August 29, 2018
Ahead of the upcoming Securities and Exchange Commission (SEC) roundtable on the proxy process, SEC Chairman Jay Clayton and the Commissioners should turn their attention to issues the Society for Corporate Governance has raised surrounding proxy advisory firms.
The Society for Corporate Governance represents corporate secretaries and business executives in governance. Corporate secretaries are responsible for ensuring corporations are governed in accordance with state law. Specifically, they must ensure that Board members have the proper advice and resources to discharge their fiduciary duties. Corporate secretaries often also serve as a liaison between a company’s board, senior management, and shareholders. They are on the ground floor when companies are faced with shareholders who use the services of proxy advisory firms.
In a statement regarding the upcoming roundtable, Chairman Clayton demonstrated interest in discussing many issues that the Society for Corporate Governance has addressed in the past, such as “…the extent of reliance on these firms is in the best interests of investment advisers and their clients…”, “whether issuers are being given appropriate opportunity to raise concerns if they disagree with a proxy advisory firm’s recommendations”, “whether there is sufficient transparency about a proxy advisory firm’s voting policies and procedures..”, “whether there are conflicts of interest with respect to related consulting services provided by proxy advisory firms”, and “the appropriate regulatory regime for proxy advisory firms…”
Given the key role that corporate secretaries play in the proxy process, it isn’t surprising that the Society for Corporate Governance has flagged, for some time now, issues their members have encountered with proxy advisory firms.
Most recently, the Society for Corporate Governance has come out in support of the “Corporate Governance Reform and Transparency Act” which was designed to “improve the quality of proxy advisory firms for the protection of investors and the U.S. economy, and in the public interest, by fostering accountability, transparency, responsiveness, and competition in the proxy advisory firm industry.”
Darla Stuckey, Senior Vice President of Policy and Advocacy at the Society for Corporate Governance testified in front of Congress on issues faced by her members in 2013, and laid out many of the same issues the Main Street Investors Coalition has raised with proxy advisory firms:
“…proxy advisory firms tend to implement mechanical policies, including check-the-box approaches that clients can tweak in ‘custom policies’ that still are severely constraint analytically.”
Stuckey also noted the total lack of SEC oversight in the proxy industry, despite evidence that proxy advisory firms have a significant sway over shareholder votes:
“Proxy advisory firms may produce reports with material misstatements and omissions without any legal consequences for the proxy advisory firm.”
“There is no regulatory regime that governs the manner in which these firms develop their policies or form the recommendations they make. The policy process at proxy advisory firms is not sufficiently transparent. It is not clear who actually participates in the process of policy development.”
Finally, Stuckey pointed out multiple ways in which proxy advisory firms have conflicts of interest:
“The Society believes that proxy advisory firms who are acting as voting agents for the institutional investors have a conflict of interest in charging companies for consulting services that the institutional shareholders themselves are providing free of charge.”
“…some proxy advisory firms make voting recommendations in favor of proposals that are being submitted by investors that are clients of the proxy advisory firm.”
“…proxy advisory firms will make recommendations that will increase demand for the services they or affiliated companies offer to the same institutional clients.”
As SEC staff prepare for the upcoming roundtable on the proxy process, we urge them to build an agenda that will facilitate a robust discussion that hits on many of the issues raised by the Society for Corporate Governance. The direct experience in corporate governance provided by corporate secretaries will be invaluable to the SEC as they consider changes necessary to make the proxy process work for retail investors.