Paul Hodgson: Power, politics and proxy voting guidance

The market is starting to absorb the implications of the SEC announcement

In the week or so since the Securities and Exchange Commission’s guidance on proxy voting was released the market has had time to absorb its implications. This is a follow-up to Paul Hodgson’s initial reaction piece.

Reaction to the SEC’s ‘guidance’ on the use of proxy advisors has largely been cautious. “Not as bad as it could have been,” was one early reaction, though as the guidance was considered further, that position has changed to one of greater concern.

The two largest proxy advisors, ISS and Glass Lewis, both said they would carefully review the guidance. But ISS Chief Executive Gary Retelny added: “However, we are deeply concerned that aspects of the guidance may significantly undermine our ability to deliver independent, timely and accurate data, research, insights and perspectives to aid in the discharge of our clients’ fiduciary duties.” He also raised concerns about additional costs.

His peer at Glass Lewis, Katherine Rabin, reiterated the efforts that the company makes to ensure accuracy, its provision of fact-only versions of its reports to issuers, its open door policy on engagement with issuers and its Report Feedback Service, which allows companies to “communicate their perspectives regarding our analysis to [GL] clients.”

But she also added: “It is in the best interest of our investor clients to be able to continue to operate our business and offer services in a manner that doesn’t compromise the independence, quality and timeliness of the research that Glass Lewis provides.”

Raj Thamotheram of Preventable Surprises agreed with my analysis that the SEC had “become captured by corporate interests when it comes to proxy voting”. He asked some awkward questions about whether mega investors who say they are active owners actively lobbied against the proposed change or were merely bystanders.

The two SEC commissioners who dissented from the guidance – Robert Jackson and Allison Herren Lee complained about the lack of consultation beforehand, so it is likely that no one lobbied against it as they did not know was coming.Investors are, however, lobbying against the SEC’s clear intent to mess with shareholders’ ability to file resolutions – another sign of its corporate capture.

Sara Wilson, CEO of Minerva, said that she thought the guidance was a mixed bag. “I think Allison Lee has good point to make about ‘should’ having considerable weight,” referring to the commissioner’s statement that ‘should’ in SEC guidance for a highly regulated industry actually means ‘must’.

“It puts a bullseye on the back of proxy advisors”

She also noted that some of the themes chime with both the revised Shareholder Rights Directive II and with the guidance from the industry’s Best Practice Group (BGG). “Issuer access is highly controversial,” she added, noting that the EU’s MiFID rules do not allow it. “This is about power and politics, not about analysts.”

Further concerns were raised by Ken Bertsch at the Council of Institutional Investors, who said in an email to RI: “Our major concern is ‘the other shoe to drop’ – that is the rulemaking to come on proxy advisors and exemptions from solicitation rules. We do not know what commissioners plan, but if they make the exemptions contingent on, say, company pre-review of reports, or deference to company peer groups, or other interference with methodologies – that would be of great concern.”

For different reasons, he also agreed with Commissioner Jackson that the guidance also creates further barriers to new entrants into the business: “The fact that the commission now has said clearly and unequivocally that proxy advice is solicitation and subject to 14a-9 fraud rules puts a bullseye on the back of proxy advisors.

“It is difficult to gauge how much this has changed the scene, as the SEC staff had already said the same thing, and some precedents would seem to imply the commission already had this view. But at a minimum, if I were contemplating entering this business, I would be much more hesitant now.” In other words, this creates a much more significant barrier to entry for new firms and, for the time being at least, cements the positions of the dominant players.