Corporate Shareholder Meetings: Issues Relating to Firms That	 
Advise Institutional Investors on Proxy Voting (29-JUN-07,	 
GAO-07-765).							 
                                                                 
At annual meetings, shareholders of public corporations can vote 
on various issues (e.g., mergers and acquisitions) through a	 
process called proxy voting. Institutional investors (e.g.,	 
mutual funds and pension funds) cast the majority of proxy votes 
due to their large stock holdings. In recent years, concerns have
been raised about a group of about five firms that provide	 
research and recommendations on proxy votes to their		 
institutional investor clients. GAO was asked to report on (1)	 
potential conflicts of interest that may exist with proxy	 
advisory firms and the steps that the Securities and Exchange	 
Commission (SEC) has taken to oversee these firms; (2) the	 
factors that may impede or promote competition within the proxy  
advisory industry; and (3) institutional investors' use of the	 
firms' services and the firms' potential influence on proxy vote 
outcomes. GAO reviewed SEC examinations of proxy advisory firms, 
spoke with industry professionals, and conducted structured	 
interviews with 31 randomly selected institutional investors. GAO
is not making any recommendations.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-765 					        
    ACCNO:   A71766						        
  TITLE:     Corporate Shareholder Meetings: Issues Relating to Firms 
That Advise Institutional Investors on Proxy Voting		 
     DATE:   06/29/2007 
  SUBJECT:   Competition					 
	     Conflict of interests				 
	     Corporate culture					 
	     Funds management					 
	     Investment companies				 
	     Investment planning				 
	     Risk management					 
	     Securities 					 
	     Stocks (securities)				 
	     Voting						 
	     Corporations					 
	     Mutual funds					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-07-765

   

     * [1]Results in Brief
     * [2]Background
     * [3]Potential Conflicts of Interest Exist among Proxy Advisory F

          * [4]ISS's Business Model Has Been Identified as the Major Potent
          * [5]Other Potential Conflicts May Arise on the Part of Proxy Adv
          * [6]SEC Has Not Identified Any Major Violations in Its Oversight

     * [7]Analysts Cite ISS's Long-standing Position in the Industry a
     * [8]Large Institutional Investors Reportedly Rely Less Than Smal
     * [9]Agency Comments
     * [10]GAO Contact
     * [11]Staff Acknowledgments
     * [12]GAO's Mission
     * [13]Obtaining Copies of GAO Reports and Testimony

          * [14]Order by Mail or Phone

     * [15]To Report Fraud, Waste, and Abuse in Federal Programs
     * [16]Congressional Relations
     * [17]Public Affairs

Report to Congressional Requesters

United States Government Accountability Office

GAO

June 2007

CORPORATE SHAREHOLDER MEETINGS

Issues Relating to Firms That Advise Institutional Investors on Proxy
Voting

GAO-07-765

Contents

Letter 1

Results in Brief 3
Background 6
Potential Conflicts of Interest Exist among Proxy Advisory Firms That
Could Affect Their Vote Recommendations, but SEC Has Not Identified Any
Major Violations in Its Examinations of Registered Firms 9
Analysts Cite ISS's Long-standing Position in the Industry as a Potential
Barrier to Competition, Although Firms Have Entered the Market in Recent
Years 13
Large Institutional Investors Reportedly Rely Less Than Small
Institutional Investors on Advisory Firms, Limiting the Influence These
Firms Have on Proxy Voting Results 15
Agency Comments 18
Appendix I Scope and Methodology 20
Appendix II GAO Contact and Staff Acknowledgments 23

Tables

Table 1: Overview of the Major Proxy Advisory Firms 13
Table 2: Reliance of Large Institutional Investors on Proxy Advisory Firms
15

Abbreviations

Egan-Jones Egan-Jones Proxy Services
Glass Lewis Glass Lewis & Co.
ICS ISS Corporate Services, Inc.
ISS Institutional Shareholder Services, Inc.
MCG Marco Consulting Group
PGI Proxy Governance, Inc.
PWBA Pension Welfare Benefits Administration
SEC Securities and Exchange Commission

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office
Washington, DC 20548

June 29, 2007

The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Deborah Pryce
Ranking Member
Subcommittee on Capital Markets, Insurance,
  and Government Sponsored Enterprises
Committee on Financial Services
House of Representatives

The Honorable Richard Baker
House of Representatives

Each year, publicly traded corporations hold shareholder meetings for
director elections and to consider management and shareholder proposals
that may have an effect on a corporation's operations and value, such as
executive compensation, corporate governance matters, and proposed mergers
and acquisitions. Most shareholders typically do not attend these
meetings, opting instead to vote by mail or online, through a process
known as proxy voting. According to Automatic Data Processing, Inc.--one
of the largest providers of transaction services to the financial
industry--most proxy votes are cast by or on behalf of institutional
investors, such as mutual funds and pension plans, given the level of
stocks they manage as compared to other types of investors.

In recent years, concerns have been raised about the proxy advisory
industry, which is comprised of five major proxy advisory firms that help
many institutional investors carry out their fiduciary responsibilities
relating to proxy voting.^1 These proxy advisory firms may perform several
functions on behalf of their clients, such as offering research and
recommendations on particular proxy issues (e.g., whether to approve an
executive compensation plan) or casting the actual votes. Critics of proxy
advisory firms, including certain industry associations and academics,
contend that the proxy advisory industry suffers from significant
conflicts of interest and a lack of competition and that these firms have
a disproportionate influence on proxy voting. Others counter that the
firms provide a valuable service for institutional investors and note that
such clients are sophisticated market participants that are free to choose
whether and how to employ the services of proxy advisory firms.

^1See Proxy Voting by Investment Advisers, 68 Fed. Reg. 6585 (2003) (final
rule) (codified in various sections of 17 C.F.R. Part 275), which requires
registered investment advisers to adopt policies and procedures reasonably
designed to ensure that they vote proxies in the best interests of their
clients. Similarly, the Employee Retirement Income Security Act of 1974
(ERISA) has been interpreted as imposing fiduciary obligations on persons
authorized to vote proxies associated with equity securities owned by
ERISA plans. See 29 C.F.R. S 2509.94-2 (2006).

Under the Securities Exchange Act of 1934,^2 the Securities and Exchange
Commission (SEC) regulates the proxy solicitation process with respect to
publicly traded equity securities, and SEC regulates the activities of
proxy advisory firms that are registered with SEC as investment advisers
under the Investment Advisers Act of 1940.^3 Under SEC rules, when
soliciting proxies, certain information must be disclosed in writing to
shareholders, and such disclosure, referred to as a proxy statement, must
be filed with the agency.^4 These proxy statements must include important
facts about the issues on which shareholders are asked to vote. Under the
Investment Advisers Act and related SEC rules, registered investment
advisers are required to take a variety of steps designed to help protect
their clients. For example, an investment adviser must disclose
information about its business practices and potential conflicts of
interest to clients and potential clients. SEC monitors compliance with
the laws and rules through, among other means, periodic examinations of
registered investment advisers. Based on examination findings, SEC may
send letters to investment advisers requiring them to correct identified
deficiencies. SEC may also take enforcement actions for more serious
violations, as deemed appropriate, such as seeking civil fines in federal
district court.

Because of your interest in helping to ensure the integrity of proxy
voting, you asked us to provide an overview of proxy advisory firms and
SEC's oversight of this industry. This report (1) identifies potential
conflicts of interest that may exist with proxy advisory firms and the
steps that SEC has taken to oversee these firms; (2) discusses the factors
that might impede or promote competition in this industry; and (3)
analyzes institutional investors' use of proxy advisory services to help
vote proxies and the influence proxy advisory firms may have on proxy
voting.

^215 U.S.C. SS 78a et seq.

^3Most, but not all, of the major proxy advisory firms have registered as
investment advisers with SEC, as will be discussed in this report.

^4See section 14 of the Securities Exchange Act of 1934 (codified as
amended at 15 U.S.C. S 78n) and related rules.

To address these objectives, we conducted a literature review and examined
studies relating to the proxy advisory industry. In addition, we
identified and interviewed various professionals (experts, academics,
industry association representatives, and others) with knowledge of the
industry. To gain an understanding of SEC's oversight of proxy advisory
firms, we reviewed relevant investment adviser regulations and examination
reports and interviewed agency officials. Further, we conducted structured
interviews with 31 institutional investors selected randomly by type,
including mutual funds, corporate pension funds, government pension funds,
and union pension funds, as well as some asset management institutions, to
gain an understanding of the ways in which they use proxy advisory firms
and the influence that such firms have on proxy voting.^5 Our sample was
derived from Standard & Poor's Money Market Directories (January 2006),
and consisted of a population of institutional investors with over $1
billion in assets, including large and small institutional investors from
each type above this asset level. We defined "large" and "small"
institutional investors as the top and bottom 15 percent of each investor
type. Large and small institutional investors account for over 72 percent
of the managed assets held by all of the institutional investors with over
$1 billion in assets. Although we randomly selected these institutional
investors, the size of the sample was small and might not have been
representative of the universe of institutional investors. As a result, we
could not generalize the results of this effort.

We conducted our work in Washington, D.C., between September 2006 and June
2007 in accordance with generally accepted government auditing standards.
See appendix I for more information on our scope and methodology.

Results in Brief

Various potential conflicts of interest exist among proxy advisory firms
that could affect vote recommendations, but SEC has not identified any
major violations in its examinations of such registered firms. In
particular, the business model of the dominant advisory
firm--Institutional Shareholder Services, Inc. (ISS)--has been cited by
industry participants and analysts as creating a significant potential
conflict of interest. ISS advises institutional investor clients on how to
vote their proxies and at the same time provides consulting services to
help corporations develop management proposals and improve their corporate
governance. Because it provides both types of services, ISS could, for
example, help a corporate client develop an executive compensation
proposal to be submitted for shareholder approval while at the same time
making a recommendation to investor clients on how to vote for this
proposal. ISS's critics also contend that this could lead corporations to
feel obligated to retain ISS's consulting services in order to obtain
favorable proxy vote recommendations. However, ISS officials said that
they have disclosed and taken steps to help mitigate this potential
conflict. For example, ISS publicly discloses information about the
potential conflict on its Web site and firm policy requires relevant
disclosures to its institutional investor clients. In addition, ISS
officials explained that the proxy advisory and corporate consulting
businesses have separate staff, operate in separate buildings, and use
segregated office equipment and information databases. While all
institutional investors we spoke with that use ISS's services said they
are satisfied with the steps ISS has taken to mitigate this potential
conflict, some industry analysts we contacted said there remains reason to
question the steps' effectiveness. We also identified other potential
conflicts associated with proxy advisory firms. For example, owners or
executives of proxy advisory firms may have a significant ownership
interest in or serve on the board of directors of corporations that have
proposals on which the firms are offering vote recommendations. In its
oversight capacity, SEC conducts examinations of proxy advisory firms that
are registered as investment advisers, including, among other things,
assessing compliance with requirements of the Investment Advisers Act and
related rules, including the requirement that investment advisers
identify, disclose, and mitigate conflicts of interest. To date, SEC has
not identified any major violations and has not initiated any enforcement
action against proxy advisory firms.

^5For purposes of this report, the term "institutional investor" refers to
both the institution that owns the securities as well as an asset manager
delegated the authority to vote proxies on behalf of the investors as the
context requires.

ISS's long-standing position in the proxy advisory industry has been cited
as a potential barrier to competition in this industry, although new firms
have entered the market in recent years. Since it began operating in 1985,
ISS has gained a reputation with institutional investors for providing
comprehensive proxy voting research and recommendations. Consequently,
other providers may have difficulty attracting ISS's institutional client
base of over 1,700 firms. According to industry participants, proxy
advisory firms must offer comprehensive coverage of public companies in
order to compete, because institutional investors may not be interested in
subscribing to limited service offerings. Firms also need to develop
sophisticated information systems to provide the research and
vote-processing capabilities clients demand. But industry analysts also
explained that firms interested in entering the market do have access to
much of the information needed to conduct research, including the annual
and quarterly reports companies file with SEC. In addition, various
academics told us that once a firm has acquired the necessary technology
and research processes, the marginal cost of providing services to
additional clients and of updating and maintaining these services is
relatively low. Competitors that have entered the market in recent years
have attempted to differentiate themselves from ISS by, for example,
emphasizing that they provide only proxy advisory services and not
corporate consulting services. While these firms have attracted
institutional clients, it is too soon to tell what their ultimate effect
will be on enhancing industry competition.

Among the 31 institutional investors we spoke with, large institutions
reportedly relied less than small institutions on the research and
specific recommendations offered by proxy advisory firms to help decide
how to vote proxies. Specifically, large institutional investors reported
that their reliance on proxy advisory services is limited because these
institutional investors (1) conduct their own research and analyses to
make voting decisions and use the research and recommendations offered by
proxy advisory firms only to supplement such analyses; (2) might develop
their own voting policies, which the advisory firms would be responsible
for executing; and (3) might contract with more than one advisory firm to
gain a broader range of information on proxy issues. In contrast, small
institutional investors reported that they have limited resources to
conduct their own research and tend to rely more heavily on the research
and recommendations of proxy advisory firms. Like large institutional
investors, however, representatives of small institutions said that they
are ultimately responsible for proxy voting decisions and retain the right
to override recommendations made by advisory firms. While the
institutional investors we contacted might not have been representative of
all institutional investors, many industry analysts we spoke with agreed
that large institutions would place less emphasis than small institutions
on proxy advisory firms' research and recommendations when deciding how to
vote. The fact that large institutional investors cast the great majority
of proxy votes made by institutional investors and reportedly place less
emphasis than small institutions on such research and recommendations
could serve to limit the overall influence advisory firms have on proxy
voting results.

We provided a draft of this report to SEC for its review and comment. SEC
provided technical comments, which we incorporated, as appropriate. We
also provided relevant sections of the draft to the proxy advisory firms
for a technical review of the accuracy of the wording and made changes, as
appropriate, based on the firms' comments.

Background

According to ISS, over 28,000 publicly-traded corporations globally send
out proxy statements each year that contain important facts about more
than 250,000 separate issues on which shareholders are asked to vote.
Votes are solicited on a variety of key issues that could potentially
affect the corporations' value, such as the election of directors,
executive compensation packages, and proposed mergers and acquisitions, as
well as other, more routine, issues that may not affect value, such as
approving an auditor and changing a corporate name. The proxy statement
typically includes a proxy ballot (also called a proxy card) that allows
shareholders to appoint a third party (proxy) to vote on the shareholder's
behalf if the shareholder decides not to attend the meeting. The
shareholder may instruct the proxy how to vote the shares or may opt to
grant the proxy discretion to make the voting decision. The proxy card may
be submitted to the company via the mail or online.

The proxy advisory industry has grown over the past 20 years as a result
of various regulatory and market developments. The management of a mutual
fund's or pension plan's assets, including the voting of proxies, is often
delegated to a person who is an investment adviser subject to the
Investment Advisers Act of 1940.^6 In a 1988 letter, known as the "Avon
Letter," the Department of Labor took the position that the fiduciary act
of managing employee benefit plan assets includes the voting of proxies
associated with shares of stock owned by the plan.^7 According to industry
experts, managers of employee retirement plan assets began to seek help in
executing their fiduciary responsibility to vote proxies in their clients'
best interests. Consequently, the proxy advisory industry--particularly
ISS, which had been established in 1985--started to grow. According to
industry experts, ISS's reputation and dominance in the proxy advisory
industry continued to grow in the 1990s and early 2000s, fueled by the
growing fiduciary requirements of institutional investors and increased
shareholder activism. This increased shareholder activism has been
attributed in part to reaction by investors to the massive financial
frauds perpetrated by management of public companies, including the
actions that led to the bankruptcies of Enron and WorldCom. Many
institutional investors sought the services of proxy advisory firms to
assist in their assessments of the corporate governance practices of
publicly traded companies and to carry out the mechanics of proxy voting.
Finally, in 2003, SEC adopted a rule and amendments under the Investment
Advisers Act of 1940 that requires registered investment advisers to adopt
policies and procedures reasonably designed to ensure that proxies are
voted in the best interests of clients, which industry experts also cited
as a reason for the continued growth of the proxy advisory industry.^8

6To the extent a mutual fund or pension plan has delegated the voting of
its proxies to an asset manager, the proxy voting process is subject to
the Investment Advisers Act of 1940 and the Employee Retirement Income
Security Act of 1974 (ERISA). For purposes of this report, the term "asset
manager" is used to refer both to investment advisers of registered
investment companies, as well as to managers of pension plan assets.
Registered investment companies are also required to disclose the policies
and procedures that they use to determine how to vote proxies relating to
portfolio securities and must file with SEC an annual report on its proxy
voting record. See 17 C.F.R. S 270.30b1-4 and SEC Forms N-1, N-2, N-3 and
N-CSR (adopted under the Investment Company Act of 1940 (codified as
amended at 15 U.S.C. S 80a-1 et seq.)).

Today, the proxy advisory industry is comprised of five major firms, with
ISS serving as the dominant player with over 1,700 clients. The other four
firms--Marco Consulting Group (MCG), Glass Lewis & Co. (Glass Lewis),
Proxy Governance, Inc. (PGI), and Egan-Jones Proxy Services
(Egan-Jones)--have much smaller client bases and are relatively new to the
industry: Glass Lewis, PGI, and Egan-Jones were all created within the
past 6 years.

           o Founded in 1985, ISS serves clients with its core business,
           which includes analyzing proxy issues and offering research and
           vote recommendations. ISS also provides Web-based tools and
           advisory services to corporate issuers through ISS Corporate
           Services, Inc. a separate division established in 1997 which was
           spun-out into a wholly-owned subsidiary in 2006. RiskMetrics
           Group, a financial risk management firm, acquired ISS in January
           2007. RiskMetrics Group provides risk management tools and
           analytics to assist investors in assessing risk in their
           portfolios.

           o MCG was established in 1988 to provide investment analysis and
           advice to Taft-Hartley funds and has since expanded its client
           base to public employee benefit plans.^9

           o Glass Lewis, established in 2003, provides proxy research and
           voting recommendations and was acquired by Xinhua Finance Limited,
           a Chinese financial information and media company, in 2007.

           o Established in 2004, PGI offers proxy advice and voting
           recommendations and is a wholly-owned subsidiary of FOLIOfn, Inc.,
           a financial services company that also provides brokerage services
           and portfolio management technology for individual investors and
           investment advisers.

           o Egan-Jones was established in 2002 as a division of Egan-Jones
           Ratings Company, which was incorporated in 1992. Egan-Jones
           provides proxy advisory services to institutional clients to
           facilitate making voting decisions.

^7The Deputy Assistant Secretary of the Pension Welfare Benefits
Administration (PWBA, now known as the Employee Benefits Security
Administration) issued the Avon letter to Mr. Helmuth Fandl, Chairman of
the Retirement Board of Avon Products, Inc., on February 23, 1988. Current
U.S. Comptroller General David M. Walker was the Assistant Secretary of
Labor for the PWBA from 1987 to 1989. The Department of Labor subsequently
issued Interpretative Bulletin No. 94-2 (codified at 29 C.F.R. S
2509-94-2), which, among other things, set forth the department's
interpretation of ERISA as it applies to the voting of proxies on
securities held by employee benefit plan investment portfolios. The
bulletin essentially restates the views set forth in the Avon Letter.

^8See Proxy Voting by Investment Advisers.

Of the five major proxy advisory firms, three--ISS, MCG, and PGI--are
registered with SEC as investment advisers and are subject to agency
oversight, while according to corporate officials, the other two firms are
not. In their SEC registration filings, the three registered firms have
identified themselves as pension consultants as the basis for registering
as investment advisers under the Investment Advisers Act.^10 Although
Glass Lewis initially identified itself as a pension consultant and
registered with SEC as an investment adviser, it withdrew its registration
in 2005. According to SEC officials, an investment adviser is not required
to disclose a reason for its decision to withdraw its registration in the
notice of withdrawal filed with SEC. Officials from Glass Lewis and
Egan-Jones did not elaborate on their decisions not to be registered with
SEC as investment advisers, other than to note that their decisions were
made with advice from their respective counsel.

^9The Labor Management Relations Act, also known as the Taft-Hartley Act,
allows for the establishment of multiemployer trust funds, known as
Taft-Hartley funds, for the purpose of providing pension and welfare
benefits to employees and their families. Act of June 23, 1947, ch. 120,
61 Stat. 136 (1947) (codified as amended at 29 U.S.C. SS 141 et seq.).
These funds, or benefit plans, are financed in whole or part by employer
contributions and are administered jointly by labor and management. These
funds are subject to ERISA and regulated by the U.S. Department of Labor.
Accordingly, managers of Taft-Hartley fund assets have a fiduciary
obligation to protect plan assets as required by ERISA.

Potential Conflicts of Interest Exist among Proxy Advisory Firms That Could
Affect Their Vote Recommendations, but SEC Has Not Identified Any Major
Violations in Its Examinations of Registered Firms

In the proxy advisory industry, various conflicts of interest can arise
that have the potential to influence the research conducted and voting
recommendations made by proxy advisory firms. The most commonly cited
potential for conflict involves ISS, which provides services to both
institutional investor clients and corporate clients. Several other
circumstances may lead to potential conflicts on the part of proxy
advisory firms, including situations in which owners or executives of
proxy advisory firms have an ownership interest in or serve on the board
of directors of corporations that have proposals on which the firms are
offering vote recommendations. Although the potential for these types of
conflicts exists, in its examinations of proxy advisory firms that are
registered as investment advisers, SEC has not identified any major
violations, such as a failure to disclose a conflict, or taken any
enforcement actions to date.

ISS's Business Model Has Been Identified as the Major Potential Conflict of
Interest

Industry professionals and institutional investors we interviewed cited
ISS's business model as presenting the greatest potential conflict of
interest associated with proxy advisory firms because ISS offers proxy
advisory services to institutional investors as well as advisory services
to corporate clients. Specifically, ISS provides institutional investor
clients with recommendations for proxy voting and ratings of companies'
corporate governance. In addition, ISS helps corporate clients develop
proposals to be voted on and offers corporate governance consulting
services to help clients understand and improve their corporate governance
ratings.

^10Section 203A of the Investment Advisers Act prohibits state-regulated
investment advisers who have less than $25 million in assets under
management from registering with SEC, unless the person is an investment
adviser to a registered investment company, like a mutual fund. SEC Rule
203A-2(b), exempts certain pension consultants from this general
prohibition and permits them to register with SEC. 17 C.F.R. S
275.203A-2(b). An investment adviser is a pension consultant for purposes
of Rule 203A-2(b), if he or she provides investment advice relating to
assets of certain employee benefit plans having an aggregate value of at
least $50 million.

Because ISS provides services to both institutional investors and
corporate clients, there are various situations that can potentially lead
to conflicts. For example, some industry professionals stated that ISS
could help a corporate client design an executive compensation proposal to
be voted on by shareholders and subsequently make a recommendation to
investor clients to vote for this proposal. Some industry professionals
also contend that corporations could feel obligated to subscribe to ISS's
consulting services in order to obtain favorable proxy vote
recommendations on their proposals and favorable corporate governance
ratings. One industry professional further believes that, even if
corporations do not feel obligated to subscribe to ISS's consulting
services, they still could feel pressured to adopt a particular governance
practice simply to meet ISS's standards even though the corporations may
not see the value of doing so.

ISS has disclosed and taken steps to help mitigate situations that can
potentially lead to conflicts. For example, on its Web site, ISS explains
that it is "aware of the potential conflicts of interest that may exist
between [its] proxy advisory service ... and the business of ISS Corporate
Services, Inc. [ICS]." The Web site also notes that "ISS policy requires
every ISS proxy analysis to carry a disclosure statement advising the
client of the work of ICS and advising ISS's institutional clients that
they can get information about an issuer's use of ICS's products and
services." In addition, some institutional investors we spoke with noted
that ISS has on occasion disclosed to them, on a case-by-case basis, the
existence of a specific conflict related to a particular corporation.

In addition to disclosure, ISS has implemented policies and procedures to
help mitigate potential conflicts. For example, according to ISS, it has
established a firewall that includes maintaining separate staff for its
proxy advisory and corporate businesses, which operate in separate
buildings and use segregated office equipment and information databases in
order to help avoid discovery of corporate clients by the proxy advisory
staff. ISS also notes on its Web site that it is a registered investment
adviser and is subject to the regulatory oversight of SEC. In addition,
according to ISS's Web site, corporations purchasing advisory services
sign an agreement acknowledging that use of such services does not
guarantee preferential treatment from ISS's division that provides proxy
advisory services.

All of the institutional investors--both large and small--we spoke with
that subscribe to ISS's services said that they are satisfied with the
steps that ISS has taken to mitigate its potential conflicts. Most
institutional investors also reported conducting due diligence to obtain
reasonable assurance that ISS or any other proxy advisory firm is
independent and free from conflicts of interest. As part of this process,
many of these institutional investors said they review ISS's conflict
policies and periodically meet with ISS representatives to discuss these
policies and any changes to ISS's business that could create additional
conflicts. Finally, as discussed in more detail later in this report,
institutional investors told us that ISS's recommendations are generally
not the sole basis for their voting decisions, which further reduces the
chances that these potential conflicts would unduly influence how they
vote.

Although institutional investors said they generally are not concerned
about the potential for conflicts from ISS's businesses and are satisfied
with the steps ISS has taken to mitigate such potential conflicts, some
industry analysts we contacted said there remains reason to question the
steps' effectiveness. For example, one academic said that while ISS is
probably doing a fair job managing its conflicts, it is difficult to
confirm the effectiveness of the firm's mitigation procedures because ISS
is a privately-held company, thereby restricting information access.
Moreover, according to another industry analyst, because ISS's
recommendations are often reported in the media, the corporate consulting
and proxy advisory services units could become aware of the other's
clients.

Other Potential Conflicts May Arise on the Part of Proxy Advisory Firms

In addition to the potential conflict of interest discussed above, several
other situations in the proxy advisory industry could give rise to
potential conflicts. Specifically:

           o Owners or executives of proxy advisory firms may have a
           significant ownership interest in or serve on the board of
           directors of corporations that have proposals on which the firms
           are offering vote recommendations. A few institutional investors
           told us that such situations have been reported to them by ISS and
           Glass Lewis, both of which, in order to avoid the appearance of a
           conflict, did not make voting recommendations.

           o Institutional investors may submit shareholder proposals to be
           voted on at corporate shareholder meetings. This raises concern
           that proxy advisory firms will make favorable recommendations to
           other institutional investor clients on such proposals in order to
           maintain the business of the investor clients that submitted these
           proposals.

           o Several proxy advisory firms are owned by companies that offer
           other financial services to various types of clients, as is common
           in the financial services industry, where companies often provide
           multiple services to various types of clients. This is the case at
           ISS, Glass Lewis, and PGI, and may present situations in which the
           interests of different sets of clients diverge.

SEC Has Not Identified Any Major Violations in Its Oversight of Proxy Advisory
Firms That Are Registered as Investment Advisers

SEC reviews registered investment advisers' disclosure and management of
potential conflicts, as well as proxy voting situations where a potential
conflict may arise. Specifically, SEC's Office of Compliance Inspections
and Examinations monitors the operations and conducts examinations of
registered investment advisers, including proxy advisory firms. An SEC
official stated that, as part of these examinations, SEC may review the
adequacy of disclosure of a firm's owners and potential conflicts;
particular products and services that may present a conflict; the
independence of a firm's proxy voting services; and the controls that are
in place to mitigate potential conflicts.^11 As discussed previously,
three of the five proxy advisory firms (ISS, MCG, and PGI) are registered
as investment advisers while Glass Lewis and Egan-Jones are not. According
to SEC, to date, the agency has not identified any major violations of
applicable federal securities laws in its examinations of proxy advisory
firms that are registered as investment advisers and has not initiated any
enforcement action against these firms.^12

^11We did not attempt to assess the adequacy of these examinations.

^12We cannot disclose the specific results of examinations because of SEC
confidentiality considerations.

Analysts Cite ISS's Long-standing Position in the Industry as a Potential
Barrier to Competition, Although Firms Have Entered the Market in Recent Years

As the dominant proxy advisory firm, ISS has gained a reputation with
institutional investors for providing reliable, comprehensive proxy
research and recommendations, making it difficult for competitors to
attract clients and compete in the market. As shown below in table 1,
ISS's client base currently includes an estimate of 1,700 institutional
investors, more than the other four major firms combined. Several of the
institutional investors we spoke with that subscribe to ISS's services
explained that they do so because they have relied on ISS for many years
and trust it to provide reliable, efficient services. They said that they
have little reason to switch to another service provider because they are
satisfied with the services they have received from ISS over the years.
Because of ISS's clients' level of satisfaction, other providers of proxy
advisory services may have difficulty attracting their own clients. In
addition, because of its dominance and perceived market influence,
corporations may feel obligated to be more responsive to requests from ISS
for information about proposals than they might be to other,
less-established proxy advisory firms, resulting in a greater level of
access by ISS to corporate information that might not be available to
other firms.

Table 1: Overview of the Major Proxy Advisory Firms

                                 Estimated Estimated       Estimated clients' 
                                 number of number of            equity assets 
Firm              Founded     employees   clients              (dollars)^a 
Institutional                                                              
Shareholder                                                                
Services (ISS)       1985           630     1,700            25.5 trillion 
Marco Consulting                                                           
Group (MCG)          1988            70       350               85 billion 
Glass Lewis &                                                              
Company (Glass                                                             
Lewis)               2003            70       300              15 trillion 
Proxy Governance,                                                          
Inc. (PGI)           2004            31       100               1 trillion 
Egan-Jones Proxy                                                           
Services                                                                   
(Egan-Jones)         2001 Not available       400            Not available 

Source: GAO presentation of information provided by proxy advisory firms.

aClients' equity assets refers to the total assets under management by the
firms' institutional investor clients. There is overlap between proxy
advisory firms' clients' equity assets since, as will be discussed later
in this report, some clients use the services of several proxy advisory
firms.

Industry analysts explained that, in addition to overcoming ISS's
reputation and dominance in the proxy advisory industry, proxy advisory
firms must offer comprehensive coverage of corporate proxies and implement
sophisticated technology to attract clients and compete. For instance,
institutional investors often hold shares in thousands of different
corporations and may not be interested in subscribing to proxy advisory
firms that provide research and voting recommendations on a limited
portion of these holdings. As a result, proxy advisory firms need to
provide thorough coverage of institutional holdings, and unless they offer
comprehensive services from the beginning of their operations, they may
have difficulty attracting clients. In addition, academics and industry
experts we spoke with said that new firms need to implement a
sophisticated level of technology to provide the research and proxy vote
execution services that clients demand. The initial investment required to
develop and implement such technology can be a significant expense for
firms.

Although newer proxy advisory firms may face challenges attracting clients
and establishing themselves in the industry, several of the professionals
we spoke with believed that these challenges could be overcome. For
example, while firms may need to offer comprehensive coverage of corporate
proxies in order to attract clients and although ISS might have access to
corporate information that other firms do not, much of the information
needed to conduct research and offer voting recommendations is easily
accessible. Specifically, anyone can access corporations' annual
statements and proxy statements, which are filed with SEC, are publicly
available, and contain most of the information that is needed to conduct
research on corporations and make proxy voting recommendations. Also,
although developing and implementing the technology required to provide
research and voting services can be challenging, various industry
professionals told us that once a firm has done so, the marginal cost of
providing services to additional clients and of updating and maintaining
such technology is relatively low.

Some of the competitors seeking to enter the proxy advisory industry in
recent years that we spoke with have offered their services as
alternatives to ISS. Specifically, they have attempted to differentiate
themselves from ISS by providing only proxy advisory services to
institutional investor clients. ISS's competitors have chosen not to
provide corporate consulting services in part to avoid the potential
conflicts that exist at ISS. Proxy advisory firms have also attempted to
differentiate themselves from the competition on the basis of the types of
services provided. For example, some firms have started to focus their
research and recommendation services on particular types of proxy issues
or on issues specific to individual corporations.

The institutional investors we spoke with had a variety of opinions about
the level of competition in the industry. Some questioned whether the
existing number of firms is sufficient, while others questioned whether
the market could sustain the current number of firms. However, many of the
institutional investors believe that increased competition could help
reduce the cost and increase the range of available proxy advisory
services. For example, some institutional investors said that they have
been able to negotiate better prices with ISS because other firms have
recently entered the market. While some of these newer proxy advisory
firms have attracted clients, it is too soon to tell what the firms'
ultimate effect on competition will be.

Large Institutional Investors Reportedly Rely Less Than Small Institutional
Investors on Advisory Firms, Limiting the Influence These Firms Have on Proxy
Voting Results

We conducted structured interviews with 31 randomly selected institutional
investors to gain an understanding of the ways in which they use proxy
advisory firms and the influence that such firms have on proxy voting. Of
the 20 large institutional investors we interviewed, 19 reported that they
use proxy advisory services in one or more ways that may serve to limit
the influence that proxy advisory firms have on proxy voting results (see
table 2), while only 1 reported relying heavily on a proxy advisory firm's
research and recommendations.^13

Table 2: Reliance of Large Institutional Investors on Proxy Advisory Firms

                                  Use proxy Use proxy advisory                
                           advisory firm to    firm to execute   Subscribe to 
                                 supplement  customized voting  several proxy 
                          in-house research             policy advisory firms 
Number of large                                                            
institutional                                                              
investors (out of 20                                                       
interviewed)^a                        15                 14              8 

Source: GAO analysis of structured interviews with 20 large institutional
investors.

aMany of the large institutional investors we spoke with explained that,
although they subscribe to a customized voting policy, they may also
continue to use their proxy advisory firm to supplement their own in-house
research, subscribe to several proxy advisory firms, or both. This results
in overlap among the three categories of how these institutional investors
use proxy advisory firms, as shown in the table.

^13Of the 20 large institutional investors we spoke with, 7 were asset
management institutions that vote proxies on behalf of their clients. Many
large and small institutional investors we initially attempted to contact
reported that they do not vote their own proxies. Instead, these
institutional investors said that companies that provide asset management
services also vote proxies on their behalf. We added these asset
management institutions, which were referred to us by pension funds, to
our sample in order to understand the extent to which they rely on proxy
advisory services.

The following summarizes several of the reasons that large institutional
investors' reliance on proxy advisory firms' research and recommendations
is limited:

           o Most of the large institutional investors we spoke with (15 out
           of 20) reported that they generally rely more on their own
           in-house research and analyses to make voting decisions than on
           the research and recommendations provided by their proxy advisory
           services providers. These institutional investors tend to have
           their own in-house research staffs, and their in-house research
           reportedly drives their proxy voting decisions. They explained
           that they use the research and recommendations provided by proxy
           advisory firms to supplement their own analysis and as one of many
           factors they consider when deciding how to vote.

           o In addition, many (14) of the large institutional investors we
           contacted reported that they subscribe to a customized voting
           policy that a proxy advisory firm executes on the institutions'
           behalf. These institutional investors develop their own voting
           policies and guidelines that instruct the advisory firm how to
           vote on any given proxy issue. In such instances, the proxy
           advisory firms simply apply their clients' voting policies, which
           then drive the voting decisions.

           o Further, 8 of the large institutional investors we contacted
           explained that they subscribe to more than one proxy advisory firm
           to help determine how to vote. These institutional investors said
           that they consider multiple sets of proxy advisory firm research
           and recommendations to gain a broader range of information on
           proxy issues and to help make well-informed voting decisions.

We also interviewed representatives from 11 smaller institutional
investors, and the results of these interviews suggest that proxy advisory
firm recommendations are of greater importance to these institutions than
they are to the large institutional investors we spoke with. In
particular, representatives from smaller institutional investors were more
likely to say that they rely heavily on their proxy advisory firm and vote
proxies based strictly on the research and recommendations of their firm,
given these institutions' limited resources. Consequently, the level of
influence held by proxy advisory firms appears greater with these smaller
institutional investors.

However, whether large or small, all of the institutional investors we
spoke with explained that they retain the fiduciary obligation to vote
proxies in the best interest of their clients irrespective of their
reliance on proxy advisory firms. Institutional investors emphasized that
they do not delegate this responsibility to proxy advisory firms and
retain the right to override any proxy advisory firm recommendations,
limiting the amount of influence proxy advisory firms hold. In addition,
large and small institutional investors reported that they tend to provide
greater in-house scrutiny to, and rely even less on, proxy advisory firm
recommendations about certain high-profile or controversial proxy issues,
such as mergers and acquisitions or executive compensation.

Institutional investors' perspectives on the limited influence of proxy
advisory firms reflected what we heard from professionals that we spoke
with who have knowledge of the industry. Many of these industry analysts
and academics agreed that large institutional investors would be less
likely than small institutional investors to rely on proxy advisory firms,
because large institutions have the resources available to conduct
research and subscribe to more than one proxy advisory service provider.
These professionals also thought that large institutional investors would
be likely to use proxy advisory firms as one of several factors they
consider in the research and analysis they perform to help them decide how
to vote proxies. Further, several believed that small institutional
investors would be more likely to vote based strictly on proxy advisory
firms' recommendations, because they do not have the resources to conduct
their own research.

The results of our work suggest that the overall influence of advisory
firms on proxy vote outcomes may be limited. In particular, large
institutional investors, which cast the great majority of proxy votes made
by all institutional investors with over $1 billion in assets, reportedly
place relatively less emphasis on the firms' research and recommendations
than smaller institutional investors. However, we could not reach a
definitive conclusion about the firms' influence because the institutional
investors we contacted were not necessarily representative of all such
investors. Further, we could not identify any studies that comprehensively
isolated advisory firm research and recommendations from other factors
that may influence institutional investors' proxy voting.^14

Agency Comments

We provided a draft of this report to SEC for its review and comment. SEC
provided technical comments, which we incorporated into the final report,
as appropriate. We also provided relevant sections of the draft to the
proxy advisory firms for a technical review of the accuracy of the wording
and made changes, as appropriate, based on the firms' comments.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of this report until
30 days from the report date. At that time we will provide copies of this
report to the Chairman and Ranking Member, Senate Committee on Banking,
Housing, and Urban Affairs; the Chairman, House Committee on Financial
Services; the Chairman, House Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises, Committee on Financial Services;
other interested committees; and the Chairman of the Securities and
Exchange Commission (SEC). We will also make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov. If you or your staffs have any
questions about this report, please contact me at (202) 512-8678

^14We identified a study--"The Role of Advisory Services in Proxy Voting,"
by Cindy R. Alexander, Mark A. Chen, Duane J. Seppi, and Chester S. Spatt
(Dec. 14, 2006)--that examined the extent to which recommendations can
influence vote outcomes and stock prices by focusing on recommendations
made by ISS that were reported in the media. The authors documented
"significant stock price movements around recommendation dates, indicating
that proxy advice brings new information to the market," as well as "a
robust association between recommendations and contest outcomes after
controlling for differences in contest characteristics, voting rules,
dissidents, and incumbents." As the authors note, "although not all ISS
recommendations are reported in the media, restricting attention to the
newsworthy cases ensures that our sample consists of contests in which the
underlying issues are significant and the recommendation is most likely to
play an important role." However, most of the institutional investors we
spoke with reported that they tend to provide greater in-house scrutiny
to, and rely even less on, proxy advisory firm recommendations about
high-profile or controversial proxy issues, which are the recommendations
that would be more likely to appear in the media.

or [email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
Key contributors to this report are listed in appendix II.

Yvonne D. Jones
Director, Financial Markets and Community Investment

Appendix I: Scope and Methodology

Our objectives were to (1) identify potential conflicts of interest that
exist with proxy advisory firms and the steps that the Securities and
Exchange Commission (SEC) has taken to oversee these firms; (2) review the
factors that might impede or promote competition in this industry; and (3)
analyze institutional investors' use of proxy advisory services to help
vote proxies and the influence proxy advisory firms may have on proxy
voting.

To determine the types of potential conflicts of interest that could arise
in the proxy advisory industry, we conducted a literature review and
examined studies relating to potential conflicts that may arise in this
industry. Further, we interviewed various professionals with knowledge of
the proxy advisory industry, including industry experts, academics,
industry association representatives, and proxy advisory firm
representatives, as well as institutional investors and officials at SEC.
We selected these professionals based, in part, on literature searches we
conducted on topics relating to proxy advisory and corporate governance
services, as well as referrals by several of the professionals we met
with. The professionals we spoke with represent a wide range of
perspectives, and include experts from academia, business, government, and
professional organizations. We did not attempt to assess any of the proxy
advisory firms' conflict mitigation policies or procedures and, therefore,
did not come to any conclusions about the adequacy of these policies or
procedures. To gain an understanding of SEC's oversight of proxy advisory
firms, we reviewed relevant investment adviser regulations and
examinations conducted by SEC since 2000 and interviewed agency officials.
We did not attempt to assess the adequacy of SEC's oversight.

To identify the factors that might impede or promote competition in this
industry, we reviewed the relevant literature and examined studies
relating to the level of competition in the industry, and we spoke with
various industry professionals. We did not attempt to evaluate the level
of competition in this industry and, therefore, did not come to any
conclusions about the extent to which competition exists.

Finally, to explore institutional investors' use of proxy advisory
services to help vote proxies and the influence proxy advisory firms may
have on proxy voting, we conducted structured interviews with 31
institutional investors selected randomly by type, including mutual funds,
corporate pension funds, government pension funds, and union pension
funds, as well as asset management institutions. Our sample included
several of the largest institutional investors and was derived from
Standard & Poor's Money Market Directories (January 2006). The sample
consisted of a population of mutual funds and pension funds with over $1
billion in assets, and included large and small institutional investors
from each investor type. We defined "large" and "small" institutional
investors as the top and bottom 15 percent of each institutional investor
type. In total, these large and small institutional investors accounted
for over 72 percent of assets under management held by mutual funds and
pension funds with over $1 billion under management. Although we randomly
selected these institutional investors, the size of the sample was small
and may not necessarily be representative of the universe of institutional
investors. As a result, we could not generalize the results of our
analysis to the entire population of institutional investors.

We conducted structured interviews with 20 large and 11 small
institutional investors. Initially, we had contacted a total of 126 mutual
funds and pension funds that were randomly selected from our sample of
institutional investors and 20 (13 large and 7 small institutions)
reported using proxy advisory firm services and agreed to participate in
our structured interviews. The other 106 institutional investors we had
initially contacted declined to participate in the structured interviews
for several reasons. In particular, many of these institutions said that
they do not vote proxies themselves, but rather hire asset management
institutions to both manage their investment portfolios and vote proxies
on their behalf. We conducted interviews with 11 (7 large and 4 small
institutions) of these asset management institutions, which were referred
to us by several of the pension funds we had initially contacted. The
results of these asset manager interviews are included among the total of
20 large and 11 small institutional investors that we interviewed. In
addition, some of the 106 institutional investors declined to participate
because they vote proxies themselves or do not vote proxies at all, while
others refused to participate or could not be reached.

In our structured interviews with the 31 institutional investors, we spoke
with officials from the organizations who are responsible for proxy voting
activities. We asked these officials a variety of questions relating to
their institutions' policies on proxy voting and use of proxy advisory
firms. Further, we asked the officials to comment on potential conflicts
of interest associated with proxy advisory firms, steps taken to mitigate
such potential conflicts, and the level of competition in the proxy
advisory industry.

Finally, we spoke with various industry professionals discussed earlier to
gain their perspectives on the influence of proxy advisory firms. We could
not identify any studies that comprehensively measured the influence that
these firms have on proxy voting.

We conducted our work in Washington, D.C., between September 2006 and June
2007 in accordance with generally accepted government auditing standards.

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Yvonne D. Jones, (202) 512-8678 or [email protected]

Staff Acknowledgments

In addition to the above contact, Wes Phillips, Assistant Director; Emily
Chalmers; Rudy Chatlos; Eric Diamant; Fred Jimenez; Yola Lewis; and Omyra
Ramsingh made key contributions to this report.

(250312)

GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( [18]www.gao.gov ). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site. To
have GAO e-mail you a list of newly posted products every afternoon, go to
[19]www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000
TDD: (202) 512-2537
Fax: (202) 512-6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: [20]www.gao.gov/fraudnet/fraudnet.htm
E-mail: [21][email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [22][email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [23][email protected] (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

[24]www.gao.gov/cgi-bin/getrpt?GAO-07-765 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Yvonne Jones at (202) 512-8678 or
[email protected].

Highlights of [25]GAO-07-765 , a report to congressional requesters

June 2007

CORPORATE SHAREHOLDER MEETINGS

Issues Relating to Firms That Advise Institutional Investors on Proxy
Voting

At annual meetings, shareholders of public corporations can vote on
various issues (e.g., mergers and acquisitions) through a process called
proxy voting. Institutional investors (e.g., mutual funds and pension
funds) cast the majority of proxy votes due to their large stock holdings.
In recent years, concerns have been raised about a group of about five
firms that provide research and recommendations on proxy votes to their
institutional investor clients.

GAO was asked to report on

(1) potential conflicts of interest that may exist with proxy advisory
firms and the steps that the Securities and Exchange Commission (SEC) has
taken to oversee these firms; (2) the factors that may impede or promote
competition within the proxy advisory industry; and

(3) institutional investors' use of the firms' services and the firms'
potential influence on proxy vote outcomes.

GAO reviewed SEC examinations of proxy advisory firms, spoke with industry
professionals, and conducted structured interviews with 31 randomly
selected institutional investors.

GAO is not making any recommendations.

GAO provided a draft of this report to SEC for its review and comment. SEC
provided technical comments, which GAO incorporated, as appropriate.

Various potential conflicts of interest can arise at proxy advisory firms
that could affect vote recommendations, but SEC has not identified any
major violations in its examinations of such firms. In particular, the
business model of the dominant proxy advisory firm--Institutional
Shareholder Services (ISS)--has been the most commonly cited potential
conflict. Specifically, ISS advises institutional investors how to vote
proxies and provides consulting services to corporations seeking to
improve their corporate governance. Critics contend that corporations
could feel obligated to retain ISS's consulting services in order to
obtain favorable vote recommendations. However, ISS officials said they
have disclosed and taken steps to mitigate this potential conflict. For
example, ISS discloses the potential conflict on its Web site and the
firm's policy is to advise clients of relevant business practices in all
proxy vote analyses. ISS also maintains separate staff who are located in
separate buildings for the two businesses. While all institutional
investors GAO spoke with that use ISS's services said they are satisfied
with its mitigation procedures, some industry analysts continue to
question their effectiveness. SEC conducts examinations of advisory  firms
that are registered as investment advisers and has not identified any
major violations.

Although new firms have entered the market, ISS's long-standing position
has been cited by industry analysts as a barrier to competition. ISS has
gained a reputation for providing comprehensive services, and as a result,
other firms may have difficulty attracting clients. Proxy advisory firms
must offer comprehensive coverage to compete and need sophisticated
systems to provide the services clients demand. But firms interested in
entering the market do have access to much of the information needed to
make recommendations, such as publicly available documents filed with SEC.
Competitors have attempted to differentiate themselves from ISS by, for
example, providing only proxy advisory services and not corporate
consulting services. While these firms have attracted clients, it is too
soon to tell what their ultimate effect on enhancing competition will be.

Among the 31 institutional investors GAO spoke with, large institutions
reportedly rely less than small institutions on the research and
recommendations offered by proxy advisory firms. Large institutional
investors said that their reliance on proxy advisory firms is limited
because, for example, they have in-house staff to assess proxy vote issues
and only use the research and recommendations offered by proxy advisory
firms to supplement such research. In contrast, small institutional
investors have limited resources to conduct their own research and tend to
rely more heavily on the research and recommendations offered by proxy
advisory firms. The fact that large institutional investors cast the great
majority of proxy votes made by institutional investors and reportedly
place relatively less emphasis on advisory firm research and
recommendations could serve to limit the firms' overall influence on proxy
voting results.

References

Visible links
  18. http://www.gao.gov/
  19. http://www.gao.gov/
  20. http://www.gao.gov/fraudnet/fraudnet.htm
  21. mailto:[email protected]
  22. mailto:[email protected]
  23. mailto:[email protected]
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-765
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-765
*** End of document. ***