Statement on Proxy Process and Rules: Examining Current Practices and Potential Changes

Summary of Study

Bottom Line: Public companies and their shareholders are increasingly targeted through the proxy system and other means over issues that are unrelated to – and sometimes, even at odds with - enhancing long-term performance. Reforms to the proxy process can overcome such threats to shareholder value. 

Topics that should be reserved for the legislative and executive branches of government – including a variety of social and political issues that may not be directly correlated to the success of the company – are increasingly finding their way into proxy statements and being debated in boardrooms. This has created significant costs for shareholders and in many instances has distracted boards and management from focusing on the best interests of the company.

Labor-affiliated pension plans have historically been the most active at advancing such agendas that do not correlate with long term performance. Both the Department of Labor (DOL) Inspector General and the United States Court of Appeals for the D.C. Circuit have expressed skepticism as to whether the shareholder activism engaged in by labor-affiliated funds is actually connected to increasing share value. 

In other words, public pension plan beneficiaries and taxpayers in such jurisdictions are actually harmed when the overseers of public pension plans emphasize social or political goals over the economic return of the plan. Outdated SEC proxy rules have motivated special interests to take advantage of this system to the detriment of Main Street investors and pensioners.

Activist campaigns, as well as routine proxy matters that companies deal with today, are also magnified by the outsized influence of proxy advisory firms. Two firms – Institutional Shareholder Services (“ISS”) and Glass Lewis – constitute roughly 97% of the proxy advisory firm market, yet both are riddled with conflicts of interest, operate with little transparency, and are prone to making significant errors in vote recommendations that jeopardize the ability of investors to make informed decisions in their best interests.

The Chamber offered the following reform recommendations to the SEC for proxy advisory firms:

1) The SEC should take steps to ensure that the guidance laid out in Staff Legal Bulletin 20 results in appropriate changes to compliance systems for proxy advisory firms and investment advisers, particularly in light of the recent withdrawal of the 2004 Egan-Jones and ISS no-action letters.

2) The SEC should enhance the conditions that a proxy advisory firm must satisfy to be exempt from the disclosure and filing requirements that apply to proxy solicitations.

3) The resubmission thresholds under Rule 14a-8 should be raised so that proponents must receive a meaningful level of support before resubmitting proposals that are overwhelmingly unpopular with investors.

4) The SEC should withdraw Staff Legal Bulletin 14H (CF) issued in October 2015.

5) Shareholder proposal proponents should be required to provide sufficient disclosure regarding their economic interests and objectives for any company in which they submit a proposal.

6) The SEC should abandon efforts to mandate the use of universal proxy cards during proxy contests; and Retail Investor Participation.

7) Initiatives to increase retail investor participation in the proxy process – such as client directed voting (“CDV”) - should be pursued.

Read the full statement here.