As investors look forward to next week’s major SEC proxy process roundtable, one thing is clear. As well as academics, politicians and asset managers, the list of submissions for the event come from a wider range of commenters than I can recall seeing in an SEC comment period, at least recently.
The SEC yesterday announced the agenda and panelists for this eagerly awaited event, which takes place on November 15, a week before Thanksgiving.
Teamsters, nurses, retirees, widows, farmers, and even someone, Lacie Grisley, who says she is “a member” of a group called the Main Street Investors Coalition, have all written in horror at the outsize influence of proxy advisors and the hijacking of the shareholder proposal process to support political and social agendas.
All of these individual submissions repeat the same ‘conflicts of interest’, ‘lack of transparency’ and how ESG proposals are politicising the proxy process line. Many also claim that H.R. 4015, The Corporate Governance Reform and Transparency Act, is a bi-partisan piece of legislation. It passed the House on strict party lines, 238 to 182. That is not bi-partisan. That is the opposite of bi-partisan.
In a puzzling development, submissions from individuals Barb Gillis, James L Martin, Rose Marie Malatesta, Linda Yasinac, Jessica & Alan Hogenson and Paulius Klimas are addressed to Brent Fields, the SEC secretary, at “A Coalition of Growth Companies”.
I can find nothing on the internet about such a coalition and enquiries were redirected to those sending the letters, who, of course, cannot be contacted as their details are redacted. Brent Fields works for the SEC, not a ‘Coalition of Growth Companies’. It’s possible that these are robo-submissions that all came from one place.
Tim Smith of Walden Asset Management, in his submission, complains of a “a simplistic and inaccurate portrayal” of shareholders’ motives and actions.
In a detailed paper, the Council of Institutional Investors called for “fundamental longer-term improvement” in proxy infrastructure as well as short-term fixes in the current system.
Of the submissions to the Roundtable, one of the easiest to believe and simplest to understand is James McRitchie’s guide to fund investing, in the guise of answering each of the SEC’s questions on: investor experience, delivery, design and content.Of the suggestions he makes, probably the best is to make N-PX disclosures – those filings that record the votes of mutual and other funds – more uniform and easier to understand so you can see how funds have voted your shares. Most shareholders don’t know how their 401-Ks are being voted, so they have to rely on claims from either side of the debate, both of which could be unreliable. His final paragraph is a laundry of list of ‘making things easier’: “Allow universal proxies so I don’t have to go to meetings to split my vote. Ban virtual-only shareholder meetings and encourage hybrid, so boards can’t ignore the tough questions. Break up the monopoly on proxy delivery. Allow independent platforms, like the old Moxy Vote, to collect fees, designed to move proxy delivery from paper to electronic.”
The submission from Sanford Lewis of the Shareholder Rights Group opens with a letter indicating that using up valuable time in the Roundtable on reforming the shareholder proposal process would be a waste of time since it is: “functioning effectively today”.
The remainder of the submission is a reproduction of every piece of research on its web page, much of which rebuts the need, put forward by Republicans in Congress and by the Chamber of Commerce among others, for there to be any reform of the shareholder proposal process in the first place, including its recent report on ‘Shareholder Proposal Decision-Making of the SEC’. The following is a good example: “The Petition does not meet the burden of demonstrating that there is a problem. The petition to exclude more proposals by imposing steeper thresholds for refiling of proposals provides no evidence that shareholders are abusing the rule or that the existing rule is failing to screen out proposals with low investor support. For example, since 2010, proposals on environmental or social issues have only been resubmitted 35 times after receiving prior votes under 20% for two or more years.”
There is also a submission from the American Council for Capital Formation (ACCF), which describes itself as a nonprofit, nonpartisan economic policy organization dedicated to the advocacy of pro-growth tax, energy, environmental, regulatory, trade and economic policies that encourage saving and investment. The ACCF is led by Mark Bloomfeld and George “David” Banks, who serve as its president and executive vice president, respectively.
Banks was the chairman of the Main Street Investors Coalition, which has also made a number of submissions to the SEC on this issue. His name no longer appears on the MSIC website, nor is his chairmanship of the group listed, even as a former post, on his LinkedIn page, so it may be that he has left.
Rather than address the shareholder proposal question, as did McRitchie and SRG, the ACCF submission focuses on the adverse influence of the ‘unregulated’ proxy advisory firms. The letter runs through the usual complaints about ISS and Glass Lewis; no oversight, no transparency, too much influence over voting practices, conflicts of interest. The ACCF supports H.R. 4015, and calls for greater transparency about how proxy advisor recommendations are formulated.
It closes its submission with the following statement: “Lastly, proxy advisors should be required to disclose that much of the data they use are unaudited and incomplete. Proxy advisory firms have failed to adequately disclose to their subscriber [sic] and the wider public that they rely heavily on unaudited and, potentially, incomplete or inaccurate disclosures from the companies they research to make recommendations on environmental and social disclosure-based policies.” But proxy advisory firms rely on publicly available information published by companies to construct their research reports, primarily the proxy statement. Thus, the problem with this statement is that, if it is true, then this means that companies are providing their shareholders with unaudited and incomplete data, which is an unacceptable situation. If it is true, then it is the fault of corporations themselves rather than that of Glass Lewis and ISS.One submission from the MSIC’s chairman Bernard Sharfman also focuses on proxy advisors, while the other adduces the Proxy Voting Rule, part of the Investment Advisers Act, to force “investment advisers to mutual funds”: to disclose their voting policies to avoid conflicts of interest where votes are cast in order to obtain business from public and labour pension funds; and to identify “an actual link” between support for a shareholder proposal and enhancement of shareholder value.
But the submission also makes the following claim: “This new concentration of voting power [in the big three mutual funds – BlackRock, Vanguard and State Street] has its origin in the industry practice of centralizing the voting of mutual funds into the hands of their advisor’s [sic] corporate governance department. In essence, not only would portfolio management be delegated to the mutual fund adviser, but also the voting of proxies. I refer to this as the ‘empty voting of mutual fund advisers.’ That is, they have the voting rights but not the economic interest in the underlying shares.”
But this relies on the argument that corporate governance departments are not part of, nor are controlled by, the mutual funds themselves which have assembled them. A claim that is unlikely to be true.
The National Association of Manufacturers, one of the sponsors of MSIC, has also submitted comments to the effect that, again, although it supports the changes to resubmission thresholds and share ownership requirements in H.R. 4015, concentrates on proxy advisors’ outsized influence on voting. It, too, rehearses the same arguments, lack of transparency and oversight, one-size-fits-all policies, “a profusion of errors” and a refusal to correct them, and “robo-voting”. This last complaint appears to be based on the fact the that proxy advisors follow their clients’ voting instructions, which appears to me to be a business practice it would be difficult to find fault with.