Using proxy advisors, and proxy voting itself, is on the docket for Securities and Exchange Commission on Nov. 5, when it will have an open meeting to propose new regulations for proxy advisors, which are firms that aid pensions and shareholders on preparing and submitting proxy votes. Typically these can focus on electing board members, but more recently they’ve included resolutions that focus on environmental, social and governance issues.
In the meeting, the commission states it will “consider whether to propose amendments to the proxy solicitation rules that would provide for disclosure of material conflicts of interest and set forth procedures to facilitate issuer and shareholder engagement, to provide clarity to market participants, and to improve the information provided to investors.”
Proxy advisors believe the meeting and vote will curb their business as well as small shareholders’ ability to let their issues be heard. Jon Hale, Morningstar’s global head of sustainable research, rebuked the SEC in his blog, The ESG Advisor:
“As if limiting the ability of proxy advisors to issue independent advice on proxy votes isn’t bad enough, the SEC’s next move is to limit shareholders’ ability to submit and resubmit resolutions at company’s annual general meetings under rule 14a-8.
“For years, any shareholder holding $2,000 worth of a company’s stock continuously for at least one year has been able to propose shareholder resolutions. Such questions are subject to a materiality test, which keeps questions irrelevant to a company’s business off the ballot. This process allows small “Main Street” investors to raise questions to corporate management, and serves as a sort of early-warning system for companies about developing issues. Inherent in the process is also the belief that small investors may have good ideas that could prove beneficial to a company and its shareholders.
“Once a shareholder resolution is filed, it must receive at least 3% of shares voted to be eligible for resubmission the next year. In year two, it must receive at least 6% and in year three and thereafter, at least 10%.”
The SEC has plans to increase this threshold despite not producing “evidence that the current process is broken,” Hale writes. Indeed, he maintains a reason for the SEC move is that the number of resolutions pertaining to ESG has grown significantly over the past decade. According to Morningstar, the number of resolutions submitted in 2017 was close to 225 with an average support of roughly 20%. In 2019, as of late July about 175 resolutions had been submitted with about an average of 30% supporting vote.
Et tu, DOL?
In fact, the U.S. Chamber of Commerce requested that the Labor Department also put similar restrictions on proxy voting and advisors.
The Chamber’s letter to the department was met with an acerbic response from ValueEdge Advisor Vice Chairman Nell Minow, who called the COC Sept. 20 letter “slanted, sloppy, self-serving and superfluous,” and said: “The fact that the CEOs behind this comment are willing to spend so much time, effort, and (shareholder) money to stop shareholders from a tiny fraction of non-binding, advisory-only proxy votes contrary to managements’ recommendations makes it clear that their goal here is extinguishing even the mildest of shareholder response.”
Minow told ThinkAdvisor in an email, “What [the SEC] may do on Tuesday could be significant — keep in mind, it is only a proposal and will have to go through a comment period and be revised accordingly before it goes into effect. I have no inside info but hear the SEC and DOL will be issuing proposed rules.”
In August, the SEC voted on guidance directed at investment advisors on how much they can “outsource” to proxy advisor firms and still fulfill their fiduciary duty, explains Cydney S. Posner, special counsel at Cooley LLP, in a Sept. 1 analysis of the meeting and topic. According to the memo, SEC Chairman Jay Clayton noted that the new guidance would allow advisors to provide “reasonable due diligence, reasonably identifying and addressing conflicts, and full and fair disclosure.” He added that “voting proxies [are] important,” but the SEC guidance would help advisors make sure proxy advisors don’t have conflicts of interest and have accurate information. “These potential actions discussed in the guidance are not new.”
That said, Institutional Shareholder Services, the giant proxy advisory firm, filed a lawsuit against the SEC over its August guidance, seeking “injunctive and declaratory relief.”
The ESG industry is worried the change could thwart their push to force companies not only to provide information but to change their ESG practices when found lacking. Minow says in her letter to Labor that the Chamber’s goal was to “get rid of non-binding shareholder resolutions and initiatives on the subject of climate change at a fraction of a percent of listed companies. … Any self-reported, unaudited [company] claims of expense from shareholder resolutions are vague and unsubstantiated and highly suspect. As shareholder resolutions are non-binding, even a 100% vote in favor does not require companies to take any action whatsoever.”
The proxy issue exploded last July when in a speech to the American Enterprise Institute, SEC Commissioner Hester Peirce took aim specifically at ESG ratings and proxy advisors. The speech led to a maelstrom response from advisors who utilize ESG investing and others in the business.
It doesn’t seem likely even SEC proposals will up-end the multitrillion-dollar ESG investment business. Even the U.S. Congress has joined the movement, introducing various bills that would push companies to disclose ESG information in their annual reports. States, such as Illinois, also are implementing rules for pension funds.
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