June 21, 2018
Today at the annual meeting of the Society for Corporate Governance, SEC Commissioner Robert Jackson emphasized that retail investors need more and better capabilities to be involved in voting on shareholder resolutions.
Following Jackson’s opening remarks, which largely centered on the importance of good cybersecurity practices and disclosures to investors, a conference attendee asked the commissioner on his views about whether the SEC should be doing more to help retail investors be involved in voting their shares.
“You’re wondering, when a retail investor gets a proxy statement, does it give them the information they need, in a way that’s compelling and clear, so they can make an investment or voting decision,” he replied. “I’m worried that it doesn’t.”
Jackson’s view is supported by the evidence that only a minority of retail investors in the market actually vote their shares. A study by PWC and Broadridge Financial Solutions found that only 29% of retail shareholders took part in voting on proxy statements in 2017, while 91% of institutional shareholders exercised that same power.
One key difference between retail shareholders and institutional investors is that most institutional investors enlist the help of proxy advisory firms, which provide services to streamline the process of voting one’s shares on a shareholder resolution that comes to a vote. Commissioner Jackson also acknowledged the widespread concern that these proxy firms and their institutional investor clients are not acting in the best interests of anyone but themselves, rather than the investors whose money they control through index funds.
“I share the concern that a few very large and powerful shareholders have a great deal of influence on any vote that takes place in corporate America,” Clayton remarked in response to a question who asked his opinion on how major asset managers and proxy firms wield outsized influence. “And I also hear corporate boards when they say, that they feel ISS and Glass Lewis and other advisory services have too much influence, and a lot of influence.”
Another participant raised the question of dual-class shares being issued by companies that want to concentrate voting power in the hands of certain investors. Some investors view this as problematic at certain companies, and, where the SEC falls on the issue could be especially important for future corporate governance practices.
Commissioner Jackson explained that his position is that it should be up to stock exchanges to set the rules for what types of stock participating companies could sell, along with setting some standards for shareholder rights. He noted, however, that exchanges are sometimes hesitant to act.
In those cases, some large investors have been asking index fund providers and institutional investors to impose similar restrictions on the market by excluding certain companies from popular index funds – which could be detrimental to retail investors. “They’re telling the indexes, ‘we want these companies excluded’… and that troubles me greatly,” he responded.
Why is this a concern for the SEC? In Commissioner Jackson’s view, it’s because “most Americans, most 401(k)’s, Mr. and Mrs. 401(k), are in indexes. They put their retirement funds in 401(k)’s that are in the S&P, they’re in the Russell, they’re in indexes. If we leave America’s fastest growing companies out of those indexes, increasingly Mr. and Mrs. 401(k) are not going to be in our most exciting companies. They’re not going to be part of the growth story in this country. To me, that’s profoundly troubling.”
On the whole, Commissioner Jackson reaffirmed the SEC’s focus of protecting the everyday Americans who invest their retirement savings from the powerful interests of Wall Street. Indeed, they should have every opportunity to see their investments grow, and not have their options limited – or interests maligned – by powerful companies like asset managers and proxy firms. The solutions, Commissioner Jackson acknowledged, will not be easy, but he commended the efforts of SEC Chairman Jay Clayton to reform the system for the betterment of the economy. Hopefully, these efforts will continue.