End of Week Notes
The SEC’s proxy-voting guidance is both out-of-step and partisan
Republican commissioners impose unnecessary regulation on investors
The SEC voted 3–2 this week to publish new guidelines for investment advisors to follow in order to ensure they are fulfilling their fiduciary duties when casting proxy votes and using proxy advisors for advice on how to cast votes. The guidelines also say that issuers — public companies — should be given a greater say in how proxy advisors develop their recommendations.
The majority Republican appointees all supported the move: Chairman Jay Clayton, who enjoyed a round of golf with President Trump last weekend, Elad Roisman, and Hester Peirce, who recently trashed ESG investing in a American Enterprise Institute speech.
The two Democratic appointees, Robert Jackson and Allison Lee dissented. The guidance, Commissioner Lee said, “creates significant risks to the free and full exercise of shareholder voting rights.”
She’s right. The guidance amounts to unnecessary burdensome government regulation of the sort that Republicans normally rail against.
The 26-pages of guidelines outline detailed steps investment advisors should take to ensure they are not violating their fiduciary duties in the proxy-voting process. Based on my read, it’s not clear from the text the extent to which all these steps are now required, but that appears to be part of the point — to inject uncertainty into the process so that investment advisors may be dissuaded from using proxy advisors, or even from casting their proxy votes at all, which the guidelines pointedly note isn’t required.
This concerned Commissioner Lee, who wrote in her dissent:
Although the release states that the very detailed approaches to assessing a proxy advisory firm are just examples of how an investment adviser could meet its fiduciary duties with respect to proxy voting, many of those examples are presented as steps the adviser in fact should take. A regulated entity ignores such direction at its peril.
For his part, Commissioner Jackson emphasized that additional compliance costs could lead smaller investment advisors to vote less frequently:
Many large institutions already take some of these steps, but smaller ones may be less able to bear the costs of doing so. If smaller investors respond to these costs simply by choosing to vote less, the result may be to give more influence to large institutions.
The guidelines also suggest public companies should have a greater say in the process by which proxy advisors develop their recommendations, prompting this response from Commissioner Jackson:
To the extent we have any information, such as from the proxy roundtable in late 2018, we know that institutional investors and investment advisers have been clear that involvement by issuers would undermine the reliability and independence of a proxy advisory firm’s recommendations. Today’s release does not address or respond to those views, and, importantly, it does not justify why a contrary policy was chosen here, as would be required after notice and comment. Certainly, issuers have expertise and insight, but they also have a clear stake in the outcome.
It is the height of irony when anti-regulation Republicans, especially Commissioner Peirce, noted for her opposition to financial regulation, want to impose regulatory costs on small investment advisors.
Why is that, exactly?
That brings me to the “out-of-step” part: As we saw earlier this week with the release of the Business Roundtable statement on stakeholder capitalism, the public philosophy on the role of the corporation in society is shifting from the view that corporations exist primarily to serve shareholders to one in which corporations exist to meet the needs of all stakeholders.
Increasingly, the latter view is expressed in the proxy process, as stakeholder concerns are now more often reflected in required say-on-pay votes and increased numbers of — and increasing levels of support for — shareholder resolutions on a range of environmental and social issues.
As my colleague Jackie Cook has shown, average support for shareholder resolutions between 2004 and 2019 has increased from 12% to 29%. And in 2019, 14 resolutions attracted majority support.
But the traditional shareholder-primacy view, and this is certainly reflected in the inside-Washington business lobbyists who have the Republican SEC commissioners’ ears on this, is that these environmental and social resolutions are merely political issues that burden public companies with bothersome irrelevancies.
It’s an increasingly outdated perspective, even among the companies that the commissioners and business groups are trying to protect. That’s because companies today face unprecedented sustainability challenges and great expectations from a full range of stakeholders to address them effectively. To do this, companies are increasingly engaging with shareholders alongside other stakeholders, which is facilitated by the proxy process.
As The Wall Street Journal reported in May, “companies are becoming more responsive to investor demands before annual meetings, especially as consumers engage more on environmental and social topics.”
It all makes sense from the stakeholder perspective. Companies are increasingly expected to be good stewards of the environment and to treat well the workers and customers and communities in which they operate. Those that don’t face hits to their reputation that can lower revenue, difficulty attracting talent, and even an erosion of their social license to operate. Those are all material issues that impact shareholder value and therefore are not only appropriate topics for engagement, they are urgent topics for engagement.
The front page of the SEC’s website boldly states, WE ARE THE INVESTOR’S ADVOCATE. But in its actions — and there may be more to come — the SEC is not advocating for the growing number of investors who support the idea that corporations exist for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.