The proxy advisors have had their say at the Proxy Process Roundtable, a crunch meeting this week at the SEC.
Since their most consistent critics were not on the relevant panel, they had, frankly, a pretty easy time. Indeed, it looked more like a ‘love-fest’ than the mauling they have had in the past.
We will review the entire event in an in-depth piece at a later date, but this is a good moment to step back and look at the proxy advisors’ submissions to the Roundtable.
While ‘defensive’ is a word that could characterise all three, from Minerva Analytics, ISS and Glass Lewis, they all deal with both the role of the proxy advisory firm and ‘proxy plumbing’.
Minerva provides proxy advisory services – though not voting recommendations as it is careful to stress – through its subsidiary Manifest.
Perhaps because of this, its submission opens with a list of 10 immediate improvements to the ‘proxy plumbing process’ which it says is bogged down by “cumbersome notification processes, tortuous and duplicative transmission of instructions, lack of confidentiality and process monopolization by a few powerful intermediaries”.
It recommends the following to mitigate these issues: Legal Entity Identifiers (LEI) so that shareholders can be uniquely identified; transfer of provision of beneficial ownership data from the SEC to the Depository Trust and Clearing Corporation (DTCC); eliminating the OBO/NOBO distinction – shareholders are ‘non-objecting beneficial owners’, or NOBOs, or they are OBOs, if they have objected to the disclosure of their identities and share positions.
Other recommendations are aimed at removing intermediaries to simplify the process, such as: bringing the record date, the date on which shareholders must prove they hold the shares, to within 48 hours of the meeting; allowing parties to transmit voting instructions directly to the tabulators; and removing mandatory voting or standing instructions.
Minerva also calls for fee transparency and an audit of the fee structure to identify conflicts of interest, as well as bringing proxy regulation under the SEC’s authority rather than delegating parts to the exchanges. In general, Minerva recommends a more European-style proxy process. For example, in a radical recommendation on shareholder proposals, it suggests removing the SEC from the shareholder proposal approval process altogether and forcing shareholders and corporations to sort it out on their own, with, perhaps, reference to a Public Company Accounting Oversight Board-style Governance Council made up of a range of stakeholders.
The ISS submission begins with a defences of proxy advisory services. It rebuts, for example, misconceptions that investment advisers are over-reliant on proxy firms. It also tackles the issue of perceived conflicts of interest, particularly with reference to ISS Corporate Solutions.
ISS offers fewer recommendations on fixing the proxy process. On this, the most important topic, according to its clients, is end-to-end vote confirmation. It is much less inclined to allow access to beneficial ownership information for this purpose as it is unclear whether its clients would wish to compromise the confidentiality of the OBO system.In fact, surveys suggest they are split down the middle. However, it believes that the DTCC could provide a ‘trustee’ service that could sit alongside the proxy voting chain that could allow it to confirm a vote without having access to the owners’ information.
In addition, it also supports the use of LEIs. It is also supportive of moving the record date closer to the annual meeting, though its recommendation is two weeks prior, and for agendas for annual meetings to be released well in advance of record dates. More than half of clients asked for agendas two weeks prior. More than a third said such a change would “increase the likelihood of their recalling their shares” [that are out on loan].
Finally, a strong case is made for the universal ballot, because any investor wanting to make a cross-slate vote, or vote for directors on both the company ballot and a dissident ballot, must attend the annual meeting and manually add directors to one or other ballot and these votes must be counted manually. This is a badly cumbersome process that deters most, even large, shareholders from pursuing such a course.
Glass Lewis, which made its submission on the morning of the Roundtable, also makes some good points. Rationales for arriving at a vote decision are not the same, says the submission, either among investors or proxy advisors, even if the vote is ultimately the same.
Indeed, CEO KT Rabin said on the panel that if she had a dollar for every time someone had said “right decision, wrong rationale” to her she would be able to take the entire roomful of people at the SEC out for a drink. In addition: “it should come as no surprise that the voting results may mirror the recommendations issued by proxy advisors as there are many commonly accepted governance principles used by both investors and advisors”.
As ISS also said, Glass Lewis votes the vast majority of its clients’ shares in line with those clients’ custom voting policies, and not in line with their recommendation. Like ISS, Glass Lewis provides ‘data only’ reports to issuers prior to publication. Minerva no longer does this as too many issuers were breaching copyright.
And while it can’t boast anything as potentially conflict-prone as a corporate advisory service, critics have not been slow in attacking Glass Lewis through its owners, the Ontario Teachers’ Pension Plan Board and Alberta Investment Management. It includes prominent disclosure of its owners’ positions in each relevant Proxy Paper report.
Glass Lewis is not regulated as an investment advisor, as is ISS, and has no intention of becoming one, but, like Minerva, it stresses the existing Best Practice Principles group that all the major proxy advisors are members of, adding that principles, unlike regulations, can and do develop in line with regulatory changes.
Finally, it adds its own list of fixes on the other Roundtable topics: vote confirmation; advanced disclosure of agendas, 14 days before record date; and record dates no closer than 21 days because of retail investors receiving proxy information via mail. Current hurdles and protections for shareholder proposals, it says, are working because low submission and resubmission thresholds are mitigated by no-action relief.