightened demand for sound advice. “A lot more attention is being devoted by investment management companies to the whole area [of voting] in the last couple of years,” says Kent Hughes, managing director of proxy research at Egan-Jones.

Unique Views

A chart of the various proxy voting firms is at the bottom of this article, but suffice it to say that the dynamic nature of the industry has created slightly different offerings. “It’s a marketplace that is expanding in terms of the number of customers and their interest in corporate governance and proxy voting,” says Taxin of Glass Lewis. “The current firms each have a slightly different philosophy and approach.”

“It’s not bad for the market to have these options," agrees

Pruette at Egan-Jones. "Firms represent different groups.”

ISS is known for having created the proxy analysis business over 20 years ago, and it is the largest proxy advisor to mutual funds, providing corporate governance services as well as research. ISS’s services are tied to telling investors how to vote, and also physically voting for their clients and keeping records for them.

In proxy matters involving public companies, ISS annually recommends votes on ballot issues for more than 28,000 shareholders meetings in 102 markets around the world.

“Being here longer, ISS has the lion’s share of the business,” notes Pruette.

“Ours is the only end-to-end process," claims Gustitus. "IRRC comes close, although they do not make recommendations.”

The IRRC, a proxy voting agency service company, focuses on governance and social responsibility issues. The firm started as a not-for-profit that looked at public statements and institutional analyses, but would not give voting advice. The firm recently created a relationship with Glass Lewis to create a more comprehensive offering.

“We’re in partnership with San Francisco-based Glass Lewis & Co., who do research," said IRRC's director of marketing Michele Soulé. "We provide background information on the issues for voters. We compete directly with ISS.”

Glass Lewis, a relative newcomer in the field, began selling proxy research and advice to institutional investors in 2003. The firm has quickly gained a high profile, partially through the contributions of Lynn Turner, a former chief accountant at the Securities and Exchange Commission. In addition, Glass Lewis has been outspoken on research, analytical, and even competitive issues. “First and foremost, our research is vastly superior to any of the other firms’ research," asserts CEO Taxin. "ISS’s research is weak, and is perceived as such by the market. We partner and go after clients together with IRRC.”

Egan-Jones Proxy Services, another newcomer, has 50 institutional clients. “We are unlike ISS, who don’t offer consulting advice, and unlike IRRC, who don’t provide data,” says Pruette of Egan-Jones. In addition, the firm has not produced social guidelines like ISS and IRRC. “We provide research and voting recommendations, and can vote on behalf of clients as well. We cover what is in our clients’ portfolios, taking what they have and then researching,” adds Pruette.

A quick look at the proxy voting firms is available, below, including pricing and conflict-of-interest details, where available:

Egan-Jones Proxy Services

History: The company began offering proxy services in 2001. It was founded in 1992 to provide independent credit research.

Rating Methodology: EJ Proxy offers two sets of guidelines: Taft-Hartley and Shareholder Value.

Staff evaluates each proxy voting proposal individually. For instance, a sample report on Staples (available online) examined the level of audit and other fees paid to

outside auditors, terms of executive compensation, board member terms and independence, and shareholder rights plans.

Scope: The companies in clients' portfolios.

Business Model: A for-profit company that provides proxy voting recommendations and voting services to investors. Egan-Jones doesn't sell consulting services or data to corporate management.

Conflicts of Interest: Avoided, since Egan-Jones doesn't sell services or data to corporate management.

Rates: $12.50 per company, per year for U.S. companies; $25 per company, per year for international firms.

Data Utilization: Clients are mutual funds, investment advisors and bank trust departments that use the data to evaluate how to vote on a variety of proxy issues.

Regulatory Differentiator: Claim to go above and beyond the regulatory requirements when making recommendations. For instance, the firm may recommend that director elections include multiple

nominees for each seat, rather than a single slate.

Glass Lewis

History: Founded in 2003. Co-founders include Gregory Taxin, Kevin Cameron and Lawrence Howell.

Rating Methodology: Staff evaluates proxy proposals case-by-case, after reviewing information on each public company from more than a dozen electronic sources.

Scope: More than 5,000 U.S. companies and 1,200 non-U.S. companies. Includes all companies in the Russell 3000; universe represents 99 percent of the U.S. investable market and 90 percent of the global investable market.

Business Model: Glass Lewis is a for-profit, limited

liability company. Its services are only for institutional investors and other institutional participants in the capital markets.

Conflicts of Interest: Glass Lewis doesn't provide consulting or other services to companies the firm evaluates, nor to CEOs whose compensation it evaluates.

Rates: Individually negotiated.

Data Utilization: Data it used by "more than a majority" of the 15 largest pension funds, mutual fund families, and institutional money managers. Other clients include law and accounting firms and compensation consultants.

Regulatory Differentiator: Regulations are considered a "floor" by the firm; in other words, recommendations often go beyond regulatory minimums.

Investor Responsibility Research Center (IRRC)

History: Founded in 1972 to provide information on pending shareholder resolutions with social policy implication. Added corporate governance service in 1981.

Rating Methodology: Provides proxy voting guidance, not "recommendations." Investors set-up conditions under which they will vote "yes" or "no"; for instance, an investor might agree to the issuance of additional stock, provided the dilution is less than 10 percent.

Scope: 4,000 U.S. corporations, as well as

thousands of global companies in more than 80 markets. Shareholder meeting dates for more than 10,000 non-U.S. companies.

Business Model: For profit. Clients pay for research, reports, and access to proxy voting applications.

Conflicts of Interest: IRRC doesn't recommend a yes or no vote; client sets voting criteria. In early 2005, the IRRC launched a service called ii-Profiles that is aimed at corporate secretaries and investor relations executives. The service profiles the proxy voting policies and records of institutional investors.

Rates: Would not disclose.

Data Utilization: Key clients include financial institutions, public pension investors, and social or religious investment vehicles.

Regulatory Differentiator: Not applicable, since clients set criteria they will use to determine how they'll vote.

Institutional Shareholder Services, Inc. (ISS)

History: Founded in 1985 as proxy advisory

firm, then moved into vote execution. In 2002, added corporate governance ratings.

Rating Methodology: Evaluation looks at "best practices" regarding any issue that may come up on a proxy ballot, including compensation plans, board declassifications, and mergers. Evaluations measure impact of proxy issues on shareholder value. Also provides social investment research on employment practices,

environmental protection, and labor practices, among others.

Scope: About 28,000 company meetings worldwide in more than 100 markets.

Business Model: Financial institutions pay ISS to

receive recommendations.

Conflicts of Interest: ISS has received the lion's share of criticism levied against proxy voting firms. The allegations of conflict derive from accusations that ISS charged investors for access to governance ratings and vote recommendations, and then consulted with companies on improving those same ratings. The company now claims that the corporate and financial institutions of the business are under separate leadership and work from separate databases.

Rates: Individually negotiated.

Data Utilization: Clients include 1,100 financial institutions.

Regulatory Differentiator: Claim to go above-and-beyond regulatory requirements on a number of issues. For example, evaluations of board independence issues are often more stringent than NYSE or Nasdaq rules.

Proxy Governance

History: A wholly owned subsidiary of FOLIOfn, PGI will provide its services for the first time in 2005.

Rating Methodology: Company evaluates proxy issues and makes voting recommendations on an "issue-by-company" basis; claims to avoid “across-the-board” recommendations like ISS or IRRC.

Scope: Will initially cover 1,600 companies, including the S&P 1500 and all publicly traded companies in the Fortune 500. In 2006, PGI aims to cover all companies in the Russell 3000.

Business Model: Company promises to perform case-by-case analysis instead of “one size fits all” approach.

Conflicts of Interest: PGI claims total independence and ability to be free from conflicts of interest, "with all of its recommendations supported by clearly stated rationales." In addition, the company does not provide any consulting to public companies.

Rates: Would not disclose.

Data Utilization: Claims data is being used by advisors, mutual funds, pension funds, money managers and other fiduciaries.

Regulatory Differentiator: Not relevant; the firm's recommendations are company-specific, not blanket advice that pertains to universal issues.