Did E&Y make the right move to acquire PGI?
Ernst & Young’s (E&Y) recent acquisition of Proxy Governance Inc (PGI) can potentially have a two-fold effect on the shareholder value of companies that use governance and proxy advisory services, according to analysts.
The Big Four auditor purchased the seven-year-old London-based proxy advisory and voting firm’s key corporate governance assets in a deal that closed on February 1. Then last month, E&Y established its own Corporate Governance Group (CGG) headed by members of the former PGI governance team. In a statement, the company says its new unit ‘has already assisted clients in addressing the needs of boards, audit committees and senior managements’ of its clients.
‘The move by Ernst & Young props up its corporate governance to compete with KPMG’s Audit Committee Institute and the corporate governance practices of Deloitte and PwC,’ says Gary Larkin, editor of the Conference Board’s Governance Center in a recent blog post.
The move strengthens E&Y’s position in the market for corporate governance service and, by extension, could potentially strengthen the corporate governance efforts of its clients. E&Y’s heightened ability to compete may also move its competitors to upgrade their services in an effort to protect their market share. Over the long term, the result may be better corporate governance for a larger number of companies – and better corporate governance generally leads to better corporate performance and greater shareholder value.
At the same time, E&Y’s purchase of PGI may serve to damage the proxy advisory business. Last December, the independent governance analysis firm, Glass Lewis, revealed that it entered into an agreement with PGI to provide proxy voting and advisory services to its clients. Now that PGI has left the proxy business entirely, industry observers believe most, if not all, of that business will fall to Glass Lewis and Institutional Shareholder Services (ISS), the two dominant players left in the US proxy business
‘PGI's decision to exit the business indicates that barriers to entry are high in this industry, and I am not aware of any new entrants that are aiming to challenge Glass Lewis and ISS, leaving them in what appears to be a strong duopoly position,’ says Allan McCall, a researcher at the Stanford Graduate School of Business who specializes in corporate governance. ‘There would be a concern that E&Y could not offer recommendations that are free from existing or potential conflicts of interest, as E&Y is likely to have significant active or potential economic interests in the issuers they would be providing recommendations.’
With E&Y unable to use its brand recognition and huge resources on the proxy side of the business, analysts suggest fewer companies providing proxy services could have a negative affect. In May, McCall co-authored a study titled ‘Proxy Advisory Firms and Stock Option Exchanges: The Case of Institutional Shareholder Services,’ which concluded that proxy adviser recommendations can decrease shareholder value. In fact, since proxy firms like ISS and Glass Lewis can sway a substantial number of shareholder votes, they can have a larger ability to dictate a company’s corporate governance practices, says McCall.
‘Our hypothesis is that the incremental cost of determining proxy votes internally exceeds the loss they suffer from bad voting recommendations,’ McCall notes. ‘At a general level, the question of whether the policies of proxy advisers help or hurt shareholders is a concern of many public companies.’
