November 1, 2018
Glass Lewis recently released an overview of how they intend to approach proxy advice this year and, in turn, provided an excellent example of how proxy advisory firms use their influence to act as quasi-regulators.
In the paper, the proxy advisory firm announced that they intend to punish members of a company’s board of directors if they successfully petitioned the U.S. Securities and Exchange Commission (SEC) to not include certain shareholder proposals:
“We view the shareholder proposal process as an important part of advancing shareholder rights and encouraging responsible and financially sustainable business practices. While recognizing that certain proposals cross the line between the purview of shareholders and that of the board, we generally believe that companies should not limit investors’ ability to vote on shareholder proposals that advance certain rights or promote beneficial disclosure. Accordingly, Glass Lewis will make note of instances where a company has successfully petitioned the SEC to exclude shareholder proposals. If after review we believe that the exclusion of a shareholder proposal is detrimental to shareholders, we may, in certain very limited circumstances, recommend against members of the governance committee.”
A company’s ability to exclude a shareholder proposal is allowed under SEC Rule 14a-8 if the company submits its reasons to the Commission and the Commission agrees. Glass Lewis’ indicates that its new policy will be to conduct its own review of proposals submitted to the SEC and re-determine the appropriateness of the SEC’s action. If Glass Lewis believes that the SEC did not make the right decision, they will take retaliatory action against the company by punishing members of the board for utilizing their legal right to petition the Commission. This announcement is a thinly-veiled threat directors who consider petitioning the SEC to exclude irrelevant shareholder disclosures.
As one of only two proxy advisory firms, which are heavily relied upon by institutional investors to recommend how they vote their proxies, an adverse recommendation from Glass Lewis has significant sway over the outcome of a vote.
This announcement comes after reports that the SEC has granted more of these exclusion requests in 2017:
“The Securities and Exchange Commission allowed a greater number of companies to exclude shareholder proposals during the 2017 annual meeting season, according to a report by law firm Gibson, Dunn & Crutcher LLP.
Of course, this move by the SEC limits the outsized influence of Glass Lewis, who is then unable to push boards and recommend that their clients vote for the proposals.
As SEC staff prepare for the upcoming roundtable on the proxy process they should take note of the proxy advisory firm’s threat to disregard regulators and should seek ways to limit this concentrated power.