Letter to RiskMetrics Group

My name is Eli Lehrer and I’m Director of the Center for Risk, Regulation, and Markets at the Competitive Enterprise Institute. As an organization, we’re deeply concerned about proposals we have heard you are considering that would recommend proxy votes and other measures against certain capital management techniques. We rarely comment on the performance or policies of private organizations but, given the extent to which public and quasi-public actors follow your guidance, we believe that your actions have an impact on public policy that makes it important for us to interject ourselves into the debate.

The Center for Risk, Regulation and Markets is committed to the free market above all else. We have a strong interest in insurance and reinsurance issues and are concerned about anything that impacts the availability, affordability, or freedom of these markets.

We’re concerned that the proposed disincentives to use capital management tools could have a devastating consequence for insurance and reinsurance markets. The proper functioning of worldwide reinsurance markets depends on freedom to use a wide variety of tools to manage capital. These include debt and equity issues to the public and employees as well as share buybacks. While we think that publically traded entities in all sectors have a need to use these tools from time to time, they are particularly important for businesses–insurers, reinsurers, and investment firms–that exist entirely for the purposes of managing capital in an efficient manner. In this light, we understand that the model RMG uses to consider proposals to create or increase shareholder equity plans reserves has a strong bias against certain defined dilution caps. It seems to us that such caps may inadvertently create artificial restraints on share buyback plans and other capital management instruments that would otherwise be in interests of shareholders. In addition, we wish to see management teams empowered with the widest possible range of tools to align their executives and employees with the long-term interests of capital providers.

Any restriction on the use of these tools, particularly in the insurance and reinsurance space, would have a chance of materially and significantly impacting the efficient allocation of reinsurance and insurance capital throughout the world. This, in turn, could lead to increases in rates and decreases in the affordability of primary insurance. We think that this should be avoided and believe that consumers, the economy, and the free market will all suffer if you go forward with models, policies or other proposals that would cause many stockholders to oppose given capital allocation proposals. All of this may be especially important to market participants in the current cycle in light of the current increased cost of capital and restrictions on cash and liquidity that continue to persist.

In that context, we urge you to review employee share plan proposals carefully and not take steps that would serve to encourage destructive restrictions on insurance, reinsurance, and investment firms’ allocation of capital and ability to attract and retain talent. In particular, we urge that RMG be willing to grant well-governed management teams wide flexibility to use long-term shareholder alignment tools such as equity-linked compensation plans, and the flexibility to manage capital appropriately in the long-term interests of shareholders, even when the two, taken together, appear to impose short-term dilution costs. With appropriate disclosure, the market will grade these companies fairly.

Yours truly,

Eli Lehrer