“Stop, Look and Listen”—Improving the SEC’s Proposed Rules on Proxy Advisors
Bottom Line: The SEC’s proposed rules to provide companies with the opportunity to receive a proxy advisor final recommendation two days before its publication to allow time to prepare a response in the proxy advisor’s report will not achieve its regulatory goals unless current electronic default voting practices are stopped. While the inclusion of the company's response provides investors with the opportunity to consider both sides of the story before voting, this response would likely be unread or ignored without associated changes to default voting.
The publication of a “Stop, Look and Listen” communication is explicitly embraced in the SEC’s proposed rules as a method for alerting shareholders that more information will soon be available that could influence their decision to tender or retain their shares. Such communications ask investors to pause until the target of the tender offer publishes its side of the story before making their tender decision. A similar mechanism should be employed in the SEC’s proposed rules relating to the proxy advisory firms in those instances where the company provides a written response to the voting recommendation of a proxy advisor.
Giving companies a two day “heads up” concerning the contents of a proxy advisor’s recommendation is a good start, but it is largely meaningless without also addressing electronic default voting. Voting data demonstrates that default voting, also known as "robo-voting," may influence the outcome on a given proxy proposal by as much as 20% or more.
A potential solution framework includes:
- Distinguishing between the situations in which the company is submitting a response and those in which it is not to determine which topics are being contested and therefore need electronic default voting to be altered.
- In cases in which a company is not submitting a response, electronic default voting can proceed as it has in the past.
- In those contested situations in which the company is requesting the inclusion of a response, the proxy advisory firm would have the option to either:
- Disable electronic default voting, or
- Pre-populate the investor’s ballot on contested items with an “abstain” or “no vote” selection.
- Investors could then either choose to not vote or record a different vote after taking the affirmative step of replacing the pre-populated no vote after considering the information provided by the proxy advisor and the company.
Read the full study here.