December 11, 2018
Today, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton told the Senate Banking Committee that he has directed his staff to put together a proposal for the Commission’s consideration about issues raised at the recent SEC roundtable regarding proxy advisors. Today’s testimony comes on the heels of another Senate Banking Committee hearing, which featured the growing bipartisan consensus that additional scrutiny of proxy advisory firms is needed.
In his written testimony, Clayton cited consensus amongst the impacted stakeholders as a key reason for pursuing regulatory action:
“For proxy advisory firms, I believe there is growing agreement that the current dynamics among four parties, (1) proxy advisory firms, (2) investment advisers who employ those firms and have a fiduciary duty to their investors, (3) issuers and (4) investors at large, including our Main Street investors can be improved.”
Specifically, Clayton singled out the need to clarify what investment advisers are responsible for versus proxy advisory firms and increased transparency as key priorities:
“For example, there should be greater clarity regarding the division of labor, responsibility and authority between proxy advisors and the investment advisors they serve. We also need clarity regarding the analytical and decision-making processes advisers they employ. On this last point, it is clear to me that some matters put to a shareholder vote can only be analyzed effectively on a company-specific basis, as opposed to applying a more general market or industry-wide policy.”
Clayton also believes additional scrutiny of conflicts of interest and allowing companies to review recommendations to ensure accuracy should be considered:
“Finally, there were other issues raised at the roundtable that we should consider, including: (1) the framework for addressing conflicts of interest at proxy advisory firms, and (2) ensuring that investors have effective access to issuer responses to information in certain reports from proxy advisory firms.”
Senate Banking Committee Chairman Mike Crapo agreed that the SEC should address regulatory oversight over proxy advisory firms and issues with the proliferation of environmental social and political shareholder resolutions:
“Many members [of the Senate Banking Committee] expressed interest in continuing the discussion on the appropriate relationship between proxy advisory firms and market participants as it relates to shareholder proposals and corporate governance. I’m concerned about the misuse of the proxy voting process and other aspects of the corporate governance system to prioritize environmental, social, and political agendas over the economic interests of investors…Many of the rules governing our system have not been examined for decades and I encourage the SEC to take an aggressive approach addressing the scope and appropriateness of previous regulatory actions.” (emphasis added)
In his questioning, Senator Toomey asked Clayton about some of the broader implications of regulatory impediments and how the increase in environmental and social resolutions impacts the attractiveness of the public market. Specifically, Toomey asked if the increase in environmental and social resolutions discourages companies from going public. Chairman Clayton responded that they do:
“To the decisionmakers who decide whether a company should go public or not, when they look at that kind of activity, is it a check mark in the negative box? Yes.”
As unaccountable proxy advisory firms increasingly support environmental and social resolutions, companies increasingly perceive that becoming a public company is more onerous than obtaining private capital. Fewer public companies hurt Main Street investors, who then have fewer opportunities generate healthy returns on their investments.
The Main Street Investors Coalition will continue to monitor developments at the SEC as the staff works on a proposal. Given the diverse array of support for additional scrutiny of proxy advisory firms, we agree with Senate Banking Committee Chairman Crapo that SEC staff should put forward an “aggressive” proposal to address the need for additional transparency from proxy advisors. One that will mitigate conflicts of interest, help all stakeholders understand how they derive their decisions to ensure they are factually accurate, and ensure recommendations pertain to each company’s specific circumstances.