While the SEC’s proposed rules regarding proxy advisory firms and shareholder proposal submission threshold requirements appear primarily favorable to issuers, they could drive notable changes in investor behavior, injecting substantial uncertainty into the upcoming proxy seasons, according to a recent PJT Camberview brief. As the article highlights, that may drive investors to attempt to influence issuers in ways that “build upon or amplify emerging trends” and it could encourage proxy advisors to adhere to a more rigid check-the-box style of governance and compensation analysis. Camberview highlights several potential strategies investors may utilize, including:
- Join or create issue-specific investor coalitions which seek change through letter writing, collective engagement and vote campaigns. Certain environmental and sector-based coalitions have developed some momentum with this strategy.
- Increased votes against directors. Barring the chance to submit or vote on shareholder proposals, investors may launch more “vote no” campaigns against either directors, compensation, or equity proposals to get their point across.
- Take a harder line on shareholder proposals. For the shareholder proposals that make it to ballots, supportive votes could be substantially increased.
There is some precedence for this action. In recent years, at companies that did not provide shareholders with a right to call a special meeting, or had a significant hurdle to such an action, shareholders approve proposals to act by written consent. When engaged, boards heard from institutional investors that did not actually want to act by written consent, but wanted an accessible right to call a special meeting.
The article highlights several other potential changes, including:
- Proxy advisors and certain investors may take a black and white approach to voting policies. If proxy advisors (and some smaller investors) feel a case-by-case approach opens them up to risks of material omissions of fact, they may feel “safer” using a rigid approach.
- Companies will have less time to engage with investors on proxy voting reports. The proposed two review periods may delay report publication and investors will have less time prior to vote submission to engage with companies and potentially override a voting policy.
- Activists and others soliciting votes will have equal access to proxy advisor reports. As such, they should be afforded the same review periods and the same right to provide a hyperlink to their view on the final report.
In order to prepare for any increased volatility, boards and management should prioritize shareholder engagement, understand investors’ (increasingly differentiated) voting policies, models, and ESG priorities, and build relationships with the individuals responsible for making the ultimate voting decisions. As highlighted in several panels at the Center’s 2019 Annual Meeting, shareholder engagement is rapidly growing into a multi-disciplinary function with elements of customer relationship management, HR, investor relations, legal, and finance.
An article this week in The Economist noted the division among academics on the proxy advisory firm proposals while distilling the overall debate. The article quotes Stanford Business School and former SEC Commissioner and Joseph Grundfest as saying: “As long as iss is accurate in everything it does, it has no additional legal liability.” On the other side, it quotes University of Delaware Professor Charles Elson stating the proposal is “a punitive solution looking for a problem” arguing, similar to other opponents that institutional investors are not complianing. (Which is not surprising, under the circumstances.) The Economist notes that the SEC could "soften the proposal's sharp edges" while focusing on greater accountability.