Despite Shutdown, Drumbeat for Proxy Reform Grows Louder

January 18, 2019

Despite the partial government shutdown slowing the U.S. Securities and Exchange Commission’s (SEC) efforts to develop a proposal to regulate proxy advisors and amend the current rules for shareholder proposals, companies are gearing up to share their experiences with proxy advisors to inform the Commission of the issues they face when dealing with problems such as “one-size-fits-all” recommendations, “robo-voting” and an inability to correct proxy advisory firm errors. Companies are also sharing how certain shareholder proposals are decreasing instead of enhancing shareholder value. All of these issues ultimately impact Main Street investors, who need rules that protect them from the undue influence of the two largest proxy advisory firms.

As Stephen Connolly wrote in MoneyWeek today regarding proxy advisors:

“The sector has gradually expanded over the past 30 years or so with minimal oversight. As funds proliferated and came to hold more and more of the shares in circulation, it became logistically difficult for managers to research and vote on every issue up for debate at all the companies they owned. So the proxy advisers sprang up to do it for them. Research shows they do shift votes, giving them significant sway over the boards of blue-chips as well as minnows – a power that demands supervision. How votes are cast, whether electing directors or approving takeovers, can materially affect shareholders’ interests and returns, and getting it right is crucial.”

Associations representing hundreds of companies are also calling for reform of the shareholder proposal process to eliminate zombie proposals that distract companies’ year after year, despite receiving only limited parochial support from shareholders. One way to do this would be to raise the resubmission threshold, or the minimum amount of support a proposal needed to be resubmitted the next year.

Earlier this week Lindsay Frost of the Financial Times reported:

“Indeed, many constituents, including the Business Roundtable, want the SEC to also increase the resubmission requirements.”

Frost featured Tim Doyle of the American Council on Capital Formation, who explained one of the issues with the current shareholder proposal process:

“Just because [a shareholder] submits a proposal doesn’t mean they are the only shareholder involved in this process. We need to take into consideration the rest of the shareholders and focus on long-term value as well as the costs associated with dealing with proposal time and time again.”

These reports come amid news that at least 100 companies have signed onto NASDAQ’s letter calling or reform. Once the shutdown ends, it is likely that more companies will publicly comment on their experiences to the SEC to allow staff to develop a proposal that addresses key concerns faced by those companies. The Main Street Investors Coalition remains hopeful that 2019 will be a good year for main street investors as the SEC grapples with ways to improve the proxy process.

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