The Nasdaq enlisted the help of more than 300 companies in pressing the Securities and Exchange Commission for reforms in the proxy system. The proposed reforms represent more than just the usual kvetching about shareholder proposals that annoy management. In this case, business interests appear intent on curbing some of the power currently exercised by proxy advisory firms like Institutional Shareholder Services Inc. (ISS) and Glass Lewis. These firms make recommendations to shareholders regarding how they should vote on shareholder proposals.
In a Feb. 4 letter to the SEC, the Nasdaq-led group urged chairman Jay Clayton to address “three critical frustrations” with the way proxy advisory firms currently operate. (Clayton has signaled in the past he believes some changes to the rules for proxy firms are warranted, and Commissioner Elad L. Roisman agreed to oversee the SEC’s efforts to improve the proxy voting process and infrastructure.)
First, the coalition called on the Wall Street watchdog to crack down on proxy advisors’ potential conflicts of interest. The group said the SEC should look “to ensure that conflicts of interest are eliminated where possible, minimized and/or mitigated where appropriate, and transparent to the users and subjects of reports.” That includes disclosing such conflicts on the front page of proxy advisor reports.
Additionally, the SEC should facilitate the ability of companies to challenge proxy advisors on “matters of mistakes, misstatements of fact and other significant disputes so that timely resolution of those disputes and corrections to the record can be made to minimize the negative impacts that such mistakes can have on the subject company’s proxy voting outreach and its shareholders,” according to the coalition.
Finally, the group requested the commission mandate public transparency in instances in which proxy advisors plan to change their voting policies between proxy seasons “and ensure that companies have the ability to determine, on their own, whether they can satisfy those policies.”
Pushback from the business community regarding the influence of proxy advisors should come as little surprise in the current market environment. Even as the SEC has taken steps to reduce regulatory requirements for registered companies, ISS and Glass Lewis are part of the growing class of what could effectively be considered shadow regulators within the financial system. Lately, powerful third parties like proxy advisors and institutional investors have been flexing their corporate-governance muscles. As a result, public companies are feeling pressure to adhere to even stricter policies on environmental, social and governance issues than those required by law.
Publicly traded companies, meanwhile, have little direct recourse when it comes to influencing proxy advisors. While companies can lobby lawmakers and regulators, they lack any leverage to push proxy advisors for favorable policy decisions. In that sense, encouraging the SEC to take a more proactive stance toward advisory firms feels like a new twist on an old saw: “Since we can’t beat them, make them join us.”