June 12, 2019
Last week, Business Roundtable, an association of chief executive officers who’s companies collectively oversee 15 million employees and $7.5 trillion in revenues, submitted its second letter to the Securities and Exchange Commission (SEC), calling for review and reform of the proxy process.
Drawing on examples from its 2019 survey of member companies, the new letter touches on two key reforms: modernization of the shareholder proposal process and ensuring accuracy and transparency of proxy advisory firm recommendations.
Shareholder Proposal Process
Under the current rules, shareholders only need to own $2,000 worth of stock in a company to submit a proposal. For most members of Business Roundtable, $2,000 is less than 1 millionth of 1 percent of the outstanding shares; an amount too low to warrant such power. Likewise, interested parties that own no shares in a company can submit proposals by proxy.
“People for the Ethical Treatment of Animals (PETA), for example, employed exactly this tactic, making the minimum investment necessary to file a shareholder proposal with Levi Strauss & Co. that asked the company to switch its cow-skin leather patches to ‘vegan leather.’”
Instances like the above demonstrate how the current system allows shareholders with insignificant investments submit proposals to advance societal causes without any intentions to improve the company or create long-term shareholder value.
Business Roundtable also suggests raising the resubmission threshold. A 2018 study by the Council of Institutional Investors (CII) found shareholder proposals submitted between 2011 and 2018 won on average 33.6 percent on the first submission, 29.2 percent on the second and 31.8 percent on the third—all of which exceed proposed thresholds of 6 percent, 15 percent and 30 percent.
“The increased resubmission threshold is not intended to, and this recent empirical evidence suggests that it will not, eliminate the ability for shareholders to advocate for change across multiple years — even on matters that do not initially receive even moderate levels of shareholder support. Instead, this data indicates that increased resubmission thresholds would work around the edges to eliminate repetitive proposals that a company’s shareholders have decisively rejected one or more times.”
Proxy Advisory Firm Recommendations
Also of concern is the lack of regulation and oversight of proxy advisory firms, considering the amount of influence these firms have over shareholders’ voting decisions. Business Roundtable highlights that proxy advisory firms’ recommendations frequently contain factual errors and lack transparency into the methodologies used to make these recommendations and any potential conflicts of interests.
Business Roundtable members also have concerns about institutional investors upholding the fiduciary duty of the shares they manage and their evaluation of the proxy advisory firms they retain.
“One Business Roundtable member company, for example, reported that the number of votes cast tripled in a single business day following a report from Institutional Shareholder Services (“ISS”), with the votes overwhelmingly consistent with ISS’s recommendation.”
The overwhelming level of votes cast and consistent with ISS’ recommendations suggests institutional and retail investors are spending little to no time evaluating recommendations by proxy advisory firms or outsourcing their votes to the proxy firm itself—only increasing proxy advisory firms’ influence and power.
Several Business Roundtable members have indicated errors in the analysis and methodologies of their voting guidance. Many cite incorrect or flawed peer groups used to develop recommendations. Others cite blatant mistakes that violate the proxy firm’s own rules:
“One member company reported that its retired CFO, rather than its current CFO, was included in ISS’s compensation analysis, in conflict with ISS’s stated practice and despite the fact that the company had brought the issue to ISS’s attention.”
The examples Business Roundtable lists in its letter to the SEC are further proof of the real issues U.S. public companies and their shareholders are experiencing with proxy advisory firms. We hope the SEC will take these into consideration when evaluating and shaping reform to the proxy system.