December 31, 2018
Since the launch of the Main Street Investors Coalition in May, many positive developments have transpired for retail investors. America’s retail investors are rightly concerned about how their investments are managed, given the proliferation of investor activism and environmental and social resolutions that have radically shifted the investment landscape.
As 2019 draws to a close, the U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton has committed to regulating proxy advisory firms, a key victory for retail investors who are concerned about how their money is being used. There has also been bipartisan legislation introduced and debated in the U.S. Senate that shows growing consensus that proxy advisors need additional oversight. Ahead of the SEC roundtable, the Commission rescinded the 2004 ISS and Egan-Jones no-action letters which essentially allowed institutional investors to rely on the advice of proxy advisory firms and uphold their fiduciary duty to act in their clients’ best interests without doing their own due diligence.
These changes have centralized decision-making regarding corporate governance for publicly listed companies at a time when companies are facing resolutions that wade into more controversial and politically oriented issues. When asked, most retail investors affirm that they do not want institutional investors to promote social or political causes with their money, instead they want their fund managers to maximize their investments.
How Main Street Investors Informed the Debate
To inform the broader public, the U.S. Congress and the SEC about the issues facing retail investors, members of the Main Street Investors Coalition released numerous reports this year:
- American Council on Capital Formation: Politics Over Performance – The Politicization of New York City Retirement Systems by Tim Doyle. This report details how the performance of New York City pension funds has been negatively impacted by a focus on political issues. For example, 12 percent of the funds’ assets are invested in a group called the “Developed Environmental Activist” asset class, which has underperformed the overall funds’ returns by an average of 600 basis points over the last three years.
- American Council on Capital Formation: The Conflicted Role of Proxy Advisors by Tim Doyle. This paper looks at the rationale for proposed regulation of proxy advisory firms and explores the history of how these firms became so influential, how their recommendations impact shareholder voting and the conflicts of interest inherent to the business models of proxy advisory firms.
- National Association of Manufacturers: Political, Social and Environmental Shareholder Resolutions: Do they Create or Destroy Shareholder Value? By Joseph P. Kalt, PhD and Adel Turki, PhD. This paper, conducted by award winning economists, reviewed the impact that environment, social and political shareholder resolutions had on targeted companies and found that there is no discernable economic benefit to such resolutions. The paper further found that the resolutions were costly to companies and shifted the focus of management away from the core functions of the targeted companies.
- American Council on Capital Formation: Are Proxy Advisors Really a Problem? By Frank M. Placenti. This paper explored the extent that institutional investors “robo-vote” or automatically vote in line with the recommendations of proxy advisors. The paper found that nearly 20 percent of shares were voted consistent with a negative recommendation from Institutional Shareholder Services (ISS), the largest proxy advisory firm, within three days of issuing an adverse recommendation. This gives companies little time to respond or react to adverse recommendations, which is especially problematic if the recommendation used flawed data.
- Corporate Governance Oversight and Proxy Advisory Firms by Ike Brannon (Academic Advisor to Main Street Investors Coalition) and Jared Whitley. This paper shows how the objectives of proxy advisor firms may not align with the institutional investors that defer to them on issues of shareholder governance. The lack of transparency and accountability at proxy firms make it difficult to understand how they are impacting shareholder return.
Members of the Main Street Investors Coalition also wrote to the SEC to inform the Commissioners of issues with the proxy process that will be used to help develop rules overseeing the process:
- Main Street Investors Coalition Advisory Board Chairman Bernard Sharfman authored a comment which argued how a company’s board of directors are often in the best position to recommend governance that will create value, a comment on how additional guidance is needed for proxy advisors to carry out their fiduciary duty, a comment on how the SEC should clarify that investment advisors must clarify their policies and procedures and a comment about how retail investors should be able to provide voting instructions to their investment advisor.
- Tim Doyle of the American Council on Capital Formation submitted a comment that reaffirmed the widespread use of robo-voting where institutional investors automatically vote in line with the recommendations of proxy advisors and another comment that highlighted the conflicts of interest with proxy advisors.
- James L. Martin of the 60 Plus Association submitted a comment calling for additional transparency of the proxy advisory industry to mitigate conflicts of interest.
Main Street Investors Will Continue to Push for Reform in 2019
The Main Street Investors Coalition looks forward to another productive year in 2019 as the SEC moves forward with a proposal to rein in proxy advisory firms. The Coalition will continue to inform the debate and ensure that whatever proposal is put forward forces more transparency onto proxy advisory firms to mitigate conflicts of interest and ensure all recommendations are based on accurate data.