October 9, 2018
A new report from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness entitled, “Zombie Proposals and the Need to Modernize an Outdated System” explains how proxy advisory firms help keep repeatedly rejected shareholder proposals from dying – costing public companies significant time and money. The report aims to inform the Securities and Exchange Commission (SEC) staff as they prepare for the roundtable on the proxy process this November. In addition to its report on zombie proposals, the Chamber’s Center for Capital Markets Competitiveness also released its survey on the 2018 proxy season. Both the shareholder proposal report and the 2018 survey present more justification for reform within the proxy advisory industry.
“Zombie” shareholder proposals are proposals that have received very low shareholder support, yet are resubmitted and included in a company’s proxy statement multiple years in a row. According to the report, 32 percent of all failed proposals between 2001 and 2018 were zombie proposals. The SEC currently has very low thresholds for the amount of support needed to resubmit a failed proposal. According to the report, the low thresholds have allowed activists to take advantage of the proposal process:
“…the shareholder proposal system has devolved into a mechanism that a small group of activists use to advance parochial agendas which are uncorrelated to enhancing the long-term value of public company shareholders. As a result, the vast majority of public company shareholders are disenfranchised by these outdated rules.”
The report also explains how the increase in political and social resolutions, which typically do not receive much support from shareholders, makes the presence of zombie resolutions even worse:
“The low level of support provided by retail investors for politically motivated shareholder proposals – coupled with an increasing skepticism over the role played by public pension plans in promoting such proposals – demonstrate the growing disconnect between the agendas of many who claim to speak for Main Street investors, and the actual investors themselves.”
Unsurprisingly, proxy advisory firms have been elongating the life of zombie proposals by increasingly recommending that their clients support a high percentage of them:
“In 2018, ISS supported 95% of the zombie proposals examined, a slight increase from 88% in 2016.”
Institutional investors generally assume that voting recommendations from proxy advisory firms are well informed, however the companies who are faced with these resolutions would likely disagree. According to the Chamber of Commerce’s Center for Capital Markets Competitiveness survey on the 2018 proxy season, only thirty-nine percent of the companies the group surveyed believe that the advisory firms adequately researched and accounted for all relevant aspects of each proposal. Companies also weighed in on their ability to respond to these crucial voting recommendations,
“Thirty-eight percent of the companies asked proxy advisory firms for opportunities to provide input both before and after the firms’ recommendations were finalized. However, as in previous years, the amount of time companies were given to respond to recommendations varied. Companies again reported being given anywhere from 30 to 60 minutes to two weeks. In 2018, 1 to 2 days was a common response among companies.”
Proxy advisory firms should give companies faced with shareholder resolutions ample time to respond to voting recommendations before they are made final. It is unreasonable to give a company one day to respond to a recommendation that could have far-reaching repercussions for years to come.
In its report on shareholder proposals, the Chamber suggests that the issues brought on by zombie proposals could be minimized if the SEC was to raise the resubmission thresholds that currently allow rejected proposals to be submitted year after year. The report noted that if the threshold was changed to a six percent threshold for the first year the proposal was submitted, 15 for the second, 30 for the third (which was proposed in 1997), only 27 percent of zombie proposal would have been eligible for a fourth year on company ballots. According to the report:
“The most meaningful reform the SEC could undertake would be to raise the “resubmission thresholds” that determine when proposals that receive a low amount of shareholder support may be resubmitted in a subsequent year. Continuous resubmissions are a drain on shareholders and companies alike, requiring significant time and monetary resources to defend against proposals that have time and time again been rejected.”
With its new report and survey, the U.S. Chamber joins a growing chorus of organizations calling out proxy advisory firms’ undue influence on the proxy process, including the Manhattan Institute, the American Council on Capital Formation, and Capital Policy Analytics. The Main Street Investors Coalition agrees that proxy advisory firms are distorting the proxy process by issuing recommendations that are completely divorced from the preferences of the real owners of a company’s shares, retail investors. Although these firms do not actually vote, research shows that they have significant sway over how shareholders vote. As such, the Coalition hopes to see continued momentum from the SEC and Congress to rein in proxy advisory firms and restore retail investors’ voices in the proxy process.