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E-MailSteve Seelig and Puneet Arora are regulatory advisors at Willis Towers Watson. This post is based on a Willis Towers Watson memorandum by Mr. Seelig and Mr. Arora.
What’s clear from the recent Securities and Exchange (SEC) roundtable on the proxy voting process and subsequent press accounts is that concerned parties have very different agendas for possible next steps. So we’re hesitant to believe predictions that regulation of proxy advisory firms is imminent or that the entire shareholder proposal process needs to be revamped. Many stakeholders are content with the current state of affairs. That said, the roundtable enables the SEC to build a record of public comments to support its rulemaking decisions, increasing the odds of new regulations forthcoming on the three topics covered.
Proxy Advisor Discussion
Prior to the roundtable, the proxy advisor topic appeared to be the most controversial, so it seemed appropriate for the SEC to place it last on the agenda. Yet, we heard little appetite from attendees for changing how advisors participate in the proxy voting process based on the important role they play in assisting institutional investors with voting recommendations. The roundtable also avoided a deep examination of whether ISS’ simultaneous work with clients and issuance of proxy recommendations is a potential conflict of interest. ISS, however, noted that it makes available to its clients revenue data earned from consulting services to issuers to whom it makes voting recommendations.
While the proxy advisor discussion was anti-climactic, there may be traction for proxy advisor regulation. Although symbolic in a “lame duck” session of Congress, six senators have introduced the Corporate Governance Fairness Act of 2018, reflecting bipartisan support for additional regulation. And, as we noted in “Will the SEC act in the ongoing proxy advisor debate?” Executive Pay Matters, November 5, 2018, the SEC still needs to clarify the impact of its withdrawal of its long-standing “no-action” letters which detail investment advisor responsibilities regarding potential conflicts of interests of proxy advisory firms.
It is noteworthy that none of the business associations that are predominant critics of ISS were members of this panel, so we did not hear much discussion on how potential conflicts of interest could influence ISS voting recommendations. Also largely absent from the discussion were complaints about how proxy advisors form their policies or how they could improve their dialogue with companies which disagree with proposed voting recommendations. The critical comments were expressed in the proxy proposal section, where the comments were more global in nature. They lamented both the notion that proxy advisors serve as de facto regulators because investors frequently follow their voting recommendations (so-called “robo-voting”) and that perceived conflicts could diminish the credibility of ISS voting recommendations. However, no details on potential SEC action were provided.
Discussion on Shareholder Proposals
This discussion was more wide-ranging, reflecting a definite bifurcation between those that favored the status quo and a corporate viewpoint which seeks to change who introduces proposals, and how often they can do so. Corporate representatives want to:
- Raise the ownership levels of those who can submit proposals above the current ownership thresholds (lesser of 1% of the company or $2,000)
- Raise the length of share ownership (shareholder must own minimum threshold no less than a full calendar year before proposal is submitted
- Impose additional requirements on so-called “zombie” proposals (perennial proposals that garner little shareholder support).
The discussion seemed to suggest the lack of a compromise, leading us to believe this would be a tough area for the SEC to tackle in rulemaking.
Yet, the SEC did recently provide Staff Guidance that could further expand the ability for companies to seek “no-action letters” to oppose shareholder proposals. Your SEC counsel is best qualified to provide a primer on this entire subject, although our immediate reaction is that the SEC staff wants to hear more from companies on how they have already addressed the subject of the proposal, the extent to which other shareholders have similar concerns, and the results of prior voting support on the proposal issue (no threshold of prior voting support was mentioned). So it may be the case under this broader, qualitative standard that “no-action letters” will be granted in the upcoming proxy season where the SEC previously allowed a proposal to move forward.
Another aspect to the Staff Guidance is the question of whether a proposal seeks to “micromanage” a company. The SEC appears to have broadened its standards by calling for a report to shareholders, which many compensation-related proposals seek. Our impression is that the SEC may be more likely to exclude a proposal, citing micromanagement, when the results of the report could lead to a company altering its policies, and also depend on the specific manner of how or timing when those changes would be made. To pass SEC muster, proposals that pursue changes in corporate policies may need to be crafted even more generally then they are today.
Going Forward
It seems plausible that the SEC’s recent actions leading up to the agency hosting an all-day roundtable, coupled with years of pressure from industry groups, will culminate in changes to the proxy process. While we hoped the SEC staff would shed light, or at least give some indication on the form of any such changes during the roundtable, it largely stayed out of the fray and listened to what invited guests had to say. We’ll continue monitoring SEC activity in this area and keep you posted on any significant developments.
