Peltz’s Tentative and Tenuous Triumph over P&G Points to Proxy Process Problems
Nelson Peltz’s tentative and tenuous victory to take a seat on the Procter & Gamble Co. (P&G) board of directors has spawned a rash of press. A couple of recent articles, one in the Wall Street Journal and one from Bloomberg’s Matt Levine, we think described the situation best. But there are a number of additional dimensions to this matter that we believe need consideration as well.
Proxy Access Needed
Peltz’s seemingly successful insurgency against P&G did not come cheap and it was not easy. Between them, Peltz and the company issued 187 different proxy notices over 60 days and spent an estimated $25 million and $35 million, respectively. For Peltz, that means he and his Trian Partners spent the equivalent of $0.66 per share owned to fight for a place on the board. That is on top of the hedge fund’s $3.5 billion investment in the company’s shares.
The decks being stacked against shareowners is nothing new. It is an issue CFA Institute raised in a 2014 report, Proxy Access in the United States: Revisiting the Proposed SEC Rule.
Insurgent shareowners do not always — or even usually — know best how to run companies. But they do represent the interests of their investment clients, people whose funds are invested in the company. So, it is shortsighted for companies like P&G to ignore the interests of their owners. The problem is that proxy rules have abetted companies in their shortsightedness by making it difficult to vote for alternative board members who are not beholden to the CEO/chair for a $300,000 per year, part-time director’s position.
Mandating independence of the nominations committee would be an excellent step forward in better governance.
P&G’s vote also highlights the problems with proxy voting. Despite massive improvements in technology over the years, the voting process still looks like Precinct 13 of Jim Wells County, Texas, did in 1948 (Lyndon Johnson’s first and controversial Congressional victory). Matt Orsagh noted the need for modernization in a post earlier this month. It is a problem that many see blockchain addressing at some point in the future.
Role of Proxy Advisers
And finally, there is the role proxy advisory firms played in the contested election. In this shareowner notice from Trian, dated 3 October, three such firms released statements supporting Peltz’s efforts. The notice, included on the SEC’s EDGAR site, incorporates supporting comments from ISS, Glass Lewis, and Egan-Jones.
In the meantime, Representative Sean Duffy (R, Wisconsin) re-introduced the “Corporate Governance Reform and Transparency Act of 2017,” which calls for proxy advisers, such as the trio noted above, to register with the SEC. The following are among the mandates that the advisers must meet:
- Submit a completed registration form
- Provide registration updates
- Certify that the firm can “consistently provide proxy advice based on accurate information”
- Submit annual recertification
- Disclose the procedures and methodologies used to develop proxy recommendations
- Employ “sufficient” staff to create voting recommendations based on accurate and current information
- Document policies and procedures
- Have a code of ethics and a compliance officer
Based on this list, one might conclude that the bill is designed to give these three incumbents an exclusive on proxy advice for the foreseeable future. Of course, it will raise costs for the investment firms that use their services. But it will not stop the investment firms from buying their services because investment firms do not have the capacity to do the work in-house.
The bill is virtually identical to the approach taken in 2010 when, in the Dodd–Frank Act, Congress mandated an exclusive market for credit rating agencies in the name of “improving” the quality of credit ratings. Dodd–Frank, like Duffy’s bill, ended the requirements in law and regulation that mandated everyone from money market funds to regulatory agencies to outsource their credit analysis to the agencies. But the government often contradicts itself. In the world of credit ratings, the contradiction came in the form of higher barriers to entry, which have proven nearly insurmountable for anyone thinking of creating a new and innovative ratings firm to compete with the incumbents.
By increasing the costs of entry for firms interested in competing for proxy advice, this bill would have much the same effect.
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