New Proxy Voting Rules Take Aim at Powerful Advisory Firms
This post was originally published by Bloomberg on November 14, 2019.
The shareholder vote is fundamental to how publicly traded companies are run. But the question of who gets a real voice in a proxy fight is more complicated than one vote for every share.
Many investors hop in and out of stocks and are happy to ignore votes. Others hold their stock at one remove, via a mutual fund or pension. Decisions on voting those shares are often farmed out to proxy advisers, specialized companies that provide recommendations to money managers. And while many investors—and corporate managers—think votes should focus solely on issues that affect profits and shareholder returns, others see owning a piece of a company as an opportunity to weigh in on how it behaves. About half of shareholder proposals these days focus on social and environmental issues.
On Nov. 5, the U.S. Securities and Exchange Commission stepped into this fray by proposing new rules affecting shareholder votes. One set of measures would put new regulations on the proxy advisers, effectively making them run recommendations past companies and give them a chance to respond before sending the advice to investors. Business groups backing the plan say the advisers aren’t transparent enough and have acquired too much power to sway votes. In 2015, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon lashed out at “lazy” shareholders who just followed proxy advisers’ recommendations. (Advisers had recently recommended voting against his pay package; it was approved.) Bloomberg News has reported that Dimon pushed the Business Roundtable, a Washington trade group he chairs, to lobby the SEC and lawmakers on proxy rules.
Proxy advisers and some investor advocates say these rules will tilt power toward management and muffle shareholder voices that are mobilized by the advisers. “They’re trying to kill the messenger,” says Nell Minow, vice chair of ValueEdge Advisors, which works with institutional investors on corporate governance issues. Earlier in her career, Minow was the fourth person hired at Institutional Shareholder Services Inc., the dominant shareholder-voting adviser.
ISS was formed in 1985, a time when institutional investors tended to vote in line with management or not at all. Voting has since gained significance—due partly to the rise of activist investors such as hedge funds, who seek changes they think can boost stock prices, but also to a shift toward passive, index-based investing. Because many investors have to hold every company in an index, they can’t express their displeasure with a CEO or corporate board simply by selling shares. They speak with their votes.
All of this makes ISS and its main rival, Glass, Lewis & Co., important players, though many big asset managers, including BlackRock, Vanguard, and State Street, also have in-house teams dedicated to proxy voting. Most matters that go up for a shareholder vote are routine, such as approving firms that audit corporate accounting. Voting on executive pay and director elections can be contentious, especially during fights with activist funds, as can corporate mergers and acquisitions. These votes are where the proxy adviser firms are seen as having the most sway. An ISS spokesman says that the idea that clients merely vote as proxy advisers tell them is “an affront to investors who, and who alone, are responsible for the final voting decision.”
Corporations complain about errors in the analyses the firms use—for example, comparisons of executive pay packages—when they come up with their voting advice.
“Companies are dealing with this on a regular basis—cookie-cutter advice, flawed recommendations, the feeling that they need to kowtow to these firms operating as quasi-regulators,” says Charles Crain, who directs tax and domestic economic policy at the National Association of Manufacturers. Supporters of the rules say they’ll help weed out mistakes. ISS and Glass Lewis argue their error rates are low and say the complaints are really about recommendations companies don’t like.
The proposed rules may sound like small tweaks. But Robert Jackson Jr., an SEC commissioner who voted against the rules, described them in his statement as a “tax” on anti-management advice. While proxy advisers are unlikely to face much blowback when they give advice that sides with the C-suite, they could “risk federal securities litigation over their methodology” when they disagree. In August, the SEC also put proxy firms on notice with guidance that their advice is subject to certain broader securities rules.
ISS is pushing back on that guidance with its own lawsuit against the SEC. While the commission’s proposed rules are not yet final—the SEC is asking for public comment—the August guidance is already in effect.
A second set of proposed rules affects shareholders who offer their own measures to be put on a corporate ballot. These can include pension funds prodding the oil industry on climate-change-related risks or nuns pressing gunmakers about safety. Such efforts have at times gotten backing from big mutual fund companies, who’ve also used their voting heft to call for more women on boards. Small shareholders known as corporate gadflies also use proposals to seek governance changes in areas such as how directors are elected.
Those with as little as $2,000 in a company’s stock for one year can offer a shareholder proposal today. The new rules would put the dollar figure on a sliding scale that goes up to $25,000, depending on how long an investor has held shares. Another potential rule change would raise the bar for letting a shareholder try again on a failed proposal. Gadfly James McRitchie estimates half the 150 stocks he and his wife hold wouldn’t meet one of the new thresholds for activism under the SEC’s plan.
Much of the pressure around shareholder advocacy is coming from the same business groups who want tougher rules on proxy advisers. They say a small stake shouldn’t be used as a soapbox. In his remarks at the hearing, SEC Chairman Jay Clayton, who voted in favor, cited a study showing that the majority of shareholder proposals filed by individual shareholders—about a third of the total—came from just five people.
Groups such as the Council of Institutional Investors, which represents many pension funds, contend shareholder proposals are a mechanism for holding corporations accountable. While the SEC’s new rules won’t stop big pension funds from getting an issue on a ballot, the worry is that they could stop fresh issues and ideas about corporate governance from bubbling up. “Part of the value in keeping the dollar threshold relatively low is that it is a statement that even relatively small investors bring something to the table,” says Jill Fisch, a law professor at the University of Pennsylvania who studies proxy issues. A seat at that table might be getting more exclusive. —With Ben Bain
BOTTOM LINE - Companies that offer advice to investors on how to vote their shares are facing more regulation, which might make it less likely that they’ll disagree with management.