February 13, 2019
Two opinion pieces published this week highlight continued momentum on the need for reform of the proxy process, as impacted stakeholders continue to submit comments to the U.S. Securities and Exchange Commission (SEC) following the roundtable on the issue last fall and as the SEC considers a proposal for specific reforms.
In a recent issue of Investor’s Business Daily, Main Street Investors Coalition advisory council member Nan Bauroth went through the laundry list of problems intrinsically associated with the proxy industry.
Bauroth, a retail investor and advisor to the Main Street Investors Coalition, writes:
“As the number of shareholders investing in funds has exponentially grown in the past decade, fund managers have begun to wield tremendous influence over corporate governance at American public companies, even though these managers do not actually own any stock themselves. Unfortunately, too many asset managers expend little effort in determining how to properly execute their newfound proxy voting power.”
Even more troubling, these managers rely on proxy advisory firms – third parties that guide institutional investors on how they should vote at corporate shareholder meetings – that are wielding inflated influence on company’s boards. Problems related to proxy advisors are numerous, with studies indicating that politically motivated resolutions end up creating greater costs for the companies, while ‘zombie’ proposals are often kept alive at a cost to investors’ time and money.
“Among other failings, proxy firms have also been criticized by public companies and academics for using ‘one size fits all’ methodologies, a lack of transparency in decision-making, conflicts of interests between business units, a track record of incorrect guidance and an inability to correct errors.”
Frequently, the resolutions that they weigh in on are political in nature; proxy advisors are pushing companies towards environmental, social and governance (ESG) issues, even while there is an ongoing debate over how to properly measure such factors.
These issues have broad implications not only for corporations but for society as a whole. The Bipartisan Policy Center’s John Soroushian and Timothy Doyle of the American Council for Capital Formation wrote a joint op-ed published in Roll Call calling for proper regulation of the proxy industry, noting that political issues such as immigration, gun control and human rights are making their way into the boardroom:
“This developing trend seems unlikely to change anytime soon and has stirred debate over the proper role of a corporation in addressing political questions. That’s made the role of the government in regulating public corporations and setting the rules of corporate governance all the more critical.”
As Sororshian and Doyle conclude, “Politics is seeping into corporate boardrooms, and that trend is not going away. Regulators must make sure corporate governance policies are ready for it.” The SEC should heed these calls and ensure that the proxy advisory industry is held to the highest levels of transparency and fairness.