Ally Financial has blasted a proxy advisory firm for its recommendation that shareholders vote against the re-election of four of the Detroit company's directors.
The recommendation revolves around the issue of Cerberus Capital Management, Ally's biggest shareholder, and the shares the firm has pledged as collateral for margin loans from Ally. Institutional Shareholder Services argues the 37.5 million pledged shares present a substantial risk to Ally, whereas Ally argues it has sufficient governance policies in place to prevent risks.
ISS recommended shareholders vote against the four members of Ally's audit committee, because of their lack of risk oversight in approving Cerberus' pledged shares. It's the second consecutive year ISS has issued the recommendation.
Calling ISS's recommendation "disappointing and misguided," Ally Chairman Franklin Hobbs said ISS's "refusal to evolve their thinking on this matter reflects their adherence to rigid generic policies versus true understanding of company risk and governance."
Hobbs' comments were included in a letter sent to shareholders on Tuesday.
ISS recommended votes against Robert Blakely, Maureen Breakiron-Evans, Mayree Clark and John Stack. The election is scheduled for May 3, at Ally's annual meeting in Detroit.
ISS argues that pledged shares, as a general rule, are a bad idea for corporations. That's because the directors or executives who have pledged their shares could be forced to sell them at a discount, thus negatively impacting the company's share price. Pledged shares can also be used in hedging or monetization strategies to help protect executives, ISS said.
Ally counters that it can't restrict Cerberus from pledging its shares and that the chance of those shares being subject to foreclosure is remote.
Cerberus' chief executive, Stephen Feinberg, an Ally director, has sole voting authority over the pledged shares, although he does not have a direct financial interest in the shares. Feinberg's participation on the board requires Ally to disclose financial information about the pledged shares. If he were to leave the board, Ally would not be required to disclose the information, which would reduce transparency for shareholders.
"Following the ISS recommendation … would cause Ally to lose a valuable director, result in less disclosure to shareholders and do nothing to mitigate risk," Hobbs wrote.
ISS acknowledged that the chance of foreclosure on the pledged shares is remote, but said the risk that the shares pose to Ally is too great to allow the shares to remain.
The risks "would have significant adverse consequences far out of proportion to their perceived probability," ISS said.