End of Week Notes
Shining a Light on Corporate Democracy
SEC proposes improvements in mutual fund proxy vote reports
The Securities and Exchange Commission proposed this week much-needed improvements in the way mutual funds report their proxy votes. Since 2003, funds have had to report their proxy votes on Form N-PX by August 31 every year for votes cast during the preceding proxy season ending June 30. The reporting needs improvement because the data provided under current rules is exceedingly difficult to analyze, undermining its transparency and usefulness for investors. Using plain-text or HTML formats that can’t even be downloaded into a spreadsheet, reports filed today literally look like they were created in 2003.
(I’ll give you a minute if you want to go to the SEC’s EDGAR database or a fund company website to find proxy votes and to take a look at how they are presented.)
Under the proposal, funds would have to file reports using an XML structured data language. They would also have to use the same language describing a vote that the company used on its proxy ballot and — importantly — categorize votes so investors can more easily find topics of interest to them. The proposal would require funds to disclose that their proxy records will be available on their websites and provide them to investors free of charge. Finally, the proposal would require funds to disclose the actual number of shares voted and the number of shares not voted because they are on loan as part of a securities lending program.
Overall, the proposal makes Form N-PX information “more consistent, comparable, and decision-useful for investors,” SEC Chair Gary Gensler said in a statement of support.
Commissioner Allison Lee, who has spearheaded this initiative, argued more fully that better transparency is needed because funds and investment managers wield significant influence at the corporate ballot box, based on the assets of everyday investors:
Corporations are owned by shareholders and shareholders have a voice in how their companies are run. That voice comes through the voting rights attached to their shares. Who handles that voting? Largely investment companies (“funds”) and institutional investment managers because most Americans who invest do so through funds and other intermediaries. As a result, funds and managers wield significant influence at the corporate ballot box. Opinions vary widely about whether to vote for or against specific proxy proposals. That’s as it should be; that’s how corporate democracy works. In fact, it’s that divergence of views that makes transparency around how votes are cast all the more important. That’s what today’s proposal is all about.
Not suprisingly, the Republican-appointed commissioners disagree. In fact, Commissioner Hester Peirce argues that less transparency is needed because proxy voting is “unlikely materially to influence an investor’s choice to invest in a particular fund.” The real interest in having better information, she says, comes from “activists and the ever-expanding population of ‘stakeholders’, for whom proxy voting seems to be the fund’s highest purpose.”
It’s a bizarre argument. Because fund investors may not have based their decisions to invest in a fund on its proxy votes, neither they nor anyone else — those who Commissioner Peirce rather sneeringly refers to as “stakeholders” — should get this information at all. Never mind that it would have been close to impossible for any investors to inform their fund selection based on proxy voting given the way it is reported today. And never mind the corporate voting power wielded by funds that is itself powered by the fund investments of everyday investors.
Below are the statements of all five commissioners; the proposal has the support of the three commissioners appointed by Democrats and is opposed by the two commissioners appointed by Republicans. (I should point out that another provision of the proposal would have institutional investment managers report their “Say on Pay” votes on executive compensation, to belatedly implement a provision of the Dodd-Frank Act.)
More timely disclosure is needed
Unfortunately, the proposal doesn’t go far enough in one respect. It leaves in place the existing requirement to file Form N-PX only on an annual basis. Funds have until August 31 to file based on their votes in the proxy season ending June 30.
More timely reporting is needed. Under the current requirements, the votes on some meetings may not be known for up to 14 months. My colleague Jackie Cook notes that companies like Tesla, Procter & Gamble, Nike, and Oracle hold their annual general meetings in the fall, so we won’t know how funds voted at these meetings until next August 31.
To that end, Commissioner Lee invited public comment on this question, asking:
In light of the potential for funds and managers to collectively cast deciding votes on important ballot issues, does annual reporting provide investors and the public with sufficiently timely information to effectively monitor voting practices? Have advancements in technology — such as the proliferation of structured data and automated voting and reporting platforms — made it easier to report proxy votes on a more timely or frequent basis, whether on Form N-PX or on their own websites?
Nothing is stopping funds from reporting their votes immediately, or even pre-announcing them. But it seems to me that quarterly filings would improve transparency and would also encourage funds to better explain their voting rationales.
