The Senate is now looking at proxy advisors and shareholder proposals, but before we look at that in detail it’s worth noting the views of the SEC top brass.
In a speech last week at Columbia University in New York City, SEC chair Jay Clayton announced the regulatory priorities for 2019 —saying of proxy advisory firms: “I believe there is growing agreement that some changes are warranted.” This built upon his remarks at the recent proxy process roundtable where he spoke of a consensus that the proxy ‘plumbing’ needs a major overhaul.
But at Columbia he went on to say: “I also believe it is clear that we should consider reviewing the ownership and resubmission thresholds for shareholder proposals.” On these last two, however, it seems Clayton attended a different roundtable from the one I listened in to.
The general impression was that the panels on shareholder proposals and proxy advisors were a waste of time, especially when the proxy plumbing issues were so complex and so urgent. Several commentators have suggested this demonstrates Clayton is in thrall to the US Chamber of Commerce, the business lobby group with a bee in its bonnet about the proxy firms.
He may not be the only one.
Also last week the Senate banking committee heard evidence on these issues.
Of the three witnesses called, two had already presented to the SEC – Michael Garland, the NYC Assistant Comptroller, and Thomas Quaadman, of the Chamber’s Center for Capital Markets Competitiveness.
The new contributor was Daniel Gallagher, the former SEC commissioner who is now Chief Legal Officer to drugs firm Mylan (which recently settled $465m with the US Justice Department for overcharging for its EpiPen product).
Gallagher wholly blamed the SEC for the overweening power of proxy advisory firms; he was often on the attack against them when a commissioner, though with little result.
Like many of the critics of proxy advisors, Gallagher made a number of unsubstantiated accusations. The first was that proxy advisory firms – all of them – will be lenient with those that purchase their corporate advisory services and harsh on those that don’t. In reality, only one proxy advisory firm sells corporate advisory services.
He also relied on American Council for Capital Formation (ACCF – see under Main Street Investors Coalition) research that “shows” that “175 entities, representing more than $5 trillion in assets under management, follow ISS’s recommendations over 95% of the time”.
Clearly, like Clayton, Gallagher was not watching the same roundtable as me.
Both ISS and Glass Lewis explained very clearly that these so-called robo-recommendations were made based on the entities’ own proxy voting guidelines. For investors to vote against their own guidelines would not make sense. Ultimately, he recommends that the Senate passes the proposed Corporate Governance Fairness Act.
Gallagher’s assertions on shareholder proposals mirror his accusations about proxy advisors: “In other words, the vast majority of proposals are brought by individuals or institutions with idiosyncratic and sometimes political agendas that are often unrelated to, or even in conflict with, the interests of other shareholders.”He recommends revising “the absurdly low holding requirements” needed to submit a shareholder proposal and moving to a percentage test; clarifying and bolstering requirements regarding the substance of shareholder proposals; and increasing the thresholds required to re-submit a failed shareholder proposal from one year to the next.
Garland’s testimony follows and expands on his presentation to the SEC roundtable with some unanswerable observations: “I find it remarkable the impetus for onerous regulation of those firms is coming from those who are the subject of the analysis — particularly board members, corporate executives and their lobbying organizations — rather than from the institutional investors who pay for the research services,” he said, noting that if there is a problem, it’s investors’ problem as clients.
His concerns – especially as ISS and Glass Lewis vote NYC shares according to the NYC’s own guidelines – are that without proxy advisor firms “to pull information into a consistent format that permits quick reference to comparable data” time and staffing constraints during proxy season would making decisions about voting such shares impossible.
Indeed, he said that critics were “seeking to remedy problems that do not exist.”
He also defends against an accusation that shareholder proposals are preventing companies from going public: “The notion seems to be that a company would forgo the benefits of efficient public equity markets to avoid the possibility that, sometime in the next decade or so, a shareowner might submit a non-binding proposal to (for example) ask for improved disclosures around climate risk.”
Garland points to the success of his own fund’s Boardroom Accountability Project, which successfully introduced proxy access [the shareholder right to nominate directors] after three proposals to introduce it (in 2003, 2008 and 2010) by the SEC itself were blocked by the Business Roundtable and the Chamber.
On the matter of submission thresholds, he repeats that, yes, $2,000 worth of shares is low, but even adjusted for inflation it would be only $3,000. A percentage threshold would remove the ability of shareholders to present any proposal, as even the NYC funds don’t own 1% of any company. But why should there be a threshold, he asks? “Large institutional investors do not have a monopoly on good ideas.” And in any case, the proposal process is already tilted in favour of management, since, for example, Netflix has refused to implement multiple shareowner proposals receiving majority votes.
In addition, shareowner proponents are limited to 500 words (corporate defences have no limit) and “corporate management can call on company resources to hire counsel to pursue no-action requests, while the proponent engages in that debate at her own cost”.
Moving on to the remarks from the Chamber’s Quaadman, he opened with the statement that proxy advisors are “riddled with conflicts of interest, operate with little transparency, and are prone to making significant errors in vote recommendations”.
“While many issues were laid on the table [at the roundtable], we believe that the top priority for the SEC [my emphasis] should be reforming the proxy advisory system”.