Investor protections are under threat, and the culprit is the Securities and Exchange Commission. Catering to the pleas of corporate interest groups, the SEC is moving quickly to impose new regulations on proxy advisor firms that will undermine a well-established, market-based system that has served investors, companies, and the U.S. equity market for decades.
As state treasurers, we are responsible for safeguarding and investing billions of dollars on behalf of taxpayers, pensioners, college savers, and units of government. As we seek to provide the highest level of service, stewardship, and financial value to our beneficiaries, our offices routinely vote on proxy ballot items. These votes involve fundamental business decisions, including the election of board directors; executive compensation; and environmental, social, and governance risks and opportunities. Proxy voting is a critical means for investors—the actual owners of these companies—to signal issues of concern, hold corporate leaders accountable, and protect their assets.
However, on November 5, 2019, the SEC proposed new rules that represent an unnecessary, unprecedented, and destructive intrusion on the relationship between investors and their advisors.
Institutional investors rely on proxy advisors, like Institutional Shareholder Services and Glass Lewis, to provide timely, independent recommendations on proxy ballot items that require votes every year at tens of thousands of companies around the world.
Proxy advisors have recently been accused, without specific examples, of altering director nominee recommendations at the secret direction of a small cabal of their clients. Advisors are retained to provide independent, evidence-based analysis to their clients, and it is difficult to discern a motive for any advisor to disregard its responsibility to the vast majority of clients who pay for objective reviews at the behest of a tiny fraction of that group. Proxy advisors have helped inform investors, and ultimately corporate leadership, as they develop and institutionalize best practices. These markets worked through corporate democracy, without government intervention.
The SEC appears to believe that proxy advisors have become too powerful and needlessly sway voting decisions. We disagree. Proxy advisors serve at the behest of investors, not vice versa. Proxy advisor firms have developed policies and recommendations that reflect the views of their clients on important issues such as staggered boards, executive compensation, and dual class voting. The information provided drives vote decisions that have helped improve many facets of corporate governance for decades.
Despite the plodding pace of change, corporate insiders bristle at the accountability that the proxy voting system has created. Public company lawyers and bankers, industry trade groups, and corporations have lobbied the SEC to put a stop to the practice.
The approval of these proposed changes will have significant detrimental consequences. Among the many negative impacts could be reckless, unnecessary, and prolonged litigation causing proxy advisors to shirk from delivering their most candid assessments—the exact product that investors pay for and expect from advisors. Increased costs will be borne by proxy advisors’ shareholder clients and their beneficiaries—the very people the SEC is duty-bound to protect.
The SEC’s proposed rules would invite public companies to sue proxy advisors and create a chilling effect on independent perspective. The proposed rules would require proxy advisors to give public companies two advanced drafts of proxy advisors’ reports before investors get access to the advice for which they paid.
Paving the way for securities litigation in the context of proxy advice is a troubling idea. Giving companies a preview of proxy advisors’ recommendations and the ability to interfere with that advice before their paying customers get that information makes that bad idea much worse.
Likewise, investors deserve to receive clear, unbiased advice. It is just as much in the interest of shareholders as it is in the interest of advisors to firmly oppose the proposed rules. There is widespread opposition to this proposal from these investors, who are the actual clients of the advisory firms.
The claim that proxy advice is rife with errors is based on flimsy evidence. Analysis by the Council of Institutional Investors indicates that errors in proxy advice are extremely rare, estimated at less than 1%.
Holding corporate managers accountable through corporate democracy in the age of Big Tech, climate disasters, and political polarization is a challenge in and of itself. Obstructing proxy advisors by increasing litigation costs and allowing corporate interference with shareholders’ research will make it nearly impossible for investors to engage with companies responsible in part for some of the most complex issues of our time. The SEC should facilitate, rather than hinder, market-based accountability mechanisms.
The writers are the state treasurers of Illinois (Michael Frerichs), Pennsylvania (Joe Torsella), Rhode Island (Seth Magaziner), and Connecticut (Shawn Wooden).