Phrases like “proxy advisory firms” and “resubmission thresholds” don’t exactly roll off of the tongue, which may explain why the policies associated with those elements of the shareholder system don’t always get a lot of attention.
But if recent remarks by Jay Clayton, the chairman of the Securities and Exchange Commission (SEC), are any indication, 2019 could shape up to be a big year for Main Street investors.
Speaking earlier this month about the SEC’s vision for the year ahead, Clayton discussed in some detail how his agency plans to make corporate governance – that is, the rules and regulations that apply to companies and their interactions with shareholders – a significant focus in 2019.
Bolstered by a 2018 filled with work at the agency level, including a November roundtable to discuss the proxy process, two areas of corporate governance are especially ripe for action next year:
Proxy advisory firms
I believe there is growing agreement that some changes are warranted. For example, there should be greater clarity regarding the division of labor, responsibility and authority between proxy advisors and the investment advisers they serve. We also need clarity regarding the analytical and decision-making processes advisers employ, including the extent to which those analytics are company- or industry-specific.
Last month’s roundtable provided a platform for discussing much-needed reforms to the proxy system. In short, outdated proxy rules have allowed special interests to take advantage of the system, to the detriment of Main Street investors and pensioners.
One key takeaway from the roundtable is the fact that there is no uniform set of regulations that applies to the proxy advisory industry, which is plagued by conflicts of interest and a lack of transparency. Plus, just two firms, ISS and Glass Lewis, exert outsize influence over the industry. The lack of oversight for proxy advisory firms stands in stark contrast to past determinations about the need to oversee and regulate the proxy process for public companies.
Taking concrete steps to reform the proxy process will mean better information in the hands of investors, fewer impediments to capital formation, and more incentive for businesses to go and stay public.
[T]he resubmission thresholds have been in place since 1954. A lot has changed since then. We need to be mindful of these changes, and make sure our approach to the very important issue of shareholder engagement reflects the realities of today’s markets and today’s investors.
The decline in the number of public companies in recent decades is a multifaceted issue with no single solution, but updating shareholder resubmission thresholds would make a big difference.
David Hirschmann, president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC) put it this way during a recent hearing, “Rules governing shareholder proposals have allowed proposals dealing with social or political matters to proliferate. These are not the types of subjects that should be debated in boardrooms, and yet, public companies increasingly have to grapple with them.”
Current SEC rules allow proposals that have received very low support to be resubmitted year after year, even if a vast majority of shareholders continually vote against them. Corporate resources are expended to deal with these “zombie” proposals every year, often posing a distraction for boards that have a duty to focus on the long-term best interests of the company.
Closing the gap between activist investors and Main Street investors by raising resubmission thresholds to a more reasonable level would be good for shareholders and good for encouraging more companies to pursue IPOs.