Jay Clayton, in his inaugural speech as chairman of the Securities and Exchange Commission last year, said his top priority was looking out for average investors, whom he called “Mr. and Mrs. 401(k).” In at least one area, though, Clayton seems as if he is worried most about Mr. CEO.
On Thursday, Clayton gave a speech outlining his priorities for 2019 and said that one of them was to impose new regulations on proxy advisers — the firms that review the shareholder proposals and corporate actions of thousands of companies to inform investors about the best way to vote at annual meetings. You know who also thinks that proxy advisory firms should be reined in? The nation’s largest corporations and their lobbyists. Proxy advisory firms are one of the U.S. Chamber of Commerce’s largest bugaboos.
The complaint against proxy advisory firms is that they have too much power. Two firms, Glass Lewis and Institutional Shareholder Services, make up the entire industry. They sell services to institutional shareholders related to proxy voting, which can range from research on votes to governance scores. They also provide voting services and advice on how to disclose those votes. Critics say the concentration gives them too much power, in effect making them shadow regulators and even a significant threat to the capitalist system. Top Wachtell Lipton Rosen & Katz lawyer David Katz recently co-wrote a piece on Harvard Law School’s corporate governance blog essentially arguing that the proxy advisers must be stopped or they will soon turn America’s corporations into “vehicles for social engineering” and not the profit-maximizing machines that make the U.S. economy great.
A group called the Main Street Investors Coalition says that proxy advisory firms are crushing the voice of small investors and doing real damage. The New York Times’s Andrew Ross Sorkin, though, disclosed earlier this year that the “coalition” had no real connection to average investors or their advocates. Instead, it was just another Washington group backed by big business.
It’s true that proxy advisers at times do support more social activist causes, such as shareholder proposals that ask companies to detail their impact on the environment or urge banks to cut off business to gun makers, for-profit prisons and other companies that some holders deem distasteful or harmful to society. But that’s far from all they do, and not even their main focus. More often, ISS and Glass Lewis recommend shareholders vote against large paychecks or board seats for managers or directors who they think have not acted in the best interests of shareholders. Good management, and checks of that management, is key to profit-making.
But the biggest problem with the idea that the proxy advisers need to be reined turns on the fallacy that they are all powerful, something critics repeat a lot. They are not. Just one example, according to a stat in the Wall Street Journal, is that last year proxy advisory firms urged shareholders to vote against approving the paychecks of 12 percent of the companies they followed. In nearly all of those cases, the pay packages were approved anyway.
What’s more, the proposals that the SEC is considering won’t change much. They include greater disclosure about how the firms reach their recommendations and a requirement that they make shareholders aware of company objections to their recommendations. The firms contend the goal is just to drive up their costs and make their services more expensive and perhaps less attractive to their institutional investor client. Imagine if Hollywood studios banded together and demanded that Rotten Tomatoes be taken down, or worse somehow outlaw movie reviews. Yes, good reviews drive viewers to theaters, but Hollywood creates far more clunkers that they would rather viewers didn’t have advance word about.
It’s the same with proxy advisory firms. Yes, at times they can help companies fight off activist investors that are needlessly trying to throw out a board, but in general corporations win shareholder votes anyway, proxy firms or not. Large shareholders, which often have some other business ties to large corporations, like managing their pension or 401(k) plans, often have their own conflicts. True shareholder democracy is hard create. Proxy advisory firms give at least some voice to those who might stand up to overpaid CEOs and entrenched boards. If Clayton is serious about protecting mom and pop, he shouldn’t be helping big business to stifle proxy advisory firms.
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Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.