Risk & Compliance

Proxy Firms Fire Back at Critics

Glass Lewis and ISS say suggestions that clients are unhappy with their ownership changes are off-base.
Roy HarrisMay 30, 2007

The two top proxy advisory firms — embattled Glass, Lewis & Co. and industry leader Institutional Shareholder Services — sharply disputed press reports that cast doubt on client confidence in the quality of their services because of the companies’ new owners.

Concerns about how clients are reacting to a drumbeat of negative reports about Glass, Lewis have been far more severe. Glass, Lewis recently had two respected research managers, Lynn Turner and Jonathan Weil, resign, with Weil saying that events at the company forced him to “protect my reputation” by severing his association with the firm and its new parent.

Glass, Lewis’s purchase by the Xinhua Finance Media unit of Shanghai-based Xinhua Finance Ltd. has led to a storm of controversy. (Full disclosure: Gordon Lau, who recently resigned as CFO of the parent, Xinhua, serves on the advisory board of CFO China, an affiliate of CFO.com.) The controversy stems from news reports that have noted the role of Xinhua Finance Media’s ex-CFO, Shelly Singhal, in performing investment banking services for companies alleged to have been involved in fraudulent operations. Before beginning to do work for the parent Xinhua and its American CEO, Fredy Bush, Singhal was with the firm of Cruttenden Roth, a investment banker for AremisSoft and Summit Securites–two companies that were implicated in alleged frauds.

Singhal resigned as Xinhua Finance Media CFO a week ago. Earlier, news reports of his connection to AremisSoft and Summit had surfaced. Barron’s, in particular, has devoted recent columns to recounting Singhal’s past service for companies that turned out to be frauds. Attempts by CFO.com to reach Singhal were not immediately successful.

The cases of AremisSoft and Summit were reminiscent of the kind of alleged investor abuses that Glass Lewis researchers often described.

In an E-mail response to requests by CFO.com for comment about the resignations of high-profile Glass Lewis research managers Turner and Weil, company CEO Katherine Rabin wrote: “Glass Lewis is not about any one person. It is about the quality of the research and services we provide, which reflect the experience, professionalism and expertise of our entire research and client services organization” of 79 people. Rabin said that as editor of Glass Lewis’s accounting research business, former Wall Street Journal reporter Weil “helped turn some outstanding accountants and analysts into significantlly better communicators, and thus there’s no need to replace him.”

As for Turner, a former Securities and Exchange Commission chief accountant, his “legacy is the quality of the research we produce here and the standards, policies, models and screens we use every day,” Rabin said. “I don’t think he can be replaced with one person,” and that was the reason Glass, Lewis decided to create a research development council.

Rabin said there is “complete operational and editorial independence from Xinhua Finance, which has never interfered with our research perspective, our policies or our unrelenting commitment to integrity and transparency.”

Contacted yesterday, ex-Glass Lewis research manager Weil referred CFO.com to his resignation letter, in which he said: “I am uncomfortable with and deeply disturbed by the conduct, background, and activities of Glass Lewis’s new parent, Xinhua Finance Ltd., its senior management, and its directors.” He declined to elaborate. He declined to comment further.

ISS recently has been the subject of less volatile news stories suggesting that some of its clients were irked about its having been acquired last year by risk management firm RiskMetrics Group Inc., especially since RiskMedia began discussing a possible initial public offering. In one Wall Street Journal article, the director of pensions and benefits for the American Federation of State, County, and Municipal Employees union questioned whether short-term needs of shareholders seeking value might outweigh the policies that ISS has in place.

Replying late yesterday by email to a CFO.com query, ISS senior vice president for communications Cheryl Gustitus said that any “parallel between the troubles Glass Lewis is experiencing as a result of its new Xinhua Finance ownership and the potential IPO of RiskMetrics is fundamentally inconsistent and out of balance.” She noted that the 22-year-old ISS has nearly 700 employees and 1,700 clients, nearly 10 times the client base of the four-year-old Glass Lewis.

Since New York-based RiskMetrics acquired ISS in 2005 the proxy concern’s retention rate has been 97 percent, Gustitus said, adding that clients haven’t expressed concerns about the acquisition except for some worries associated with “possible operational distractions that generally come along with an acquisition.”

She noted that RiskMetrics hasn’t made a final decision about launching an IPO. “We also believe that if and when RiskMetrics goes public, it will be good for corporate governance as we will set an example and will hold ourselves to the same standards as the companies we analyze,” Gustitus said.

Articles that appeared citing ISS client concerns about a possible IPO, she added, quoted two individuals, neither of whom was “typical ISS client.”

In a lengthy Xinhua Finance Media press release issued yesterday, describing a $50-million buyback of shares by Xinhua Finance Media, CEO Bush devoted four paragraphs to addressing press reports on the company and the Glass Lewis departures. The “recent media onslaught was…triggered by the vague and sweeping disparaging remarks about Xinhua Finance and its directors and officers made by a former reporter and Glass Lewis employee, as he was leaving the firm.” She did not mention Weil by name. Bush and her management team, she said, “are not allowing ourselves to be distracted from continuing to execute on our business plan by refuting every unfounded claim.”