After years of discussion, the Securities and Exchange Commission is close to finalizing its long-awaited rule regarding the proxy voting process. While most of the details have now been confirmed, there remains debate over a company’s ability to review and respond to proxy advisors’ reports, as well as the practice of “robo-voting”, where certain investors are automatically following proxy firms’ guidance without doing their own due diligence.
Commissioner Elad Roisman is considering updating the proposed process through the introduction of a two-day contemporaneous review period. Under the new system, the proxy firm would send its report to the subject company at the same time as its clients. The proxy advisor would then have to notify those clients if the company raises any factual objections.
Importantly, the commission has recognized that this process can only work if automatic voting is disabled, so that issuers have the chance to address any inaccuracies before voting takes place. This change would go a long way to correcting one of the major flaws in the current process, helping to ensure that all investors are carrying out their fiduciary responsibility by fully considering the consequences of their vote.
The proposed solution represents a significant compromise by the business community, removing companies’ opportunity to review the proxy report prior to publication. As a result, investors will not be able to view both sides of the argument at the same time and will instead have to go back into the proxy report for a second time if they are alerted of a contesting view.
While potentially burdensome, the new system would respond to one of the main criticisms to the SEC’s previous proposal, that dual reviews will slow down the voting process. Instead, businesses will only have a two-day period to review reports and address any factual concerns they may have. Such a system will clearly be challenging and will require that companies dedicate additional resources to the proxy voting process, but will give investors an opportunity to view and respond to proxy reports.
A byproduct of this discussion is that the trade body which represents the proxy firms, the Council of Institutional Investors, is now arguing that a second round of notice and comment is needed to fully consider contemporaneous review. If that review were implemented, it would almost certainly push any rulemaking into 2021, and with it a potentially new SEC, perhaps hinting at the true motivation behind the demand.
Regardless, the argument would appear to be without merit. The debate around updating the proxy voting process is not a new one. As far back as Jul, 2010, the SEC prepared a concept release on the current system, going on to convene a roundtable in 2013 and issue guidance in the shape of a Staff Legal Bulletin in June, 2014.
Indeed, Chairman Jay Clayton has run an extremely comprehensive process, including another roundtable discussion, two consultations which collectively garnered almost 1,000 comment letters from academics, retail investors, asset managers, proxy advisory firms, and companies, and more than 50 recorded meetings on the subject.
A decade after the original concept release was published, there has been no shortage of discussion, congressional hearings, and academic analysis on how best to update the proxy voting process.
Perhaps most importantly, the material substance of the rule will not be altered with the introduction of a contemporaneous review period. The process will be condensed, and companies will benefit from one less need to review reports, but the fundamentals of the system will remain consistent with the SEC’s previous guidance and proposed rulemaking.
Taken together, contemporaneous review would appear to go a long way towards fixing a system that is no longer fit for its purpose. The Chamber of Commerce’s 2019 Proxy Season Survey underscored this point, showing a continual decline in the number of companies that are taking time to engage with proxy advisors. Having discussed with its members, the Chamber believes that the results clearly demonstrate that confidence in the existing system continues to decrease year on year and that many members no longer see the value in engaging with proxy advisors.
The proposed system represents a balanced and pragmatic compromise which responds to both sides’ concerns. Clayton and the commission should be applauded for their rigorous and thorough review of the proxy process and its determination to advance fair and reasonable rulemaking, which will protect and enhance our public markets.
Kyle Isakower is senior vice president of regulatory and energy policy at the American Council for Capital Formation.
