Contrasting Articles Highlight Divisions Across the Market on SEC Regulations for Proxy Advisory Firms
November 16, 2019
As expected, the SEC’s proposed rules (approved on Nov. 5, 2019) regarding proxy advisor firms are generating both vocal praise and strident criticism.
An article in Institutional Investor highlighted the opposition from one of the US’s largest pension funds, the California State Teachers Retirement System (CalSTRS). Christopher Ailman, CalPERS Chief Investment Officer, highlights several concerns, including re-entrenchment of management and impairment of the proxy voting process. He also states that the provision in the proposed rules giving regarding companies the ability to review a final proxy report prior to publication demonstrates the need for simplified compensation plans. According to Ailman: “It’s so complex and convoluted, and they do that intentionally, and they complain when somebody might, in their view, misinterpret” executive compensation disclosures. He continued: “We have often said that nowadays most proposals require an MBA and a math degree to find out what’s really going on in executive comp.” He noted if companies simplified compensation plans, they could reduce the risk of a perceived misinterpretation.
On the other side, the Wall Street Journal published an editorial titled "The Proxy Protection Racket" highlighting the risks of having two firms, ISS and Glass Lewis control 97% of the proxy advisory market. The article notes, as the Center has, that an adverse vote recommendation could reduce a vote result by 20-25%. It also notes companies’ significant concerns with the current (largely non-existent) review process for proxy reports and highlighted that many companies do not get a chance to address mistakes prior to publication and shareholder begin voting. It concludes: "Corporate governance is distorted when two privately held companies that don’t own shares in public companies have so much sway over shareholder votes and corporate policy."
The two sides do seem to agree on one point: disclosures by the proxy advisory firms regarding potential conflicts of interest need to be substantially improved and strengthened. Given that the proposed rules have now entered the public comment period, and that ISS has filed a lawsuit against the SEC, it is expected that the current proposal will undergo some modifications should the rules be finalized.