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Exclusive: U.S. Chamber faces doubts in drive on proxy advisor use

By Ross Kerber

BOSTON (Reuters) - One of the most powerful U.S. business groups is seeking support from mutual fund firms for proposals that could rein in the influence of proxy advisory firms, but it is meeting resistance from some money managers.

Proxy advisors such as MSCI Inc's ISS and Glass, Lewis & Co help thousands of institutional investors decide how to vote on sensitive shareholder issues, including takeovers, executive compensation and board appointments.

Only this week, for example, ISS recommended shareholders of Hewlett-Packard Co oust the chairman, Ray Lane, and other directors for their role in the ill-fated 2011 acquisition of British software company Autonomy.

Such recommendations have drawn the ire of many companies, and led to efforts by the U.S. Chamber of Commerce to impose restrictions on proxy advisors. The Chamber in 2010 asked the U.S. Securities and Exchange Commission to put proxy firms under closer supervision.

The Chamber, which represents 3 million businesses, recently approached the mutual funds trade group, the Investment Company Institute, with proposals such as calling for more disclosures from portfolio managers when they hire proxy advisors, according to three fund executives who spoke on condition of anonymity.

The Chamber also suggested a fund's outside directors - or a similar authority - review how it selects and uses proxy advisors, according to a draft Chamber memo seen by Reuters this week. It also called on fund managers to disclose the identity of their proxy advisor, ascertain that the firm is "fully independent," and describe how other funds receiving the same advice voted.

Investment portfolio managers can use outside experts to help in areas like proxy voting but "they cannot delegate the satisfaction of their fiduciary obligations to the outside experts they enlist," the Chamber's draft memo states.

A spokesman for the Investment Company Institute declined to say if it agreed with the Chamber's proposal. "As with many issues where our members' interests overlap, we have appreciated the collaborative dialogue with the Chamber regarding proxy advisors," spokesman Mike McNamee said in a statement.

But the three fund executives, who work for different firms, said the Chamber was unlikely to convince fund companies to adopt all these guidelines, in part because they could be costly and cumbersome. They said the Chamber's efforts seemed influenced by big publicly traded companies that wanted to attack ISS and Glass Lewis for recommendations against management proposals.

"I think the biggest motive is to generally push back on the wave of shareholder activism of the past several years," one of the fund executives said, adding that the Chamber sees proxy advisors as the "main facilitators" of the activism.

The Chamber's vice president for its Center for Capital Markets Competitiveness, Tom Quaadman, denied that motivation, saying the group was trying to improve transparency and accountability.

"We are in this issue because we think it is important to have strong corporate governance," he said, declining to give specifics on conversations with the fund firms, saying the talks are ongoing.

ISS, which has roughly 1,700 clients, did not have enough information to comment, spokeswoman Cheryl Gustitus said. A spokesman for Glass Lewis, which has about 1,000 clients, said executives were not available to comment.

Both companies have defended their work in the past and pointed to standards they already make publicly available.

FOCUS ON GOVERNANCE

Historically, mutual funds were often allies of management in proxy contests, particularly firms that ran index funds and paid little attention to individual stocks.

After the financial crisis, money managers began to pay more attention to proxy voting and increased their research staffs in the area. The Dodd-Frank financial reform that required companies to hold "Say on Pay" votes also spurred interest.

Last year, at least 57 companies in the Russell 3000 index failed to win majority shareholder support for executive pay packages, up from 37 in 2011, according to compensation consultancy Semler Brossy. Examples of companies where pay votes failed include Citigroup Inc and Oracle Corp.

With the increased focus on corporate governance, proxy advisors have come to hold significant sway. While they tend to support management proposals most of the time, their negative recommendations carry a lot of weight.

For instance, ISS recommended votes against executive pay at only 14 percent of the Russell 3000 companies it assessed in 2012, according to Semler Brossy. But in those cases, shareholder support was 30 percentage points lower than in cases where ISS endorsed executive pay.

Nasdaq OMX Group General Counsel Edward Knight, speaking at a Chamber of Commerce event in December, called on the SEC to finish an on-going review of the proxy system. "We need to evolve these firms so they are more accountable, less opaque," Knight said. The SEC did not respond to requests for comment.

Dan Siciliano, director of a corporate governance center at Stanford University, said proxy advisors provide help to fund firms faced with reviewing thousands of corporate proxies. "The fund-management side is really anxious about additional burdens and red tape," he said.

Vanguard Group, the biggest U.S. mutual fund firm, uses recommendations from ISS and Glass Lewis to complement its own research, said Glenn Booraem, who oversees proxy voting for the money manager. He declined to discuss the trade group talks.

"Many companies waste energy trying to discredit the proxy advisors that would be better spent engaging with institutional investors like us," Booraem said.

"At the end of the day, we vote the proxies. Advisory services don't push the button. We do," he said.

(Reporting By Ross Kerber; Editing by Aaron Pressman, Paritosh Bansal, Tiffany Wu)

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