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E-MailDimitri T.G. Zagoroff is Content Manager and Internal Consultant at Glass, Lewis & Co. This post is based on his Glass Lewis memorandum. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).
If effecting change at a single institution is like reversing the course of an aircraft carrier, revamping the proxy system is something akin to turning around a whole fleet. Undaunted by the task, it appears that the SEC’s Investor Advisory Committee has gotten nearly all of its own boats pointed in the same direction. At a meeting September 5th, the IAC’s Investor-as-Owner Subcommittee recommendation on proxy plumbing received overwhelming support from all but two members of the bipartisan committee.
The IAC, chaired by Anne Sheehan, former director of governance for CalSTRS, was established by Dodd-Frank to provide the Commission with findings and recommendations on issues ranging from governance standards to the functioning of the market. Following last year’s SEC Roundtable, the Investor-as-Owner Subcommittee was tasked with disentangling the inefficiencies and complex interests of the proxy system.
In his introductory remarks to the meeting, SEC Commissioner Jay Clayton invited the committee to focus its discussion of changes to the proxy system on retail investors, asking if their lack of engagement stems from procedural overload or a disconnect between voting matters and long-term shareholder value. In particular, the commissioner put the spotlight on shareholder proposals, questioning whether (re)submission thresholds are “appropriately crafted to ensure that the proposing shareholder’s interests are aligned with those of a reasonable portion of the company’s long-term investors[.]”
However, the Subcommittee’s recommendation sidesteps submission thresholds and abstract questions regarding the meaning of the proxy agenda to instead focus on areas of the proxy system infrastructure that are “clearly in need of immediate attention.” In particular, the Subcommittee recommends that the SEC:
- Adopt a universal proxy card for contested meetings;
- Require end-to-end vote confirmations;
- Require all parties involved in proxy voting to cooperate in reconciling data on a regular basis; and
- Conduct studies on (a) investor views on anonymity and (b) share lending.
The Subcommittee’s recommendation was initially presented at the IAC meeting held July 25, however several members requested more time for discussion before putting it to a vote. In the interim the Subcommittee made several changes to its report, including an explicit statement that systemic improvement requires SEC intervention, and additional background on the rationale for adopting universal proxy ballots.
The IAC had previously recommended adopting the universal proxy system for contested meetings back in 2013, leading the SEC to propose rules to require their use in 2016. Those rules remain in limbo after initially facing significant corporate opposition, reflecting unfounded fears that a universal proxy would put management at a disadvantage. The Subcommittee notes that by last year’s SEC Roundtable, opposition had diminished “significantly, in part because of evidence that a universal proxy would not in fact favor dissidents over incumbents.” Moreover, the experience in markets like Switzerland, which has adopted the universal proxy, suggest that it would not lead to more contested meetings. Within the IAC, procedural objections to the specific implementation remain, e.g. whether or not issuers would effectively be mandated to adopt, however it appears that universal proxy has achieved a broad consensus of support. The Subcommittee recommendation effectively affirms the existing SEC rule, while suggesting minor changes to the pending rules to address perceived concerns, e.g. increasing dissident solicitation requirements.
In Glass Lewis’ view, implementing universal proxy would both enhance shareholder rights and simplify the mechanics of proxy voting. The current system for contested meetings limits flexibility and increases voting complexity by forcing investors to choose between management and dissident nominees on separate proxy cards. There may be instances where investors believe that the best option for the long-term success of an issuer is to support a mix of management and dissident nominees. In theory, it is possible for investors to vote their shares in this manner, but the administrative hurdles and associated risk of vote rejections generally dissuade investors from pursuing this option. Requiring the use of universal ballots for contested meetings would provide investors with the flexibility to vote for their choice of management and/or dissident nominees, potentially lower the costs associated with proposing a nominee, and dramatically simplify the mechanics of the voting process for these high-profile meetings by eliminating the need for two competing proxy cards.
End-to-end vote confirmations would represent another significant development for investors, and the market as a whole. A fully transparent and accurate voting system would significantly strengthen the value of, and therefore shareholder care applied to, proxy voting. Of course, there are factors that make vote confirmations a complicated process, not least the number of entities in the chain of intermediaries (e.g., investors, proxy advisors, ballot distributors, custodians, subcustodians, depositaries, transfer agents, tabulators, etc.). This complexity is exacerbated by both the lack of standard account identifiers, since each intermediary may assign a different identifier to the same account, and the absence of a robust communication standard, making ballot reconciliation a resource-intensive, time-consuming and, occasionally, inexact exercise. However, there are already instances where confirmations are being provided to investors today, suggesting that the complicating factors can be readily overcome if the appropriate incentives exist for the various intermediaries involved in the voting process. Adopting a unique electronic identifying code, potentially in conjunction with new technologies such as block chain, could facilitate the provision of accurate, timely and granular vote confirmations while also addressing concerns around over/under-voting, investor anonymity and distribution costs.
Universal proxy and vote confirmations are two areas where a broad consensus appears achievable, and progress is clearly actionable. It isn’t always so easy.
The difficulty of effecting changes to the proxy system is heightened by the wide range of participants, and sheer complexity of the issues—as illustrated by the committee’s recommendation regarding anonymity and share lending. Both subjects inspire strong, often opposing, views from within the investor community itself, and from the wider chain of intermediaries—some of whom have vested interests in maintaining the status quo. Before proposing any specific course of action, the Subcommittee is seeking more information on whether anonymity provisions in broker contracts have impacted the SEC’s default policy of treating broker customers as named owners—and if so, whether that reflects investor wishes or disaligned incentives within the proxy process. Similarly, the clear potential for share lending to complicate the question of whether shares have been voted is widely acknowledged, however due in part to the complexity of share lending itself, the Subcommittee is calling for a close study of the process—and of whether related proxy voting problems reflect issues related to structure, contract terms, or communication—before proposing any concrete changes.
Moreover, there are practical constraints on what the Subcommittee can propose, as illustrated by its recommendation that the SEC “require every participant in the proxy system to cooperate with the others to reconcile ownership and voting information on a regular basis, both during and outside the context of specific votes.” The aim of making vote and ownership reconciliation practices routine is clear, and elements of the proposal, such as extending existing requirements from transfer agents to other participants and calling on the SEC for enforcement, are specific. However, the Subcommittee stops short of defining what that cooperation would look like, proposing any particular processes, setting out a schedule for reconciliations—or addressing the cost of increased oversight and enforcement that would fall on both proxy participants and the SEC itself. Those questions may ultimately be moot—if implemented, end-to-end voting confirmation would effectively create a regular audit process and corresponding feedback loop that should address accuracy issues.
For the two committee members who voted against, opposition reflected what the recommendation left out as well as what it included. Along with concerns about the terms of universal proxy and the inclusion of explicit references to the unwillingness of private actors to effect change, the absence of any language covering shareholder proposals or proxy advisors was cited. Subcommittee chair John Coates acknowledged that there is work to be done in these areas—however, given that both are contentious topics that could raise difficult political tradeoffs, they may need to go through the comment process rather than through the Subcommittee.
