Views on improving the integrity of global capital markets
30 November 2018

SEC Holds Proxy Process Roundtable — Will Reforms Follow?

Posted In: Proxy, US SEC

On 15 November, the US SEC held a roundtable focused on key aspects of the US proxy system, including proxy voting mechanics and technology, the shareholder proposal process, and the role and regulation of proxy advisory firms. Invited participants included representatives of the investor and issuer communities, intermediaries involved in proxy voting and the shareholder proposal process, and proxy advisers.

Although no rulemaking or reforms of the proxy process are imminent, the roundtable demonstrates the SEC’s apparently serious intent to move ahead on some of the issues discussed at the event.

The day was broken down into three panels, with investor and issuer representatives filling out most of the panels.

Proxy Voting Mechanics and Technology

The roundtable’s first panel focused on the proxy process. Issuer and investor representatives on the panel spoke with unanimity on most issues.

Both groups agreed that the SEC should lead on the issue of improving the proxy voting process. They contended that, because so many intermediaries are involved in the process, someone needs to lead the charge for reform and reasoned that the SEC is best equipped to take on that role.

The panelists suggested three improvements for the proxy voting process:

  1. Vote confirmation for investors that allows them to confirm their shares are voted
  2. Guidance for fixing errors in the voting system
  3. Use of a universal proxy in contested elections that would solve many voting issues in these situations

Panelists also addressed the use of blockchain to improve the process, though they cautioned that the focus should first be on reforms and then on finding a technology that fits any proposed solutions. Some expressed concern that the current voting system includes a number of intermediaries who may be motivated by the desire to protect their businesses rather than to create a system the best serves investors.

Another challengenoted by panelistswas the US OBO/NOBO system. A 2010 paper from the Council of Institutional Investors best explains OBO/NOBO:

Under Securities and Exchange Commission (SEC) rules, companies mainly communicate with beneficial owners through broker or bank intermediaries. Intermediaries are prohibited from disclosing to a company the identity of beneficial owners who object to that disclosure (objecting beneficial owners or OBOs), and the company cannot contact OBOs directly. The company may contact directly shareowners who do not object (non-objecting beneficial owners or NOBOs), but SEC rules nonetheless require that proxy materials be forwarded to them by the intermediaries. The OBO/NOBO distinction impedes company communications with beneficial owners and communications among shareowners. Some market participants have proposed changes to this framework.

CFA Institute is encouraged by the spirit of cooperation exhibited on this panel and the general agreement of both issuers and investors about what needed to be done. The difficulty will be in confronting entrenched interests in the proxy voting process to ensure the system works more efficiently.

 

Shareholder Proposals: Exploring Effective Shareholder Engagement

The roundtable’s second panel focused on the shareowner proposal process and the current state of engagement. Panelists representing issuers and investors agreed that the level of engagement between the two groups is the best it has ever been and has brought about a number of compromises that have resulted in shareholder proposals being removed from corporate proxies.

Panelist agreement stopped there, however, as the issuer community felt that the shareholder proposal process allows too many nuisance proposals and costs the issuer community too much in time spent fighting these proposals. Issuer representatives on the panel felt that an increase is needed to the current threshold of $2000 worth of shares held to bring a proposal and that shareholders should have to reach a higher bar to have a proposal repeated in future years. One issuer representative suggested that many companies are not going public because they feel the shareholder proposal process is too onerous.

In contrast, investor representatives on the panel responded that the vast majority (97 – 98%) of the things they vote on are routine and that the shareholder proposals about which issuers complain are few and far between. One investor representative cited a statistic that the average US company faces a shareholder proposal once every seven years — hardly a burden in the eyes of investors. Investor representatives also pushed back on raising the resubmission threshold, noting that it took years for proposals such as majority voting, say on pay, and proxy access to gain the mainstream support by the majority of investors that they have today.

CFA Institute agrees with the panel’s investor representatives that the proxy proposal process is currently working well. The number of shareholder proposals is relatively small given the size of the market and the proxy proposal process has served as an important tool to foster engagement between issuers and investors. Investors usually resort to proxy proposals only after dialogue with a company has failed, and we find it difficult to believe that the few proxy proposals advanced each year by shareholders are keeping companies from going public. Initial ownership thresholds can be revisited, but should be kept at a level that does not impede investors from using this tool in the future.

 

Proxy Advisory Firms

Perhaps the greatest area of disagreement between issuers and investors was the issue of proxy advisors and their influence on the proxy voting process, the subject of the third panel. Most of the panel’s investor representatives noted that they have their own policies and procedures that drive their voting process, and that they do not rely on the recommendations of proxy advisors. Investor representatives noted that they primarily

  1. use proxy firms to handle the simple mechanics of voting thousands of proxies; and
  2. use the research provided by proxy firms as one of the many data sets that inform their own research processes.

Despite the evidence presented by the panel’s investor representatives, issuers have pushed for increased regulation of proxy advisors in recent years. The panel’s issuer representatives asserted that advisors have an undue influence on the proxy voting process. They also noted that investors may be breaching their fiduciary duty if they vote blindly with proxy advisor recommendations, which the investor representatives denied is the case.

The panel’s issuer representatives also want more opportunity to review proxy advisor reports and a chance to rebut claims made in the reports. The panel’s investor representatives noted that, as the primary customers of proxy advisory firms, investors are generally satisfied with the level of service they are receiving and that increased regulation is an unnecessary cost that would ultimately be passed on to investors, hurting their financial returns in the long run.

CFA Institute believes that proxy advisors provide a valuable service to investors, who primarily use their services for research and proxy voting mechanics. The majority of investors have their own voting policies and procedures and do not vote in lockstep with proxy advisers recommendations. The complaints about proxy advisors from an issuer perspective usually come from instances in which a vote does not go the way an issuer wants and issuers look for someone to blame. Proxy advisors make a convenient scapegoat. Of course, proxy advisors should make every effort to minimize errors and conflicts of interests, but onerous regulation that would only add costs for investors with no discernable benefit is not the answer. Increased engagement on the part of issuers with investors is a more cost-effective solution.


Image Credit: © Micheal O Fiachra / EyeEm

 

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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