SEC Chair Jay Clayton announced earlier this week that the SEC will be holding a roundtable to discuss the proxy process, date TBD. Potential topics include the voting process, retail shareholder participation, shareholder proposals, proxy advisory firms and technology and innovation. In 2010, the SEC issued a concept release soliciting public comment on whether the SEC should propose revisions to its proxy rules to address the infrastructure supporting the proxy system, so-called “proxy plumbing.” Back then, the SEC had decided that it was time to do some maintenance on the creaky old plumbing system. However, as then Commissioner Elisse Walter, quoting Kurt Vonnegut, commented at the 2010 open meeting to vote on the concept release: “It’s a flaw in the human character that everyone wants to build, but nobody wants to do maintenance.” That statement was more prophetic than she probably anticipated when she made it: nothing came of the concept release. Whether more results from this current effort remains to be seen.
In his statement, Clayton observed that the proxy process is a fundamental component of shareholder engagement, which is, itself, a “hallmark of our public capital markets.” Since the 2010 concept release, the level of reported shareholder engagement has increased from 6% of the S&P 500 to 72% in 2017. In addition, he maintained, the “SEC’s rules governing the proxy process are at the center of investor participation in, and influence over, corporate governance at U.S. public companies.” In light of the many changes to the “markets, technology and how companies operate,” the time had come for the SEC to “review whether our existing rules are achieving their objectives effectively.”
While no agenda has yet been set, Clayton asked the staff to consider the following topics, some of which may make you think this is Groundhog Day:
Voting Process: Does addressing problems associated with over-voting and under-voting sound familiar? How about “empty voting” (when the voting rights are held separately from the economic interest)? Other issues on the list to be considered are problems in confirming whether shares are voted in accordance with instructions (especially given the number of participants in the process), and costs and challenges associated with distributing proxy materials and communicating with shareholders, particularly street name holders, whether NOBOs or OBOs.
Retail Shareholder Participation: What accounts for the huge spread between the participation rate of retail voters compared with institutional voters? For the 2017 proxy season, retail shareholders voted approximately 29% of their shares, while institutional investors voted approximately 91% of their shares. To what extent is the low level of retail participation a problem that should be addressed? Are there rules that inappropriately inhibit retail participation? Would better communication and coordination among proxy participants, increased use of technology, rule changes or investor education increase participation? How should individuals who invest through mutual funds or pension funds be able to participate in the governance of their public company investments?
Shareholder Proposals: In his statement, Clayton emphasized the need for balance in the shareholder proposal process: while shareholders “may benefit from the engagement and potential for enhanced performance brought about by consideration of a shareholder proposal,” the shareholders are also the ones that ultimately bear the costs associated with inclusion of a shareholder proposal in the company’s proxy statement. Clayton notes in particular that only a small group of shareholders submits a “significant percentage” of the proposals submitted.
Questions for consideration include whether the current minimum shareholder ownership thresholds for submission as well as the thresholds for resubmission are appropriate? Are there tests, other than the amount and duration of share ownership, that would be appropriate? Do the proposal and engagement processes properly take into account the “voices of long-term retail investors”?
Proxy Advisory Firms: Do investment advisers and others rely excessively on proxy advisory firms for information aggregation and voting recommendations? Are issuers allowed a fair shot at raising concerns about recommendations, especially about errors and incomplete or outdated information on which a recommendation is based? Are proxy advisory firm’s voting policies and procedures sufficiently transparent? Would comparisons of recommendations across similarly situated companies have value? Are any conflicts of interest (e.g., consulting services) adequately disclosed and mitigated? Should proxy advisory firms be regulated? Should prior staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms be modified?
Technology and Innovation: Are there ways that technology, such as blockchain, can be used to make the proxy process more efficient and effective for participants or to streamline or create more accountability in the process?
Other Commission Action: Under this caption, the idea of universal proxy cards has once again reared its head. A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. Clayton observed that, under the existing rules, nominees must consent to including their names on a proxy card, with the result that, in an election contest, a dissident may not include the other party’s nominees unless it receives consent, which, he noted, rarely occurs. You might recall that, in 2016, the SEC proposed amendments to the proxy rules mandating the use of universal proxy cards in contested elections, but no action was ever taken. Clayton seems to be suggesting that universal proxy cards be a topic of discussion at the roundtable. (See this PubCo post.)