Washington Update—Proxy Process Focus Continues

Nichol Garzon is Senior Vice President and General Counsel at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Garzon.

Following the SEC Proxy Roundtable last month, the Senate Committee on Banking, Housing, and Urban Development held a hearing on Proxy Process and Rules: Examining Current Practices and Potential Changes. The December 6th hearing allowed Senators to hear from, and question, witnesses on what could and should be done to improve the proxy process. Specific legislation was not discussed but policy concepts and priorities were.

Much of the conversation revolved around shareholder proposals, resubmission thresholds and the role of proxy advisory firms—and reflected a number of misconceptions regarding the proxy process. Most participants stated that proxy advisors play a critical role helping investors meet their obligations, but some argued for an increased regulatory scheme and questioned conflict disclosure policies.

Two of the witnesses, Thomas Quaadman from the Chamber of Commerce, and Michael Garland from the New York City Office of the Comptroller, had previously presented during the SEC Roundtable. The third witness was former SEC Commissioner Daniel Gallagher, currently Chief Legal Office for Mylan N.V.

One line of questioning reflected the persistent and pernicious myth that institutional investors blindly follow the recommendations of proxy advisors. Senators asked about how institutional investors use proxy advisory firms and were told that although the research of these firms may guide their voting decisions, the ultimate voting decision lies with the institution and is always based on the specific voting guidelines that have been selected and put in place by each investor.

There was also discussion around the types of conflicts proxy advisory firms are perceived to have and how they are disclosed. Sentiment was again split on this topic with some arguing that current disclosure is inadequate and others comfortable with the current policies. There seems to be, however, a continued lack of information on this topic. Mr. Quaadman, for example, advocated that proxy advisory firms should disclose whether a client is a shareholder proponent or dissident shareholder. However, in the case of Glass Lewis, a disclosure note is added to the front of the research report if an institutional investor client, or one or both of Glass Lewis’ owners, submit a shareholder proposal. This is also true if they are a dissident shareholder in a proxy contest or a shareholder proposal proponent. In addition, Glass Lewis discloses when an issuer, director, dissident shareholder or shareholder proposal proponent purchased a copy of the report. These disclosure practices have been carried out for some time now.

Senators also asked a number of questions about environmental, social and political ballot proposals and the role they play in appropriate corporate oversight by shareholders. Again, Senators and witnesses were split on this issue, and again, some of the differences of opinion may simply reflect misconceptions. For example, Mr. Quaadman claimed that more than 50% of submitted shareholder proposals are focused on environmental, social or political issues, but Glass Lewis’ own data shows that in fact more than two-thirds of the shareholder proposals it analyzed during the 2018 season only related to governance or compensation. Moreover, Mr. Garland and others pushed back on the idea that shareholders shouldn’t get a say on environmental or social issues because they don’t relate to the “fundamental running” of the business. Citing examples such as the reputational damage of price gouging for prescription medicines, they made the case that although “ESP” issues may not show up on quarterly returns, it is imperative for investors to weigh-in on these issues since they have the ability to impact the long-term value of a corporation.

Members now have several days to submit additional questions to the witnesses to further explore these topics. The Congress is expected to adjourn in the next two weeks, likely leaving this issue unresolved.

In the meantime, Chairman Clayton indicated yesterday at an event hosted by Columbia University’s School of International Public Affairs, that the SEC is considering several initiatives in 2019 to improve the proxy process, which may include raising the ownership and resubmission thresholds for shareholder proposals, in addition to imposing new and stricter disclosure requirements for proxy advisers.

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