Reading Proxies for Fun and Profit
Normally, the annual meeting of Morgan Stanley follows the company script: Everybody congratulates one another on the wonderfulness of the venerable Wall Street firm, the few shareholders who bother to attend re-elect the directors, the meeting is adjourned, and it's time for lunch. But this spring's meeting was different. An upstart investor advice company with the forgettable name of Glass Lewis & Co. had lambasted Morgan Stanley for excessive executive pay and told its clients, including the powerhouse New York State Common Retirement Fund, to support a proposal limiting future golden parachutes. To Morgan Stanley's shock, it passed with 55 percent of the vote.
From snazzy 33rd-floor headquarters with panoramas of San Francisco, one of the most influential companies you've never heard of provides advice to 155 of the nation's biggest money managers--including eight of the 10 biggest pension funds--who control $11 trillion worth of shares. And it will soon sell advice to individual investors as well.
That growing clout is already generating controversy as some investors and executives complain that Glass Lewis is trying to make its name by unfairly criticizing corporate honchos. And some investor advocates worry that the company may not be living up to its pro-investor tough talk.
Such controversy seemed impossible in January 2003, when attorneys Kevin Cameron, then 34, and Greg Taxin, 33, stood staring at 75 abandoned desks in a converted warehouse they'd just rented on San Francisco's Pier 1. They had to stand. The new office had no chairs.
The two had become friends in 1999. Taxin, a gregarious Californian, was the Goldman Sachs staffer helping San Francisco-based NorthPoint Communications, a money-losing but hot DSL provider, go public. Cameron, a tall, thin, and cerebral-looking Canadian, was NorthPoint's in-house counsel. Within two years, the company, which had reached an analyst-hyped market value of $5.3 billion, had to restate its earnings and then collapsed in bankruptcy.
Taxin and Cameron moved on to other jobs, but as they watched companies like Enron and WorldCom implode, they started brainstorming about starting a business. Perhaps investors would pay for analysis of companies' proxies. After all, most investors threw away those mind-numbingly legalistic annual meeting agendas even though they provide important hints about executive pay and board members' conflicts of interest. Their dream, Taxin said, was that "we could provide help to investors. The world would be better. And we'd be richer for it."
In 2002, the time seemed ripe. The Securities and Exchange Commission was about to require mutual funds to reveal how and why they voted their shares. And some large investors had become unhappy with the only existing provider of proxy advice, Institutional Shareholder Services. By selling advice on corporate governance to companies, ISS risked a potential conflict of interest. (ISS insists that its consulting arm is kept separate.)
Champion. So the duo met with a local venture capitalist. "This was the best business idea I'd seen" in six years of funding start-ups, says Larry Howell. But how would two obscure attorneys get noticed by money managers? Howell said they needed a well-known champion of investors, someone like Lynn Turner. Who? The name of the outspoken former SEC chief accountant meant nothing to Taxin and Cameron.
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