End of Week Notes
The Big Three appear to be fine with the SEC’s attack on shareholder democracy
Few other large asset managers have weighed in prior to Monday’s comment deadline
BlackRock and State Street Global Advisors, two of the world’s three largest asset managers, have made well-publicized — and welcome — statements this month in support of greater engagement with public companies about climate risk and other sustainability issues, and signaled a greater willingness to vote their proxies against company managements that fail to address these issues.
So, I’ve been keenly interested in how they would weigh in on the SEC’s proposed rules that would reduce the influence of shareholders on corporate governance.
One set of proposals raises the thresholds for submission and re-submission of shareholder resolutions at public companies. The other puts new regulations on proxy advisors — firms that help large shareholders navigate the proxy-voting process — making it harder for them to give objective advice to their clients.
Taken together, these rules would undermine the clear and constructive progress that is being made in engagements between shareholders and company managements on climate risk and other sustainability issues that have become material to long-term value creation, not to mention life on earth.
Make no mistake, amid the growing realization that global warming is an “all-hands-on-deck” emergency, these rules will make fighting the climate crisis more difficult.
Neither rule is being demanded by investors.
Both emerged out of the right-wing DC swamp of corporate lobbyist/trade organizations that are closely allied with the three Republican SEC commissioners, who, unfortunately, comprise a 3–2 majority.
These trade groups, led in this case by a group called the American Council for Capital Formation, have been climate-change deniers/skeptics for years and are motivated by the fact that climate-risk disclosure resolutions are being proposed more often and supported more strongly by shareholders.
In the 2019 proxy season, 56 resolutions related to climate-risk were filed, and 16 came to a vote. Those that don’t come to a vote are typically withdrawn because they spurred successful engagement with the company.
And they especially don’t like the growing support for shareholder resolutions asking companies to disclose their lobbying expenditures because they know that greater transparency around their corporate membership list could reduce their influence and perhaps even put them out of business.
In the ACCF’s case, it appears that ExxonMobil has been its biggest corporate supporter, along with other fossil-fuel firms and industry trade groups, Koch Industries, and other conservative foundations. Interestingly and, disappointingly, ACCF lists Fidelity Investments, Putnam Investments, Principal Financial Group and USAA among its chief financial “sponsors” in its most-recent annual report.
Other than the shadowy swamp groups in the background, the rules are not being pushed by any identifiable group of investors, big or small.
Which Asset Managers Will Stand Up in Support of Shareholder Democracy?
Seeing those names in the ACCF annual report raises a question about which asset managers will bother to stand up in support of shareholder democracy.
Other than dedicated ESG-focused asset managers, who have ably articulated the facts and arguments against these rules in comments they’ve submitted to the SEC, few of the big names have weighed in (other than a few that signed on to the PRI’s letter.) The comment period closes on Feb. 3.
Two that have, Neuberger Berman and T. Rowe Price, made strong cases opposing the rules.
Here’s Neuberger Berman opposing the rules raising shareholder thresholds:
“[W]e believe [the thresholds] are best viewed in the context of how the process serves to protect investors and enhance company value. We believe the potential costs pointed out by issuers are small compared to the high value of work by shareholder rights advocates who push companies towards more effective management of material risks. The fact that many proposals earn majority support, the history of early identification of many issues that become material issues, and the signal value to both companies and investors from the trends in support of those proposals, justify opposing the application of new burdens in the proxy process.
In our view the argument that changes are necessary to protect companies is flawed. Companies should bear only marginal costs as work related to engaging shareholders on their views should already be robustly implemented.”
“We strongly believe minority shareholders deserve a voice, and that it is not only appropriate but advisable that companies balance perspectives from across their shareholder base. In our view, all shareholders are capable of bringing forward good ideas for all shareholders benefit. That is especially important when considering that small investors may collectively own more shares than institutional investors, and nearly always own more shares than management.”
Bravo, Neuberger Berman!
T. Rowe Price, in its comments, opposes the proxy voting advice regulation as “unnecessary and unlikely to achieve its intended objectives”, calling the proposal “unworkable and likely to impede existing (proxy) advisers’ duties” by imposing requirements that corporations preview the vote recommendations of proxy advisors before they show them to their shareholder/clients.
“Given the lack of empirical evidence of widespread market abuse or failure, the low interest shown by public companies to review proxy research for factual accuracy, and the potential for companies to use the review process in a way that could influence valuable independent research, we strongly oppose the two review periods contemplated by the Proposal. In fact, we see enormous potential for the Proposal to do more harm than good when we consider the impediments that the proposed procedural changes would impose on proxy advisory firms, their clients, and ultimately the shareholders who would be left with inadequate time to make informed voting decisions.”
Kudos T. Rowe Price!
Which brings us back to The Big Three. What have we heard from them so far? None have submitted comments to the SEC (they have until Monday) and, if not for the reporting of Reuters’ Ross Kerber, all we’d have heard are crickets:
Vanguard Group plans to file a comment letter soon “in directional support of the SEC’s efforts,” a spokeswoman said.
A BlackRock spokesman declined to comment on the SEC rule changes.
Rakhi Kumar, who oversees State Street’s stewardship efforts, said in an interview that the firm supports shareholder democracy but does not have a stance on the rule changes.
“I don’t feel like I need to have a position on an issue that’s not impacting us,” she said.
Wow. I wish it had been crickets. I am speechless at that last comment. At least Vanguard hasn’t made big pronouncements about engagement and proxy voting, but it makes no sense for BlackRock and State Street to refuse to take a position on rules that would negatively impact the shareholder engagement ecosystem in which they participate and claim to value.
Follow me on twitter: @Jon_F_Hale
