SEC plan puts institutions, business on opposite sides of fence over proxy debate

Institutional investors view the Securities and Exchange Commission's proposed rules for proxy advisory firms and shareholder resolutions much differently than the business community.

In November, the agency voted to put forth proposed rules that would require proxy advisory firms to disclose more about their process and potential conflicts of interest and give companies the opportunity to make revisions before making final recommendations to clients. Separately, the thresholds for submitting proposals, and subsequently resubmitting them would be raised, making it likely that fewer proposals will be introduced or appear on ballots.

On one hand, Michael Garland, assistant comptroller, corporate governance and responsible investment in the office of New York City Comptroller Scott M. Stringer, the fiduciary for the five pension funds within the $215.5 billion New York City Retirement Systems, said in a statement that the two SEC proposals "will only serve to insulate management and directors from accountability to shareholders."

On the other, Erik Rust, Washington-based director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, favors both proposals. "You're hopefully going to see proposals come from investors that have a long-term interest in the company and aren't trying to influence short-termism or activist or specialized interest," he said.

A study from MSCI Inc. released earlier this month examined more than 2,300 shareholder proposals that went to a vote at U.S. companies from 2015 to 2019. It found that 30.9% of proposals were submitted by individual investors. It also found that 55.3% of the proposals submitted by those individual investors obtained "significant support," defined as winning more than 30% of total votes cast.

Ric Marshall, Portland, Maine-based executive director on the ESG research team at MSCI, said that support dispels the notion that shareholder proposals are simply filed by gadfly investors. "If these were just nuisance filings, if these were just frivolous requests, they wouldn't get that kind of support from what's obviously a much more sizable part of the investor community," Mr. Marshall said.

SEC Commissioner Elad Roisman, a Republican who is leading the commission's efforts of proxy issues, voted for the proposals, including allowing companies to review proxy recommendations before they're finalized. But in a speech March 10 at a Council of Institutional Investors conference in Washington, Mr. Roisman said that based on feedback from stakeholders that utilize proxy advisory firm services, he understands "that there is concern that these days devoted to issuer pre-review could disrupt current voting practices."

"I take this feedback seriously, and I am certainly open to considering other ways to accomplish the policy goals of improving the total mix of information available to the marketplace and enhancing fairness and transparency in the voting process," he added.

Glass, Lewis & Co., which along with Institutional Shareholder Services Inc. controls about 97% of the proxy advisory market, said in a statement that the firm continues to engage with the SEC on the proposals. "We have expressed our concerns to the SEC about the proposed rules, particularly the effect they could have on the time our clients need to use our proxy research and analysis to make critical stewardship decisions," it stated.

Patti Brammer, corporate governance officer of the $100.2 billion Ohio Public Employees Retirement System, is concerned the proposals, as written, would negatively impact the independence of proxy recommendations. Moreover, she said if costs were to rise as a result of new regulations, issuers should bear some of the burden.

"We don't want to see any increased cost to institutional investors for implementing anything that we haven't found to be a problem," she said. "We're a public entity and have to prudently administer our funds. Our resources are not unlimited."

Mr. Rust said that if enacted, the proposals will greatly help the proxy-voting system. "You're going to see a lot more high-quality information and transparency around how the voting recommendations are produced by proxy advisory firms," he said. "That's beneficial for public companies as well as investors."

The SEC comment period for its proxy proposals closed in February and a final rule is expected this year.