The health of the U.S. proxy system is about to get a check-up. On July 30, SEC chair Jay Clayton announced a roundtable to examine whether existing rules have kept pace with changes to the proxy process, and in particular to shareholder engagement.
It’s been eight years since the Commission last held a broad public consultation looking at the “accuracy, reliability, transparency, accountability and integrity” of the U.S. proxy system. Much has changed since then, particularly how issuers and investors interact. In a statement announcing the roundtable, Clayton notes the significant increase in shareholder engagement, “with 72% of S&P 500 companies reporting engagement with shareholders in 2017, compared to just 6% in 2010.” Developments in technology and the markets are also cited as reasons for the review.
While the agenda for the roundtable has yet to be finalized, SEC staff have been directed to consider a range of topics, including the process for submitting shareholder proposals, the mechanics of voting and the impact of new technologies, and the participation of institutional and retail shareholders. In addition, Clayton identified proxy advisory firms as an area of interest with regard to their accuracy, transparency, conflicts of interest and regulation, and the extent to which investment institutions rely on their work.
Many of these topics will be familiar to engaged investors. The presence of shareholder nominees and proposals on the meeting agenda has been the subject of much discussion over recent years as nearly 70% of the S&P 500 has adopted proxy access; moreover, House legislation that would change the rules regarding submission (and re-submission) of shareholder proposals is currently outstanding. Here, the context for examining shareholder proposals notes that an overwhelming proportion are submitted by a small group of investors; Clayton acknowledges that the process “is a channel for shareholders to engage” that many believe “has enhanced company performance” before raising the question of whether “the costs of this process could be significantly reduced without limiting (and potentially increasing) the benefits of shareholder engagement.” More specifically, ownership thresholds (including looking beyond how much is held, and for how long, to other measures of “meaningful ownership”) and resubmission hurdles are highlighted for review. Clayton also raises the question of whether long-term retail investors are appropriately represented.
The role and regulation of proxy advisors, such as Glass Lewis, has also seen extensive debate. Most recently, the U.S. Senate Banking Committee wrote to Glass Lewis (and to Institutional Shareholder Services) seeking information regarding the business practices of proxy advisory firms in advance of a hearing on the topic. While the alleged influence of advisors’ vote recommendations generally draws headlines (and comes up again here, both in level of influence and transparency of methodology), Clayton also puts emphasis on the range of other services these firms provide. Beyond concerns of a potential for overall institutional over-reliance on proxy advisors, questions regarding accuracy and openness are raised in the context of information aggregation and standardization services. In addition, Clayton highlights conflicts of interest in relation to consulting, a service that is unique to ISS rather than the broader industry (Glass Lewis does not provide consulting services).
While “Other Commission Action” gets its own section, Clayton only revives one subject of past business: universal proxy cards. Current U.S. rules requiring nominee consent for ballot inclusion mean that investors participating by proxy rarely get the opportunity to vote for a mix of management and dissident slates. The SEC had previously proposed changes to require their usage back in 2016; it appears the issue is back on the table.
Clayton also highlights the mechanics of the voting process itself, including the potential for over- and under-voting by broker-dealers; the issue of “empty voting”; and practical issues, relating to voting accuracy in light of the number of participants involved, and to issuer communications with “street name” holders.
The section on technology is somewhat vague, with blockchain/distributed ledger the only specific innovation that is referenced; beyond voting mechanics and the growing influence of cryptocurrency, the structure of ‘hybrid’ and ‘virtual-only’ meetings will likely warrant discussion at the roundtable. Elsewhere, Clayton notes the disparity between institutional and retail investor participation, with just 29% of retail shares voted in 2017 compared to 91% of institutional shares.
Regardless of the exact final agenda, this SEC roundtable should be directly relevant to investors and other stakeholders throughout the proxy process. Further details, including date and participants, have yet to be announced. In the meantime, interested parties are invited to submit comments online or by mail; see the SEC statement for further information.