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BLOG: Proposed Proxy Adviser “Reform” Will Hurt American Investors - Plain And Simple

This post is written by and reflects the ideas of Institutional Shareholder Services.


A Washington business group called American Council for Capital Formation (ACCF) has, unfortunately, systematically executed a false and misleading campaign to attack the long-established proxy advisory industry. Through the astroturf group “Main Street Investors Coalition” (recently outed by multiple news reports as driven solely by special interests), ACCF (and its backers) is seeking to uproot the rights of hardworking American investors. ACCF and its Main Street Investors Coalition (whose executive director is also a Vice President at ACCF) wants to silence dissent by owners of the company when it comes to issues like CEO pay and other matters.

Why proxy adviser “reform” is a red flag

Critics of the proxy advisory industry are lobbying for “reform” that they claim will increase transparency. In reality, however, their proposed “reform” will trample upon the investment rights of hardworking Americans. Under the current system, the companies that manage your investments in pensions ,401(k)s, 529 college accounts, and Roth and Traditional IRAs, have many options when it comes to closely examining the public companies within which they invest your dollars. Shareholders should, after all, expect this from their investment companies to ensure the management of these public companies is sound. Many investment companies will hire proxy advisory firms to research and analyze these public companies, and to make voting recommendations on decisions put on the ballot for shareholders to decide. Such decisions may include a vote on the CEO’s pay. Under the current system, the integrity of this research is protected and secure, and the management of the company is not permitted to inappropriately influence it or stall it ahead of the shareholder vote.

Why does this matter? It’s simple. The special interests that seek proxy adviser “reform” are focused on accomplishing one overarching goal: prioritizing their interests over those of shareholders. Hidden deep at the core of the “reform,” ACCF and its special interest partners want from the U.S. Congress and the Securities and Exchange Commission (SEC) a weakening of the protections that ensure the availability of independent and objective proxy adviser research and voting recommendations. They want the research pension plans and other institutional investors now receive directly to take a new detour, first stopping at the public corporation where management can contest it, stall it, and possibly make sure it never sees the light of day.

Many of the corporations that are registered to lobby in favor of proxy adviser “reform” are, not surprisingly, companies that met resistance from their shareholders to large CEO pay raises. It’s understandable that shareholders and investors might want to pause and closely consider whether executive pay was earned. Most of the time CEO pay is indeed tied to performance; however, there are also instances where a proxy adviser recommends to its clients against the approval of pay packages. And after considering the proxy adviser’s research and other information, and analyzing the information in the context of the institutional investors’ own proxy voting guidelines, sometimes the institutional investor chooses to vote NO on pay. Even though the vote is non-binding, it has served to give impetus and drive to this lobbying campaign for proxy adviser “reform.”

True motive, revealed

The SEC will host a roundtable on November 15 to discuss proxy adviser reform. When federal agencies host such discussions, they usually welcome public comments ahead of time. Special interests and their Washington lobbyists have already attempted to muddy this roundtable with illogical recommendations that will undermine American investors. You need to look no further than a letter submitted to the SEC by Bernard Sharfman, Chairman of the ACCF-led “Main Street Investors Coalition,” in which he argued that investors should be permitted to check the box on meeting their fiduciary compliance requirements simply by following, without any analysis, the voting recommendations from a public corporation’s board of directors and management.

That’s right. The ACCF, through its misleading “investor” group, is calling for “reform” under the guise of fostering transparency by calling on federal regulators to make changes to the current system to further empower corporate management and boards and the expense of the very group they purport to represent.

If such a proposal was enacted, the fund managing your pension plan or 401(k) could simply agree and take the rest of the day off while still meeting its fiduciary responsibility to beneficiaries. It also runs counter to the progress made in corporate accountability over the past 30 years. The research commissioned by investment companies should not be detoured to the CEO and board room, and institutional investors should continue to vote their own shares in the best interest of their underlying clients.

With $28 trillion in assets accumulated in the retirement savings system, this system is doing a lot of good for American savers. The protections in the current system like this one should not be weakened at the behest of a false and misleading lobbying campaign.

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