September 19, 2018
Last week, SEC Commissioner Robert J. Jackson, Jr. issued a statement on shareholder voting riddled with misleading arguments. In the statement, Commissioner Jackson suggested that regulating proxy advisors is not in the shareholders best interest and is, at best, a distraction. He read a similar text at a recent Investor Advisory Committee Meeting.
Commissioner Jackson released a statement criticizing the SEC’s decision to rescind two no-action letters that had bolstered the influence of proxy advisors for years. Meanwhile, the action was praised by the business and academic communities as an important step to rein in proxy advisory firms because conflicts of interest within proxy advisors will no longer be shielded from the public. Commissioner Jackson makes no mention of this aspect of the letters.
Instead, Commissioner Jackson misleads the public by suggesting that there are no grounds for seeking policy changes in the space:
” Regulating proxy advisors has long been a top priority for corporate lobbyists, who complain that advisors have too much power. There is, of course, little proof of that proposition, and the empirical work that’s been done in the area makes clear that that claim is vastly overstated. Rigorous review of the evidence shows that lobbyists are observing correlation in advisor recommendations and vote outcomes and confusing it for causation, providing no basis for the policy changes they seek.”
Little proof that advisors have too much power? No basis for policy changes? We at Main Street think otherwise, and many others agree. Just last month, the editorial board of the Wall Street Journal described the “outsize role” that Glass Lewis and ISS play in our financial systems. The Society for Corporate Governance has noted that the proxy advisory industry lacks a regulatory regime. Additionally, a 2018 report from the American Council for Capital Formation noted that institutional investors’ increasing reliance on these firms is troublesome:
“There are institutions, particularly in the quant and hedge fund space, that automatically and without evaluation rely on proxy firms’ recommendations. In addition to potentially breaching fiduciary duty, this extends the power and impact of ISS and Glass Lewis policy recommendations and decreases the ability of companies to advocate for themselves or their businesses in the face of an adverse recommendation.”
The policy changes that Commissioner Jackson claims there is no basis for come in the form of The Corporate Governance Reform and Transparency Act of 2017, which seeks to address the problems with the proxy process through legislation designed to “[foster] accountability, transparency, responsiveness, and competition in the proxy advisory firm industry.”
Also in his statement, Commissioner Jackson expresses undue concern about the upcoming Roundtable on Proxy Process:
“While I remain open to what we might hear from the marketplace, I’m worried that the roundtable’s consideration of contentious issues like this one will distract from the urgent need to fix the basic mechanics of modern corporate democracy.”
We agree with Commissioner Jackson that important changes are needed in the corporate voting system. However, we don’t agree that improvements in the proxy advisory space will detract from or delay progress in the area of shareholder voting. The upcoming roundtable will focus on the proxy process, but efforts to improve shareholder voting are moving forward as well. Earlier this year, American Business Conference petitioned the SEC to remedy the shareholder voting process by creating Advanced Voting Instruction systems that would allow individual investors to more easily vote on their shares. Meanwhile, a startup called SAY is also working to make voting more accessible through a mobile app that would allow individual investors easy access to their votes. Even though the SEC is a busy organization, it is fully capable of making improvements to multiple areas of America’s financial system at once. It is irresponsible of Commissioner Jackson to suggest that improving the proxy advisory space could hamper improvements to shareholder voting systems.
As Main Street Investors Coalition has frequently explained, this roundtable is necessary to reform a broken system. Commissioner Jackson acknowledges that the system has its problems and is need of fixing:
“It’s important to clarify the path ahead for those interested in giving shareholders real access to the levers of corporate democracy.”
The Main Street Investors Coalition fully agrees with this statement. Commissioner Jackson is right – shareholders are being shut out of important decisions. But he’s wrong about the remedy, and the cause. Proxy advisors are shoving their fiduciary duties aside in favor of playing politics, without the permission of the retail investors. The SEC’s announcement of a roundtable on the proxy process and its withdrawal of these no-action letters indicates that the Commission realizes the need for proxy advisory reform. Despite what Commissioner Jackson argues, the letter withdrawal was a step in the right direction. The Main Street Investors Coalition is hopeful that the upcoming Roundtable will continue this momentum.