Reforming the proxy voting process was the focus of a Senate Banking Committee hearing Thursday, with the business community, investing and retirement savings industries cheering the move while pension fund representatives urged a stop to any anticipated action.
The Securities and Exchange Commission has recently been dusting off old shareholder proxy rules to potentially reform the process that lawmakers and others have argued give outsize influence to proxy advisory firms and fund managers on shareholder voting results. The agency organized panels at a recent roundtable discussion in November.
At issue is shareholder engagement and the weight and influence of proxy advisory firms in the voting process.
The U.S. Chamber of Commerce testified that public companies and their shareholders have been increasingly targeted in the past 15 years through the proxy system over social and political issues that it says are unrelated to and sometimes, even “at odds with” a public company’s long-term performance.
Business stakeholders want the SEC to add conditions that a proxy advisory firm must satisfy, be subject to disclosure and filing requirements that apply to proxy solicitations and subject them to more economic interest disclosures.
Dan Gallagher, an SEC commissioner from 2011 through 2015, told lawmakers that the current shareholder environment makes investors rely on proxy advisory firms to a degree that was not anticipated when laws were first crafted, back when institutional ownership of shares was negligible.
Gallagher, now the chief legal officer of the drug company Mylan N.V., said that previous SEC rulemaking has had unintended consequences, including “a direct increase in the extent to which for-profit third-party proxy advisors, which have no economic risk in the underlying investments, drive decision making at investment advisers and corporations.”
Gallagher warned lawmakers about proxy firms’ recommendations and research.
The research, he says, often is “just not good enough, and proxy advisory firms publish some recommendations that are based on clear, material mistakes of fact. Moreover, they base some recommendations on a cookie-cutter approach to governance … even if there is a sound basis for challenging the assumption that an otherwise beneficial governance reform might not be appropriate for a given company.”
Karen Barr, president and CEO of the Investment Adviser Association, said in her letter to Senate Banking Committee members that the consensus among issuers, investors, intermediaries and academics “is that the proxy infrastructure is broken and in need of urgent attention.
SEC Chairman Jay Clayton, Barr noted, “recently reaffirmed the fundamental importance to the public capital markets of an accurate, transparent and efficient proxy process.”