FINANCE Bloomberg Businessweek November 18, 201929PHOTO
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advisers’ recommendations. (Advisers had recently
recommended voting against his pay package; it
was approved.) Bloomberg News has reported
that Dimon pushed the Business Roundtable, a
Washington trade group he chairs, to lobby the SEC
and lawmakers on proxy rules.
Proxy advisers and some investor advocates say
these rules will tilt power toward management and
muffle shareholder voices that are mobilized by the
advisers. “They’re trying to kill the messenger,” says
Nell Minow, vice chair of ValueEdge Advisors, which
works with institutional investors on corporate gov-
ernance issues. Earlier in her career, Minow was
the fourth person hired at Institutional Shareholder
Services Inc., the dominant shareholder-voting adviser.
ISS was formed in 1985, a time when institutional
investors tended to vote in line with management or
not at all. Voting has since gained significance—due
partly to the rise of activist investors such as hedge
funds, who seek changes they think can boost stock
prices, but also to a shift toward passive, index-based
investing. Because many investors have to hold every
company in an index, they can’t express their dis-
pleasure with a CEO or corporate board simply by
selling shares. They speak with their votes.
All of this makes ISS and its main rival, Glass,
Lewis & Co., important players, though many big
asset managers, including BlackRock, Vanguard, and
State Street, also have in-house teams dedicated to
proxy voting. Most matters that go up for a share-
holder vote are routine, such as approving firms
that audit corporate accounting. Voting on execu-
tive pay and director elections can be contentious,
especially during fights with activist funds, as can
corporate mergers and acquisitions. These votes
are where the proxy adviser firms are seen as hav-
ing the most sway. Corporations complain about
errors in the analyses the firms use—for example,
comparisons of executive pay packages—when they
come up with their voting advice.
“Companies are dealing with this on a regular
basis—cookie-cutter advice, flawed recommenda-
tions, the feeling that they need to kowtow to these
firms operating as quasi-regulators,” says Charles
Crain, who directs tax and domestic economic pol-
icy at the National Association of Manufacturers.
Supporters of the rules say they’ll help weed out
mistakes. ISS and Glass Lewis argue their error rates
are low and say the complaints are really about rec-
ommendations companies don’t like.
The proposed rules may sound like small tweaks.
But Robert Jackson Jr., an SEC commissioner who
voted against the rules, described them in his state-
ment as a “tax” on anti-management advice. While
proxy advisers are unlikely to face much blowbackwhentheygiveadvicethatsideswiththeC-suite,
theycould“riskfederalsecuritieslitigationover
theirmethodology”whentheydisagree.InAugust,
theSECalsoputproxyfirmsonnoticewithguid-
ancethattheiradviceis subjecttocertainbroader
securitiesrules.
ISSis pushingbackonthatguidancewithitsown
lawsuitagainsttheSEC.Whilethecommission’spro-
posedrulesarenotyetfinal—theSECis askingforpub-
liccomment—theAugustguidanceis alreadyineffect.
A secondsetofproposedrulesaffectsshare-
holderswhooffertheirownmeasurestobeputon
a corporateballot.Thesecanincludepensionfunds
proddingtheoilindustryonclimate-change-related
risksornunspressinggunmakersaboutsafety.
Sucheffortshaveattimesgottenbackingfrombig
mutualfundcompanies,who’vealsousedtheirvot-
inghefttocallformorewomenonboards.Small
shareholdersknownascorporategadfliesalsouse
proposalstoseekgovernancechangesinareassuch
as how directors are elected.
Those with as little as $2,000 in a company’s
stock for one year can offer a shareholder proposal
today. The new rules would put the dollar figure on
a sliding scale that goes up to $25,000, depending
on how long an investor has held shares. Another
potential rule change would raise the bar for letting
a shareholder try again on a failed proposal. Gadfly
James McRitchie estimates half the 150 stocks he and
his wife hold wouldn’t meet one of the new thresh-
olds for activism under the SEC’s plan.
Much of the pressure around shareholder advo-
cacy is coming from the same business groups who
want tougher rules on proxy advisers. They say a
small stake shouldn’t be used as a soapbox. In his
remarks at the hearing, SEC Chairman Jay Clayton,
who voted in favor, cited a study showing that the
majority of shareholder proposals filed by individ-
ual shareholders—about a third of the total—came
from just five people.
Groups such as the Council of Institutional
Investors, which represents many pension funds,DATA:INVESTMENTCOMPANYINSTITUTETABULATIONSOFISSCORPORATE*YEARSERVICESENDEDFIGURESJUNE^30The Investor Class Gets Woke
Shareholder proxy proposals for the largest public companies* Clayton Dimon2013 2017Board structure and electionsSocial or environmental issuesCompensation
Other22.4%39.219.119.450.5%18.925.2