Investors: Here’s Your Chance To Influence SEC On Politicized Proxy Process

The Securities and Exchange Commission’s (SEC) roundtable discussion in November on growing concerns around the politicization of the shareholder voting process provides a crucial opportunity for investors to have their voices heard.

According to research conducted by the American Council for Capital Formation (ACCF), a negative recommendation from Institutional Shareholder Services, Inc. (ISS) — the largest proxy advisors in the space — can lead to a 25-percentage-point decrease in voting support.

The impact on companies and individual investors can be immense.

According to research conducted by the American Council for Capital Formation (ACCF), a negative recommendation from Institutional Shareholder Services, Inc. (ISS) — the largest proxy advisors in the space — can lead to a 25-percentage-point decrease in voting support.

The impact on companies and individual investors can be immense.

For one, these proposals require time and energy for review and response, especially when companies and shareholders face similar proposals year after year. A recent report from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) looked at shareholder proposals that have been submitted time and again with little support, creating duplicative costs and time burdens on companies and investors.

According to the analysis, which looked at 2,449 shareholder proposals submitted from 2001 to 2018 relating to political and social matters, 723 can be defined as “zombie proposals,” submitted three or more times without garnering majority support.

Proxy ‘Zombies’

These same proposals are resubmitted every year, many driven by activist investors pushing a political agenda, as opposed to meaningful governance reform. In turn, companies must divert time and resources to respond to these duplicative proposals time and again, hurting investors and companies simultaneously.

This issue begs an important question: Is the shareholder process working as it should or is it being taken advantage of to support political agendas that have little to do with corporate value?

Equally concerning is how little input companies have in the recommendations put forward by these firms. According to a recent CCMC survey, “only 39% of the companies believed that the proxy advisory firms carefully researched and took into account all relevant aspects of the particular issue.”  This is increasingly concerning given the lack of transparency and apparent conflicts of interest in place at firms such as ISS that provide consulting services to the very same companies it is rating.

How can investors trust that recommendations are based purely in fact and not a desire to win business for the other part of the company?

As ACCF has stated in comments to the SEC, there is little systematic oversight of the proxy firms’ research processes, interactions with companies, and communications with investors. This dynamic translates to greater power to proxy advisors, and a reduced ability for companies to advocate for their own business in the face of an adverse — or factually flawed — recommendation. What’s more, much of the data these advisors use to develop recommendations is unaudited and incomplete — leaving one to question the trustworthiness of their recommendations.

Small Company Burden

These concerns are magnified at smaller companies, where fewer staff and resources are left to handle the ever changing and increasing requirements of these individual advisory firms, with little time provided to set the record straight. In turn, shareholders’ votes are too often made based on assumption over fact.

The good news is there is a growing sense of urgency to address these issues. The SEC has signaled its own concern about these trends and is taking comments in advance of next month’s roundtable. Congressional efforts are also moving forward in the form of H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017, a bill that passed the House last December and is currently being considered in the Senate.

This support from elected officials, regulators, and the public is key to bringing much needed oversight of proxy advisory firms for the protection of investors and the companies they rely on for financial returns.

It is time for transparency and oversight, and the SEC’s roundtable process is a critical step towards bringing about the change. I urge all investors to take advantage of this opportunity. Now is the time to speak up.