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The credibility of proxy advisory firms is being questioned here as concerns are mounting that they exert significant influence in the shareholders' voting process.
Officials at the Financial Supervisory Service (FSS) said that the nation's top financial regulator is closely reviewing the possibility of limiting the influence of proxy advisory firms, joining moves by the U.S. Securities and Exchange Commission (SEC).
"Proxy advisory firms present their views on very sensitive issues mostly related to M&A cases. But conflicts happen according to the situation. New regulations may be needed," said an official.
A recent example involves the U.S.-based Institutional Shareholder Services (ISS) that joined with another advisory firm Glass Lewis to oppose the proposed merger of Samsung C&T and Cheil Industries ahead of a key July 17 shareholders meeting.
"If Samsung C&T engaged with ISS for consulting services, this would benefit ISS. There are questions about transparency at some proxy advisory firms," said another official.
On July 1, the SEC ordered proxy advisory firms to actively and specifically disclose to investors the "significant" or "material" interests they had "in matters that are the subject of voting recommendations."
Officials say as proxy advisory firms have influence on big institutional and foreign investors in certain cases, the SEC's new guidance stressed that institutional investors have a duty to "ascertain that the proxy advisory firm has the capacity and competency to adequately analyze proxy issues."
Mentioning the latest recommendations by the European Commission and the European Securities and Markets Authority, the FSS official said the regulator will team up with related authorities for a possible revision, if necessary.
"Recommendations by proxy advisers may have some errors due to the lack of the time for analysis. ISS has five employees in Korea and it analyzes between 600 and 700 Korean companies. Their analyses may somewhat be superficial," said an official at a top-tier local law firm.
Proxy advisors normally side with hedge funds and their recommendations will be used as a key reference point by mutual funds and asset management firms.
The SEC said proxy advisory firms need to provide more transparency in their internal controls, policies, procedures, guidelines and methodologies.
"Proxy advisory firms should provide public companies with copies of their draft reports, in advance of dissemination to their clients, and to permit the correction of inaccurate information," it stressed.
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