Comments on the SEC Roundtable on Proxy Process Issues – Proxy Advisory Firms and Shareholder Proposals

Summary of Study

Bottom LineProxy advisory firm accountability exists only to the extent the customers of proxy advisory firms collectively hold them to high standards. This lack of oversight creates numerous problems. Market-driven solutions which remediate the concerns without the creation of an onerous oversight regime that negatively impacts shareholder rights or act as an industry barrier of entry are needed. 

Proxy advisory firms have become de facto standard setters for corporate governance and executive compensation practices, which is reinforced by the absence of an appropriate regulatory framework. 

The main issues within the proxy advisory industry which stem from the lack of oversight and accountability are:

  1. Conflicts of Interest: Major conflicts of interests inherent in the proxy advisory firm business and ownership structure exist. 
  1. Procedural Shortcomings in the Proxy Report Process: There is a lack of opportunity for companies to provide reasonable input in the proxy recommendation process, including addressing a lack of rigor and accuracy with proxy advisory firm analyses.
  1. Lack of Transparency: There is a general lack of transparency surrounding proxy advisory firm voting policies and procedures.

The Center proposes the following solutions: 

  1. Mandatory Disclosure of Conflicts of Interest: The SEC should require proxy advisory firms to provide detailed conflicts of interest disclosures. 
  1. The “Five-Day Rule”: Currently, issuers are not provided with adequate opportunities to review draft and final proxy reports. The SEC should mandate that all issuers must receive a draft of the proxy report to be provided on the issuer by a proxy advisory firm to its clients.
  1. Custom Voting Policy Disclosure: Investors which rely upon proxy advisory firm recommendations without any review or further consideration should be required to make voting policy disclosures.  
  1. Methodological Reconciliation: Currently, proxy advisory firms utilize proprietary valuation methodologies for executive compensation in their proxy reports. The SEC should require proxy advisory firms to “show their math” and provide the analysis utilizing the issuer’s valuations to allow investors to view a true side-by-side comparison of the differences in assumptions.
  1. Rolling Fiscal Year Policy Implementation: The SEC should mandate a rolling fiscal year approach to proxy advisory firm policy changes whereby finalized policy changes will not apply to annual meetings which take place before the start of the next fiscal year. 

The Center also believes the SEC should make two needed updates to modernize the shareholder proposal framework to reflect the current landscape of the use of shareholder proposals:

  1. Update the Shareholder Proposal Resubmission Thresholds: The SEC should update the shareholder resubmission thresholds from the current 3%/6%/10% standards to reflect the 6%/15%/30% standards. 
  1. Impose a Five-Vote Limit on Unsuccessful Shareholder Proposals: The SEC should allow for the exclusion of a shareholder proposal which has been voted on by an issuer’s shareholders five consecutive times without achieving majority support. 

Read the full comment letter here.