Investor and corporate groups around the world are weighing in on proposals from the Securities and Exchange Commission that could dramatically change the rules for proxy advisory firms and how shareholder proposals are submitted.
On the investor side, voices are being raised from as far away as the Australian Council of Superannuation Investors, whose members represent $2.2 trillion in assets; the U.K.’s £10 billion ($13.1 billion) National Employment Savings Trust; and Dutch asset manager Robeco. These organizations are raising concerns, if not outright alarms, that if the proposals go through unchanged, shareholder rights — and corporate governance best practices — hang in the balance.
On the corporate side, groups such as the U.S. Chamber of Commerce argue that tighter regulation of proxy advisers to curb conflicts of interest, lack of transparency and unchecked errors is overdue, as are the thresholds for submitting shareholder proposals.
By the time the comment period ended Feb. 3, the proposals were on track to set a record for SEC comment letters, with more than 14,000 already posted on the agency’s website, with investor groups, asset managers, pension funds, faith-based groups, scholars, state and local government officials, unions and thousands of individual investors strongly opposing the proposals.
If the new rules for proxy advisory firms are finalized, they would have to disclose more information about their processes and any conflicts of interest and give companies the opportunity to offer revisions to their proxy reports.
Changes under the proposed new rules for the shareholder proposal process include raising both the amount and time a stock is held before shareholders could file resolutions, higher thresholds for resubmitting shareholder proposals in subsequent years and timeouts for ideas that slip in support in a given year, among other things.
The question now turns to whether SEC officials are open to some compromises over practices that both sides acknowledge may have room for improvement, including giving companies a limited opportunity to fact-check for inaccuracies but not change things they simply don’t agree with.
There may not even be time, with the clock ticking to finalize the fast-moving initiative no later than May, to avoid having it undone if the White House changes hands in 2020. If the proposals are unchanged, it could be a return to the not-so-good old days, said Amy Borrus, deputy director of the Council of Institutional Investors in Washington, whose members include 135 public pension funds, corporate and labor funds, and foundations and endowments with more than $4 trillion in combined assets.
“The business lobbying campaign is aimed at making it harder and more costly for institutional investors to get the independent research and advice they need to hold executives accountable — and make it less likely they vote against management or vote at all,” particularly on sensitive subjects like executive pay, she said.
“I think corporate fury at proxy advisory firms is fueled in part by nostalgia for the days when more equity was held directly by individuals, and both retail and institutional investors generally voted automatically with management — or didn’t vote at all.
“Say-on-pay votes supercharged that ire. CEOs do not like public challenges to how and how much they are paid, or to be second-guessed by shareholders on a range of environmental, social and governance matters,” Ms. Borrus said.
In its comment letter, hedge fund firm Third Point LLC said the timing “does not seem to us like coincidence, as shareholders are demanding increased transparency from public companies.”
The growing trend of ESG shareholder proposals is a frequent theme raised by many commenters, both for and against the changes. Corporate supporters of the changes caution that proxy advisory firms should only consider ESG motions with a direct tie to financial performance, and the same for shareholder proposals.
If finalized, the proposed rules “would introduce major impediments to environmental, social and governance integration, which has traditionally depended on dedicated investors engaging with management and access to independent and efficient proxy voting advice,” Fiona Reynolds, CEO of Principles for Responsible Investment, wrote in a letter to the SEC. The letter was signed by scores of diverse investors from around the world, including religious groups, foundations, public pension funds and asset managers.
The U.S. is the PRI’s largest market, with more than 500 signatories investing more than $42 trillion in assets under management.
It is also a fiduciary issue, said William J. Stromberg, CEO and president of T. Rowe Price Group Inc. in Baltimore, in his comment letter. The proposed proxy reforms would likely give corporate issuers “considerably more time to review proxy reports than the fee-paying clients of proxy advisers” that rely on the reports to fulfill their fiduciary obligations to clients, he said.
The SEC’s own investor advisory committee reflects how polarizing the issues have become. A divided committee voted 10-5 to ask the SEC to rework the two proposals, saying that they do not serve investor interests and that the SEC did not establish a link between the actions and clearly identified problems. Two dissenting members filed their own comment letter, saying there is room for the full commission to debate the best path forward, one that should focus on proxy voting advice that can increase shareholder value, and, at a minimum, the SEC should address conflicts of interest in proxy advisory firms.
SEC Commissioner Elad Roisman, the point person for the proposals, characterized them in November as a first step to get actionable feedback that will help agency officials achieve “a sensible modernization” of rules to help the SEC fulfill several missions: investor protection, maintaining fair and efficient markets, and facilitating capital formation.
The prospect of something less than sensible in investors’ eyes is already triggering talk of delay or blocking tactics, including lawsuits challenging the SEC’s regulatory process and even freedom of speech protection for proxy firms.
“Shareholders are not going to stand for it. If the SEC does not go back to the drawing board, there will be legal challenges,” said Brandon Rees, deputy director of corporations and capital markets at the AFL-CIO in Washington. Its 55 member unions have a collective $736 billion in multiemployer pension fund assets.
“The corporate community is hoping to turn back the clock, but that train has long left the station,” Mr. Rees said.