SEC rethinks corporate governance oversight | National exam


(Jonathan Ernst / Reuters)

Biden’s SEC chairman has indicated he will look away from potential conflicts of interest in proxy advisory firms.

Aalthough Shot as a victory for investors, the recent announcement by SEC Chairman Gary Gensler that he will not apply a 2020 rule to regulate proxy consulting firms could undermine corporate governance in America. The move comes without justification during one of the busiest proxy seasons on record – one that has demonstrated the growing influence of shareholder proposals on the management of the company.

Over the past two years, the SEC has carefully studied and weighed the impact of proxy advisers – companies that sell voting recommendations to investors during proxy season – before finalizing a new rule to address concerns about conflicts of interest, erroneous vote recommendations and the inability of companies to respond to or report issues related to those recommendations in a meaningful way.

With the thousands of shareholder proposals that an institutional investor must vote on each year, asset managers are increasingly outsourcing responsibility to proxy advisory firms. But the downsides of this arrangement have been a bipartisan concern for securities regulators for more than a decade.

The problem with outsourcing shareholder voting, an issue addressed by the SEC in its recently halted reforms, is whether investment advisers can fulfill their fiduciary duty to clients while relying on third parties for decisions. key to corporate governance without doing their own due diligence. In the worst cases identified by experts, investors often automatically vote on proposals immediately after recommendations made by an advisor – a practice known as robovoting.

To make matters worse, key provisions of the rules were only due to come into effect next year, meaning commission staff will have to reconsider the changes they just implemented months ago without new data. . The limited data available from 2020 showed a slight but encouraging drop in robovoting.

Stepping back to examine the broader SEC priorities indicated by the move, what is perhaps most disturbing is a nod to allow more passive voting and less active participation in the shareholder process. So far, throughout the 2021 proxy season, proxy advisory firms, rather than investors themselves, have taken the lead in highly controversial corporate matters. Constructive discussions on material proposals among shareholders should be encouraged but should not be based on large blocks of passive funds following the recommendations of a third party (without fiduciary duty to those who invest in the company).

Earlier this proxy season, I explained why two institutional shareholder proposals presented at Berkshire Hathaway’s annual meeting were not good for the company. The proposals called on Berkshire’s board of directors to collect and report information on mitigating climate change and promoting diversity in each of its portfolio companies.

Berkshire, however, is a decentralized holding company with dozens of stand-alone subsidiaries acquired over 50 years that it intends to keep forever. The proposals, meant to encourage long-term thinking at Berkshire, called on its board of directors to repudiate this age-old structure by injecting directors into key areas of managerial autonomy. Advocates such as CalPERS have failed to understand that Berkshire’s historic culture is responsible for the company’s leadership on climate change and workforce diversity.

Other Berkshire shareholders largely defeated the proposals, with 75% opposition. The unbalanced result reflects the fact that Berkshire’s shareholder base remains dominated by quality shareholders, including many families and individuals, who actively choose to buy Berkshire shares and hold them indefinitely.

In contrast, the remaining equities are dominated by institutional investors. Besides CalPERs, this cohort includes large passive indexers like BlackRock, who own stocks like Berkshire just because they are part of the index, not because they understand or like the company. There are also, of course, the robotic subscribers of ISS and Glass Lewis, the two leading proxy consulting firms, who have inadvertently advised their supporters to vote against the Berkshire model.

While committed Berkshire shareholders have pushed back campaigners, most other public companies are not enjoying this luxury. They have a larger share of institutional investors who are likely relying on universal proxy advisor recommendations or their own cookie-cutter policies.

Many players in the institutional investor community are right to point out the useful function played by proxy advisers on procedural matters and the benefits that these services can convey to investors in the form of low cost indexation. However, with the widespread use of these tips, there should be some oversight. If the SEC backs off its actions regarding proxy advisers, companies will effectively remain unregulated and unaccountable with their institutional investor clients.

In his statement on the recent announcement of the suspension of the proxy advisor rules, President Gensler began by hoping that he would ask his staff to consider “whether to recommend further regulatory action regarding the advisers. in matters of proxy voting ”. All the more reason why this apparent decline is both a surprise and a loss for investors.

Lawrence A. Cunningham is Henry St. George Tucker III Professor of Law at George Washington University.


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