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Chamber of Commerce and Glass Lewis Square Off Over Alleged Conflict

Joe Mont | June 1, 2012

The U.S. Chamber of Commerce and proxy advisory firm Glass Lewis & Co.are waging a war of words over the latter's independence, or lack thereof, from its parent company.

On Thursday, the Chamber's Center for Capital Markets Competitiveness (CCMC) petitioned the Securities Exchange Commission to monitor the San Francisco based firm and its owner, the Ontario Teachers Pension Plan (OTPP).

In a letter to the SEC, CCMC detailed the “activist pension fund's” opposition to the Board of Directors of NYSE-listed Canadian Pacific Railway Ltd. That stated opposition, and support of an alternative slate of directors, “was followed by Glass Lewis issuing a vote recommendation in the parents favor during the heated proxy contest earlier this month,” it claims.

Since 2007, Glass Lewis has been a wholly-owned subsidiary of OTPP, which, as a fiduciary, manages $117 billion (Canadian) on behalf of 300,000 current and retired teachers in Ontario.

“Glass Lewis' vote recommendation in favor of its parent company calls in question the role of proxy advisory firms in corporate governance, the lack of transparency by proxy advisory firms in making vote recommendations and the potential conflicts of interest that may benefit certain activist investment funds,” CCMC wrote.

CCMC had alerted the SEC to what it described as “a similar potential conflict of interest” last year when OTPP threatened McGraw Hill with a similar contest. That issue was resolved before Glass Lewis issued a recommendation.

 “A level playing is how capital markets and corporate governance works best,” said Tom Quaadman, vice president of CCMC.  “Conflicts of interest by proxy advisory firms show that the system is out of whack. ‘Do as I say, not as I do' is emblematic of a thumb on the scale that Congress and the SEC need to investigate. The SEC has been working on the concept release on proxy voting systems for two years, but the conflicts of interests by proxy advisory firms have gotten a pass. The SEC needs to take a long hard objective look at this issue.”

In a statement, CCMC said it was “highly concerned about the lack of transparency and tangible conflicts of interest in the operation of proxy advisory firms.”

On Friday, Glass Lewis refuted the allegations, stating that “OTPP is the owner of Glass Lewis, not its operator” and maintaining its independence.

Glass Lewis further asserted that it does not offer consulting services to public corporations or directors and takes precautions to ensure its research “is objective at all times and under all circumstances.”

The firm makes full disclosure of potential conflicts by describing the nature of any relationship in a note on the cover of the relevant research report.

In the case of the May 17, 2012 Canadian Pacific Railway meeting, the following disclosure was included on the front of its report:

"It is Glass Lewis' policy to make full disclosure to its customers in instances where Glass Lewis provides coverage on a company in which Ontario Teachers' Pension Plan Board, Glass Lewis' ultimate parent, holds a stake significant enough to have publicly announced its ownership in accordance with the local market's regulatory requirements or Glass Lewis becomes aware of OTPP's disclosure to the public of its ownership stake in such company, through OTPP's published annual report or any other publicly available information as disclosed by OTPP.

“In accordance with such policy, please be advised that OTPP held an ownership stake in the company as at Dec. 31, 2011. OTPP is not involved in the day-to-day management of Glass Lewis. Glass Lewis operates and will continue to operate as an independent company separate from OTPP. The proxy voting and related corporate governance policies of Glass Lewis are separate from OTPP. OTPP is not a member of Glass Lewis' Research Advisory Council.”

Glass Lewis disputed claims that the timing of the report's publication, subsequent to the announcement by OTPP of its vote decisions on the Canadian Pacific Railway meeting, is indicative that recommendations were unduly influenced.

"In fact, OTPP's votes and Glass Lewis' recommendations were not the same,” its statement says. “The CCMC is simply wrong when it suggests that Glass Lewis was improperly influenced in formulating its voting recommendations.”

Glass Lewis publishes its reports on annual general meetings about three weeks prior to meeting date, the firm said. In the case of proxy contests, “where the situation is more fluid due to potential negotiations and additional disclosure by both parties,” it often publishes those reports closer to the meeting date.

"Glass Lewis finalized and published its report on the same day it completed separate meetings with representatives of the dissident shareholder and the company,” it added. “Glass Lewis' recommendations… were derived based on its own methodologies for analyzing contested meetings and differed significantly from the votes issued by OTPP. While OTPP voted against all of the incumbent directors, Glass Lewis recommended supporting seven of the Company nominees.”