Proxy voting issues echo midterm challenges

Last week’s Securities Exchange Commission (SEC) roundtable on proxy process may not have grabbed national headlines, but its focus on proxy voting mechanics, shareowner proposals and proxy advisory firms are important issues in world of corporate governance.

The event was organized by the SEC’s Chairman Jay Clayton and may signal the commission is ready to act; but probably not.

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The changes needed sound terribly familiar given issues raised in congressional and local elections earlier this month on the integrity of the vote count. For example, panelists agree the proxy voting system should allow investors to confirm their votes are tallied.

SEC guidance is needed to correct errors in the voting system. Likewise, a “universal proxy” could be effective in clarifying and accurately reporting proxy votes in cases where board of director seats are being contested.  

Shareowners and issuers also agreed that the current shareowner proposal process and the current state of engagement are better than ever. That engagement has produced far more compromises between the proponent and the company resulting in many shareholder proposals being withdrawn, never reaching the corporate proxy.

Points of contention

Unfortunately, not all is rosy in the world of corporate governance and the proxy voting process. While better company/proponent engagement is happening, Issuers still feel the rules for who can file a proposal allow too many nuisance proposals that waste company time, money and focus.

To combat these nuisances, issuers suggest raising current ownership requirements to file. In particular, the threshold of $2,000 worth of shares to file a proposal initially, and any repeats thereof, needs to be higher, companies said. Some continue to raise nuisance proposals as one factor in companies remaining private, to avoid the annual “dance of the gadflies."

Investors have a different take. Most issues they vote on are routine. The shareholder proposals issuers complain about are few and far between. Indeed, it was suggested that the average U.S. company faces a shareholder proposal once every seven years, hardly a significant burden.

Investors also see raising the resubmission threshold as potentially blocking important reforms. They reason that it took many years of repeated proposals to gain ground on majority voting, say-on-pay and proxy access to generate changes that are mainstream today.

Another point of contention is the fact that intermediaries involved in the current voting system may have little motivation to take actions that could upset their current businesses.

Many see large asset owners routinely voting with management as the path of least resistance, potentially diminishing the interests of underlying investors and investor protections. Overall, we see the proxy proposal process working well and an important tool in realizing the rights of share ownerships.

Proxy advisory firms

Perhaps the greatest area of disagreement between issuers and investors is the role of proxy advisers and their influence on the proxy-voting process. To be clear this has been an issue now for decades.

Issuers claim advisers have undue influence on institutional investors’ proxy votes and seek more regulation and ability to block or discredit negative vote recommendations. They raise concerns the recommendations are flawed and based on inaccurate analysis.

They also claim proxy advisory customers follow in blind adherence to proxy adviser recommendations, suggesting a breach of fiduciary duty owed to their underlying investors/beneficiaries.

Investors counter that they have their own policies and procedures for voting their proxies and use the services of proxy advisors to either handle the mechanics of voting thousands of proxies or as one of many data points informing their voting decisions. In other words, there is no blind adherence.

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Investors also note that this only comes up when a company gets a negative “vote against” recommendation. All the positive advice from proxy advisers to support management proposals (most cases) is fine. In many ways, this resembles classic retaliation by a company against a financial analyst that issues a sell or short sell recommendation for the company’s stock.

Of course, proxy advisers should make every effort to minimize errors and conflicts of interests, but onerous regulation that would only add costs for investors with no discernible benefit is not a constructive move in our view.  

There should be a free market for advice and steps to enable increased engagement on the part of issuers with investors as more cost-effective solutions.

The voting of corporate proxies is a crucial nexus between shareowner and the officers/directors entrusted to run the business. Emerging technologies that facilitate easier vote casting, counting and reporting is key and will alleviate some of the current friction.  

In the corporate governance dynamic of public companies, nothing is more important than effective owner/manager communication. Importantly, it is the proxy season and voting process that provides the best means to enabling those conversations.

Kurt Schacht is the managing director of the Advocacy Division of the CFA Institute, a global association of investment professionals.