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Drumbeat grows louder for proxy voting reforms

Council of Institutional Investors Executive Director Ken Bertsch

The proxy voting system needs to be updated and reformed in order to enhance shareholder confidence and reliability, as well as give equity investors more options in contested ballots, industry stakeholders said. "There's a consensus by all involved that the proxy voting system has to change," said David A. Katz, partner at the law firm Wach-tell, Lipton, Rosen & Katz in New York. "It's antiquated, it's out of date, it doesn't help anybody."

Members of the Council of Institutional Investors lack confidence that their shares are always fully and accurately voted, said Ken Bertsch, the group's executive director in Washington.

Aeisha Mastagni, a portfolio manager in corporate governance for the $228 billion California State Teachers' Retirement System in West Sacramento, echoed Mr. Bertsch's sentiment. "Right now, because there's so many different players, there's no way to actually know that the thousand shares that we voted were actually counted through the tabulator and incorporated in that final vote," she said.

The lack of certainty surrounding cast votes was an issue brought up repeatedly at the most recent Securities and Exchange Commission Investor Advisory Committee meeting on Sept. 13, which was the same day the SEC also rescinded two staff letters on proxy advisers issued in 2004. The letters were issued to Egan-Jones Proxy Services and Institutional Shareholder Services, and were aimed at assuring mutual fund managers that they could rely on their recommendations.

At the Sept. 13 meeting, SEC Chairman Jay Clayton voiced his support of calls to update and reform the current proxy system. "It's clear there is room for improvement," Mr. Clayton said. "And there's enough room for improvement where we should do something." The following week, the SEC announced it would host a roundtable discussion on the proxy voting system on Nov. 15.

The last major push the SEC made on proxy voting was in 2010 when it solicited public feedback. But by then the agency and industry focus had shifted to the Dodd-Frank Wall Street Reform and Consumer Protection Act so nothing came of it, Mr. Bertsch said. The system in use today has been roughly the same for decades, he added. "Shareholders overall, as well as companies, have an interest in an accurate and efficient system and better use of technology, which has developed a lot since our current system was structured," he said.

With that point in mind, Mr. Bertsch added: "We don't presently have an efficient and universal way of getting vote confirmation."

Ongoing frustration

It's a frustration for investors of all sizes, including CalSTRS. "In 2018 we should have enough technology that would make (end-to-end vote confirmation) feasible," Ms. Mastagni said.

The biggest player in the world of proxy voting infrastructure, Lake Success, N.Y.-based Broadridge Financial Solutions Inc., has been offering end-to-end confirmation for about 10 years, said Lyell Dampeer, president of Broadridge's investor communication solutions U.S., which handles the firm's regulatory communication services and its issuer and transfer agency services. But Broadridge can only offer voter confirmation when it acts as tabulator for a given annual shareholders' meeting. In instances when Broadridge does not act as tabulator, confirmation would still be possible if the tabulator communicated with all other service providers, Mr. Dampeer said.

"The information is available today to do end-to-end confirmations," he added. "If there was better cooperation or ground rules — by that I don't mean regulation — this could be accomplished literally tomorrow. I'm a little dismayed that it hasn't been."

Making end-to-end confirmations an industry standard does not require SEC rulemaking, just an agreement among stakeholders, according to Mr. Dampeer. "At the very least, end-to-end confirmation ought to be encouraged by issuers who are paying the tabulators and inspectors, and it can also be encouraged by banks and brokers who hire agents like Broadridge to fulfill their obligations under the rules," he said.

But while the SEC doesn't need to issue a rule on vote confirmation, Mr. Katz said if it did "everybody would be held more accountable."

Universal proxies

Institutional investors also are calling for the creation of a universal proxy, which would allow them to split their vote during a contested election without having to physically attend a given meeting.

Now, investors who do not attend a meeting must vote using proxy cards that do not list all board nominees. Instead they vote using management's proxy card or the dissident group's proxy card, and neither card lists all nominees, Mr. Bertsch noted.

Added Ms. Mastagni: "Shareholders really should be able to make a decision about the board and which members of either slate would best serve their interests at a company and because there's not a universal ballot I'm not able to do that as a shareholder investor. I'm limited in my choices because I have to vote on one ballot or the other."

Stephen Harvey, chief operating officer of Rockville, Md.-based Institutional Shareholder Services, said adoption of a universal proxy rule "would minimize the possibility of errors in carrying out the intent of shareholders on these complicated voting items."

In 2016, the SEC proposed a rule that would require the use of universal proxies in contested elections. Mr. Bertsch said there now seems to be a consensus in favor of the idea.

"In a proxy contest, both the activist and the target company would need to agree to a universal proxy so it almost never happens," Mr. Katz said. "The only way to make it happen is through SEC rulemaking that favors neither the activist nor the target company."

Big picture

In one of the most closely contested proxy votes on record, some 2 billion votes were cast in Trian Fund Management's efforts to have its founding partner and CEO Nelson Peltz elected to Procter & Gamble Co.'s board of directors last year. The final certified results showed a voting margin of approximately one-fourth of 1% in Trian's favor and the two sides ultimately settled, with Mr. Peltz joining the P&G board in March, according to Brian L. Schorr, a partner and chief legal officer at New York-based Trian, in his statement before the Investor Advisory Committee last month.

Mr. Schorr said the election exposed problems in the current proxy system, like over-voting, which can happen, for example, when shares that have been loaned out are voted (only shares held on the record date can be voted).

CII has proposed utilizing blockchain to enhance the reliability and security of proxy votes. Broadridge has run annual meetings on blockchain since 2017 according to Mr. Dampeer, who said it's helpful when there are multiple record-keeping systems that need to be reconciled in real time.

Mr. Bertsch added that CII cannot yet pinpoint how blockchain should be used, but said it's an idea he feels should be explored. For too long, there have been minor changes and fixes made to the system, but bigger ideas are needed, he said.

"I think there will be a temptation to just jury-rig it a little bit more and do some short-term fixes," Mr. Bertsch said. "I'm not necessarily against those but I think we need to think about the bigger systemic issues and making major changes. I think it's time to do that."