Stanford business school professors David F. Larcker and Brian Tayan have posted to SSRN.com Riskmetrics: The Uninvited Guest at the Equity Table:
In recent years, RiskMetrics Governance Services (RMG) has played an influential role in the proxy voting process. According to some estimates, a recommendation by RMG can sway a proxy vote by 15 to 20 percent. Several companies are highly critical of RMG and the methodology it uses to inform its recommendations - particularly as they relate to equity-based compensation plans. RMG believes that its methodology is both rigorous and objective. We take a closer look and highlight some key issues and reasons for concern.
The brief case study provides further detail on RiskMetrics growing power:
Over time, RMG increasingly has assumed a central position in the proxy voting process. It counts over 1,700 institutional investors as clients, managing an estimated $25 trillion in equity securities.3 Its opinions are cited in the media. According to some estimates, a recommendation by RMG can sway a proxy vote by 15 to 20 percent.4 ...
Several companies are highly critical of the proxy advisory firm’s influence. For example Tesco, the British retail chain, wrote a letter to regulators expressing “concern about unengaged fund managers increasingly delegating voting decisions.”7 Others question RMG’s methodology. The chairman of Kingsgate Consolidated called the firm’s analysis of his company’s compensation plan “particularly flawed” and indicative of a “tick-a-box mentality.”8
The conflicts of interest at proxy advisory services like RiskMetrics are at least as severe as those at the now infamous bond rating agencies. As the SEC continues to explore proxy plumbing, the power of RiskMetrics needs to be on the agenda.