In between government shutdowns for the funeral of former president George Bush and the stoppage related to the border wall, I spoke to SEC Commissioner Robert Jackson. At the time, the hot topics were related to the SEC proxy roundtable: proxy plumbing, shareholder proposals, and proxy advisors. Jackson was enthusiastic about the first issue, less so about the second two.
“It is an important moment in the history of corporate voting in America because for the first time we have bipartisan consensus among a broad range of market constituents and the Commission, not only that we should do something about proxy plumbing but about what we should do.
“People are very keen for us to require some kind of vote confirmation for investors in the United States. If an investor casts their vote in a corporate election, they ought to be able to get confirmation that their votes have been counted.
“What I’d like to do is for us focus on getting that done. Distractions, like reform of the proposal system or dealing with proxy advisers, are likely to slow us down and introduce partisan division where there doesn’t need to be any.
“To be specific, we last thought hard about proxy plumbing in 2010 and came out with a very thoughtful and detailed release. But we haven’t done anything because the Commission attached other issues to that release. I have urged the chairman and my colleagues to focus on fixing plumbing first, and we can get to the bêtes noirs of the corporate lobbyists later.”
Jackson had made remarks in an earlier speech about the many Dodd-Frank rules which have still not been enacted. He noted that there was a lot to do and to spend time on two questions which don’t have a consensus view would not be the best use of the SEC’s time.
“My real concern is prioritising things that are important to investors. I can’t think of a single significant investor who thinks that’s [proxy advisers and shareholder proposals] the way we should be spending our time.” I told him about the comments made by NYC’s Michael Garland to the Senate committee, that complaints about proxy advisers all came from the subjects of their analysis rather than from any of their clients.
“He’s quite right,” said Jackson. “The key thing to understand about the proxy advisory firms is that investors are very free to ignore their advice. And investors often do. In fact, if you look carefully at the evidence you’ll see that the supposed power of proxy advisory firms is not nearly as significant as corporate lobbyists make it out to be. What’s happening is that they are confusing correlation for causation.“They see that ISS’s recommendations line up with vote count outcomes and they assume that ISS has caused them to vote that way, as opposed to the much more plausible interpretation, which is that ISS bases its recommendations on the opinions of the shareholder body which reflect the way that they actually vote. What’s striking to me is that my Republican friends are so stridently anti-regulation and the only area that they have discovered that they want to regulate is the provision of advice to American investors.”
Jackson went on to discuss the power of big investors, saying: “The most pressing corporate governance challenge of our time is the enormous influence that large institutions have over corporate elections. I testified to the Federal Trade Commission on that issue just last week.
“The big institutions should be held accountable for the way they cast their votes.”
“In those remarks I push very hard and say that if investors are going to vote American retirement savings we should know a lot more about how they’re doing it and why they cast the votes they do. And I think, frankly, retail investors should know at the point of sale the way their shares are going to be voted so that they can have a meaningful choice about how their money is going to be voted. I call for more transparency in this process.”
Jackson referred to a paper by Emilio Catan and Ryan Bubb that used machine learning techniques to analyse millions of votes that BlackRock and Fidelity have cast and showed some important differences among them.
“Do ordinary investors really care about that?” asked Jackson, “I don’t know, but I’d love to find out. But I do think the big institutions should be held accountable for the way they cast their votes.” I commented that I thought ordinary investors might care if they had access to the information. “There are all manner of things that we thought investors didn’t care about,” responded Jackson, “like compensation, only to find that they do.”
Could voting on ESG be a differentiator between ETFs marketed by, say, Vanguard and BlackRock?
“There are a number of ways you could explain that to investors;” said Jackson, “Vanguard votes with management x% of the time whereas BlackRock votes with management y% of the time. An ordinary investor could not gain that kind of understanding from looking at a form N-PX [covering mutual fund disclosure]. Academics have begun to use that data in fascinating ways, and we should think about new ways to tell investors how their stock has been voted.”
Part two of this interview will run later this week.