February 8, 2019
Yesterday, the Bipartisan Policy Center and American Council for Capital Formation hosted a discussion on corporate governance’s increasing role in public policy that highlighted a growing consensus around reforming key aspects of the proxy advisory system. The event featured former commissioners of the Securities and Exchange Commission (SEC) and representatives from trade groups, institutional investors and asset managers from across the political spectrum and continued the discussion from the SEC’s roundtable on the proxy process in November 2018.
The Bipartisan Policy Center was an appropriate setting for such a discussion, as remarks from corporate governance experts with markedly diverse backgrounds underscored a solid agreement on how to address the factual errors that currently riddle proxy advisor recommendations. Across all three panels, many experts voiced support for a new portal for companies to view and respond to proxy guidance before final publication. This system would, according to former SEC Commissioners Elisse Walter and Troy Paredes, appropriately employ technology and would give companies a few days to correct any errors or misinterpretations.
Former SEC commissioners Elisse Walter and Troy Paredes advocate for a portal that allows companies to correct errors in proxy advisor recommendations.
Tom Quaadman, Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness, agreed that this would provide much-needed transparency and ensure that asset managers following proxy advisors advice are upholding their fiduciary duties to their clients.
Darla Stuckey, President and CEO, Society for Corporate Governance, provided color on exactly why a portal like this is necessary, explaining that smaller asset managers frequently automatically align their votes with the proxy advisor recommendations, lacking the resources to do any sort of outside research and diligence.
Barbara Novick, vice president of BlackRock, the world’s largest asset manager, also voiced her support for such a portal. The company should have the opportunity to disagree with recommendations and provide evidence to support its position, she argued.
But Novick didn’t stop there, advocating for regulations that would ensure proxy firms are subject to the same disclosure requirements as the rest of the financial services industry – a move that would force the firms to reconcile with their rampant conflicts of interest.
As for the timeline of reform, both former commissioners predicted that the SEC will take action on this issue in a way that it has not in the past decade. This aligns with recent statements from current SEC Chairman Jay Clayton noting that the SEC will delve deeper into proxy advisor reform in 2019.
The discussion was also a reminder of how much work still has to be done around other issues in corporate governance. Walter and Paredes noted that the shareholder resolution process is also in need of improvement. Stuckey added that shareholder resubmission thresholds have stayed static since their establishment in the 1950s and is wildly outdated for the world of corporate governance that has grown far more diverse and complex over the past half-century.
This isn’t the first time we are seeing concern over the proxy process spanning the political spectrum. Last year, several pieces of legislation also drew attention to the topic, such as a bipartisan Senate bill aimed at addressing the lack of transparency and conflicts of interest in proxy advisory firms. Indeed, former commissioners Walter and Paredes pointed out that the present push by the SEC to revisit this topic had roots as far back as 2010 when they were both serving at the SEC. Revisiting these topics now shows that these concerns have only grown, and that a bipartisan consensus is emerging around several specific improvements the system is in dire need of.
Yesterday’s event is yet another step forward toward corporate governance reform. As the Main Street Investors Coalition has been tracking, momentum for reform has continued to swell since the SEC’s November roundtable, to the point that not even a month-long government shut down deterred hundreds of companies from making their grievances public. The fruitful discussion between corporate governance experts yesterday underscores the bipartisan appeal of several simple yet effective solutions. The Main Street Investors Coalition is excited to see where the discussion goes next.