Comment to SEC on the Proxy Process

Summary of Study

Bottom Line: The SEC should protect U.S. investors and public companies by increasing transparency and reducing conflicts that are enabled by the extraordinary power of proxy advisory firms. Given the concentrated nature of this influential industry, the Commission should also consider whether other federal agencies have rule-making authority that could be brought to bear, such as the Federal Trade Commission or Department of Justice.

It is adverse to the interests of investors in U.S. public companies to have public companies wasting time and money on meeting demands of proxy advisory firms that achieve no general investor benefit, and in many cases, are contrary to the interest of investors, both in terms of financial impact and in terms of governance.

Proxy advisors waste corporate assets in two ways:

  1. By forcing public companies to spend time, effort and money on "hot topic" governance policies that deliver questionable (at best) benefits to stockholders
  2. In the case of Institutional Shareholder Services by leveraging the transfer of voting power into a revenue-generating private consulting business which has no accountability.

Examples of pointless and harmful governance policies promoted by proxy advisors include: (a) Proxy access, (b) Majority voting, (c) Opposition to Forum Selection Clauses, (d) Prohibition on actions by written consent and other constraints on stockholder rights.

The proxy advisor consulting business model is problematic. It takes the power of the individual stockholder under corporate law and listing rules is first transferred to the asset manager, who then transfers the power to the PAF, who then uses that power to obtain consulting fees related to proxy advisor policies, which may bear no relationship to the interests of the stockholder.

The Commission should consider the following recommendations:

  1. Balanced Disclosure of Proxy Advisor Policies -- Require proxy advisors to publish reports on each existing and proposed voting policy and on each item used to rate public companies (such as those used in ISS's Quality Score).
  2. Require Full Disclosure of Policy Calculations and Weightings -- Proxy advisory firms should be required to fully disclose their policies so that policy outcomes can be independently assessed against given facts.
  3. Require an Opportunity for Feedback on Voting Recommendations -- Several commentators have pointed out the tendency of proxy advisors to make misleading claims or outright errors in voting recommendations. Issuers should have the ability to respond and provide feedback to proxy advisor vote recommendations so that shareholders are properly informed on certain issues prior to voting.
  4. Asset Manager Disclosure -- Asset managers should be required to annually disclose the use of proxy advisors, and their adherence to their recommendations. Asset managers should also publicly confirm their support of the proxy advisor policies, and in doing so, republish the balanced disclosure of their policies.
  5. Eliminate Relative Ranking of Public Companies -- Relative ranking of public companies on governance, environmental disclosure and social policies creates an arms race environment, as public companies are pitted against each other and only one player benefits -- the proxy advisory firms.  

Read the full comment letter here