By Dena Aubin

NEW YORK (Reuters) - A growing number of U.S. companies are objecting to the role of firms that advise shareholder votes at annual meetings, complaining about conflicts of interest, errors and lack of oversight.

With shareholder balloting season well underway, companies have been challenging proxy advisers' opinions, demanding more disclosure about their work and asking regulators to rein in the firms.

Proxy firms such as ISS, part of investor services firm MSCI, and Glass Lewis & Co advise some of America's biggest investors and have gained influence as shareholder voting rights increased.

New "say on pay" rules that require nonbinding shareholder votes this year on the hot issue of executive pay have turned this proxy season especially contentious.

"It's easier for ISS to touch a nerve when they clearly urge a 'no' vote on say on pay," said Howard Berkenblit, a partner at law firm Sullivan & Worcester LLP who specializes in corporate governance issues. "I think that's why you're seeing a more direct response by some of these companies."

Already this year, after ISS recommended no votes on their pay, investors shot down pay packages at five companies: Beazer Homes, Jacobs Engineering Group Inc, Shuffle Master Inc, Hewlett-Packard Co and Ameron International Corp.

HP DENIES CRONYISM

"Many companies have resented the inevitable fact that investors may disagree with them at proxy voting time," said ISS spokesman Gary Hewitt. "ISS has become a kind of lightning rod for that issue."

At the center of the fray is ISS, the largest proxy firm, which has said it has about 1,300 clients, including some of the largest institutional investors, in the United States.

ISS has been a long-time supporter of shareholder rights, clashing with companies over executive pay and director elections and provoking resentment among corporate boards.

After ISS took aim at Hewlett-Packard for allowing its chief executive to help identify candidates for its board, chairman Richard Lane hit back, saying ISS' concerns were misplaced.

"ISS' attempt to raise the specter of cronyism in HP's director selection process is completely unsupported and unsupportable," Lane wrote in a letter to shareholders last month. He said HP's CEO had helped identify potential candidates, but he had not appointed or nominated board members.

HP won shareholder approval of its board of directors, including three ISS had recommended against, though it lost its advisory vote on top executives' pay.

ISS has also come under fire because it sells consulting services to companies it covers, raising complaints of potential conflicts of interest.

SEC MULLS TIGHTER OVERSIGHT

In a "concept release," the first stage of potential rule-making, the U.S. Securities and Exchange Commission said last year that it was looking into tightening oversight of proxy advisers and requiring more disclosure of potential conflicts.

The SEC is assessing proxy advisers as part of a sweeping review of the corporate voting system, or so-called proxy plumbing. The agency has not said when it would start drafting rules, but proxy advisers will be one of the first topics addressed, a person familiar with the matter said on Monday.

In a letter to the SEC, International Business Machines said that nearly 12 percent of its shareholder votes last year were cast in lock step with ISS one day after its recommendations were issued, a bigger percentage than its largest shareholder controls.

"This voting block is controlled by a proxy advisory firm that has no economic stake in the company and has not made meaningful public disclosures about its voting power, conflicts of interest or controls," IBM said in a letter to the SEC.

ISS spokesman Hewitt said his firm has firewalls to separate its consulting business from professionals who advise on votes. ISS is also a registered investment advisor and gets audited by the SEC, he said.

Supporters of the proxy advisers have urged the SEC not to make changes that would weaken them.

"They make shareholder rights easier to exercise by doing the research so that essentially all their clients are sharing the costs," said Nell Minow, co-founder of the Corporate Library, part of GovernanceMetrics International, a corporate governance research company.

Minow said that much of the criticism was sparked by dissatisfaction with proxy firms' opinions.

(Reporting by Dena Aubin; additional reporting by Sarah Lynch)