38 BARRON’S March9,2020
State Treasurers
Caution the SEC
On Proxy Advice
I
nvestor protections are under
threat, and the culprit is the
Securities and Exchange
Commission. Catering to the
pleas of corporate interest
groups, the SEC is moving
quickly to impose new regula-
tions on proxy advisor firms that will
undermine a well-established, mar-
ket-based system that has served in-
vestors, companies, and the U.S. eq-
uity market for decades.
As state treasurers, we are respon-
sible for safeguarding and investing
billions of dollars on behalf of tax-
payers, pensioners, college savers,
and units of government. As we seek
to provide the highest level of service,
stewardship, and financial value to
our beneficiaries, our offices rou-
tinely vote on proxy ballot items.
These votes involve fundamental
business decisions, including the
election of board directors; executive
compensation; and environmental,
social, and governance, or ESG, risks
and opportunities. Proxy voting is a
critical means for investors—the ac-
tual owners of these companies—to
signal issues of concern, hold corpo-
rate leaders accountable, and protect
their assets.
However, on Nov. 5, 2019, the SEC
proposed new rules that represent an
unnecessary, unprecedented, and de-
structive intrusion on the relationship
between investors and their advisors.
Institutional investors rely on proxy
advisors, like Institutional Shareholder
Services and Glass Lewis, to provide
timely, independent recommendations
on proxy ballot items that require votes
every year at tens of thousands of
companies around the world.
Proxy advisors have recently been
accused, without specific examples, of
altering director nominee recommen-
dations at the secret direction of a small
cabal of their clients. Advisors are
retained to provide independent,
evidence-based analysis to their clients,
and it is difficult to discern a motive for
any advisor to disregard its responsi-
bility to the vast majority of clients who
pay for objective reviews at the behest
of a tiny fraction of that group. Proxy
advisors have helped inform investors,
and ultimately corporate leadership, as
they develop and institutionalize best
practices. These markets worked
through corporate democracy, without
government intervention.
The SEC appears to believe that
proxy advisors have become too pow-
erful and needlessly sway voting deci-
sions. We disagree. Proxy advisors
serve at the behest of investors, not vice
versa. Proxy advisor firms have devel-
oped policies and recommendations
that reflect the views of their clients on
important issues such as staggered
boards, executive compensation, and
dual class voting. The information pro-
vided drives vote decisions that have
helped improve many facets of corpo-
rate governance for decades.
Despite the plodding pace of change,
corporate insiders bristle at the ac-
countability that the proxy voting sys-
tem has created. Public company law-
yers and bankers, industry trade
groups, and corporations have lobbied
the SEC to put a stop to the practice.
The approval of these proposed
changes will have significant detrimen-
tal consequences. Among the many
negative impacts could be reckless,
unnecessary, and prolonged litigation
causing proxy advisors to shirk from
delivering their most candid assess-
ments—the exact product that inves-
tors pay for and expect from advisors.
Increased costs will be borne by proxy
advisors’ shareholder clients and their
beneficiaries—the very people the SEC
is duty-bound to protect.
The SEC’s proposed ruleswould
invite public companies to sue proxy
advisors and create a chilling effect on
independent perspective. The proposed
rules would require proxy advisors to
give public companies two advanced
drafts of proxy advisors’ reports before
investors get access to the advice for
which they paid.
Paving the way for securities litiga-
tion in the context of proxy advice is a
troubling idea. Giving companies a
preview of proxy advisors’ recommen-
dations and the ability to interfere with
that advice before their paying custom-
ers get that information makes that bad
idea much worse.
Likewise, investors deserve to re-
ceive clear, unbiased advice. It is just as
much in the interest of shareholders as
it is in the interest of advisors to firmly
oppose the proposed rules. There is
widespread opposition to this proposal
from these investors, who are the ac-
tual clients of the advisory firms.
The claim that proxy advice is rife
with errors is based on flimsy evidence.
Analysis by the Council of Institutional
Investors indicates that errors in proxy
advice are extremely rare, estimated at
less than 1%.
Holding corporate managers ac-
countable through corporate democ-
racy in the age of Big Tech, climate di-
sasters, and political polarization is a
challenge in and of itself. Obstructing
proxy advisors by increasing litigation
costs and allowing corporate interfer-
ence with shareholders’ research will
make it nearly impossible for investors
to engage with companies responsible
in part for some of the most complex
issues of our time. The SEC should
facilitate, rather than hinder, market-
based accountability mechanisms.B
The writers are the state treasurers of
Illinois (Michael Frerichs), Pennsylvania (Joe
Torsella), Rhode Island (Seth Magaziner),
and Connecticut (Shawn Wooden).
By Michael Frerichs, Seth Magaziner,
Joe Torsella, and Shawn Wooden
“Proxy
advisors
serveatthe
behest of
investors,
not vice
versa. ”
The authors Dan Page
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