SEC must stop political operatives who hijack shareholder process

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Last week, millions of Americans went to the polls to cast their votes in the midterm elections and help shape the future of policymaking for our country.

Through the democratic process, we were able to make our voices heard and hold those in power accountable. And like most Americans, we are looking forward to the political ads finally leaving our television channels and for the country to come together.

Unfortunately, an alliance of fund managers and proxy advisors acting as political operatives are trying to extend the worst of the campaign season beyond the final ballot and into America’s corporate board rooms.    

The shareholder proposal and proxy advisory process, rightfully used by most investors to question and challenge management decisions about the best way to increase company profits, has been hijacked by this group.

Their goal is not to increase returns to shareholders but to use the process to inject partisan political discussions into board meetings. They want the divisive issues debated during political campaigns and best settled in the halls of Congress to dominate the board room. This should raise a red flag for every American saver with money in the U.S. stock market.

If you doubt this problem exists, look no further than California, where last month, CALPERs employees voted to remove their president for focusing on politics rather than the plan’s fiduciary duty to maximize investment returns. Bottomline: Workers do not want fund managers playing politics with their retirement savings.

The political exploitation of the shareholder process is justified by this alliance as necessary to reform capitalism to serve the best interests of society. But the capitalist system they seek so desperately to alter has helped more people escape poverty and pursue a path to prosperity than any other economic system in history.

Political shareholder proposals needlessly erode shareholder value, as each response to a proposal costs public corporations and their shareholders a whopping $150,000.

This cost also disproportionately harms smaller companies that would rather use every dollar they raise in the public market to fund research, grow their customer base and maximize returns for those investors who believed in them.

For public companies, fending off politically motivated shareholder proposals and the proxy advisor extortion that accompanies them is not a one-time affair. Numerous shareholder proposals reappear year after year because current regulation allows them to be re-submitted even though they received very little support.

Effectively, this loophole allows a slim minority of politically motivated shareholders and their proxy advisor allies to push their costly agenda on the company indefinitely.

A recent U.S. Chamber of Commerce report found that “zombie proposals” — those that fail three or more times but continue to appear on ballots — made up one-third of all failed proposals from 2001 to 2018.

Unsurprisingly, many of these zombie proposals are politically motivated and proxy advisors play an important role in keeping them alive.

Institutional Shareholder Services, the largest proxy advisory firm, supported 95 percent of zombie proposals in 2018, even though a large majority of investors continue to reject their advice on these matters.

Why is that? Do proxy advisors have skin in the game? Outside of their own profits, the answer is no. The truth is, they are aligned with certain fund managers who seek to undermine today’s form of U.S. capitalism by pushing a false narrative about the importance of political issues to shareholders because it’s good business.

The proxy advisors created consulting and rating businesses that specifically promote this outcome. And make no mistake, they aggressively use these businesses to pressure corporations into adopting the political agenda of these fund managers.

This conflict must end. Proxy advisors should have one business model with one focus: providing recommendations to investors based on an accurate and correct statement of facts.

The chamber also found proxy firms did not conduct adequate research before making voting recommendations and that numerous recommendations contained factual errors. This needs to change. Proxy advisor voting recommendations must contain correct information and not benefit their affiliated business lines.

As the SEC meets this week to discuss shareholder proposals and proxy advisors, we call on it to:

  • Subject the voting reports proxy advisory firms produce to the anti-fraud provisions of the proxy solicitation rules;
  • prohibit proxy advisors from offering rating and consulting services to issuers on any matter that they are also being paid by an investor to provide a voting recommendation on (there is no way to manage this conflict); and
  • update the resubmission thresholds for proposals that lose by wide margins.

These simple fixes should prevent the alliance from injecting politics into the boardroom.

This SEC can stand-up for “Main Street” investors and help defend a capitalist system that has provided a better life for so many families by reforming a broken shareholder proposal process.

Christopher A. Iacovella is the chief executive officer of the American Securities Association, which advances the business, market, regulatory and legislative interests of American middle-market and regional investment banks and securities dealers. 


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