Hugh Wheelan: The US corporate smackdown of proxy advisors fails…for now

SEC’s oversight document bears little danger for investors, bar slightly higher voting costs.

In the end, it was, as we Brits say, a storm in a tea cup.
Despite the concerted effort of corporate lobby groups including the US Chamber of Commerce to smack proxy advisors down, see RI coverage – a sign perhaps that shareholders are beginning to take their responsibilities seriously – the resulting oversight document on proxy firms in the form of a Q&A, published on June 30 by the SEC is innocuous, if not a little verbose. It requires little more than that investors carry out an annual check of their own voting policies and make sure the information they get from their proxy firm is of good quality. As I’ve argued – and most readers will no doubt agree – investors, as professional advisors, can decide themselves whether the advice they get on voting their shares is fair and whether the market is structured to suit their shareholder rights. The laws of freedom of speech and libel cover everything else. The only requirement in the SEC response that genuinely exceeds the good common and commercial sense that should have been applied here from the beginning is that proxy advisors should declare any potential conflict of interest regarding voting advice on a case-by-case basis (more about this later). With hindsight, the omens were good a few days earlier. On June 27, SEC Commissioner Luis A. Aguilar, gave a speech titled: Evaluating Pension Fund Investments Through The Lens Of Good Corporate Governance, which is well worth a read. It states that the SEC backs shareholder corporate governance oversight as a key plank of fiduciary behaviour. Aguilar said: “It has long been understood that a pension fund trustee’s first interest is to proactively preserve its right as an owner of the company. To that end, pension fund trustees must be vigilant in preserving their ownership right by proactively monitoring and working against restrictionson shareholder rights – and by supporting measures that enhance shareholder rights and their ability to communicate their views.”
If only more US pension fund trustees actually took such first principles seriously!
Aguilar continued: “Ultimately, focusing on the quality of a company’s corporate governance infrastructure often provides answers to the most common questions for investors, such as management effectiveness, corporate transparency, executive accountability, and the ability of shareholders to participate in company decisions.” The mooted conflict of interest issue – as most observers know – relates primarily to Institutional Shareholder Services (ISS), the biggest proxy research house which advises some corporate clients on how to improve their governance. This has raised doubts over the independence of its advice, although it’s interesting that companies and rivals rather than investor clients have been the most vocal on the issue. No matter, the SEC believes it merits clarification, and it does. The regulator notes that a business relationship outside of proxy advice would be considered “significant” or “material” if the buyer of advice might have questions about its ‘independence’. But, in its rather tautologous Q&A, the SEC says it is up to the proxy advisor to gauge whether any business relationship could represent a conflict and to make specific mention of it – and the steps taken to reduce it – up front, not via a boilerplate disclosure. The upshot is that it probably won’t make the proxy business any cheaper, and especially not for ISS’ new owners, Vestar Capital Partners, the private equity firm, which bought the company for $364m, earlier this year. However, it might put an end to a US corporate lobby that prefers to treat shareholders as a threat rather than concerned owners; although I have my doubts…