Proxy advisers: the essentials
Dealing with the proxy advisory firms
According to empirical estimates, proxy advisory firms can swing a vote by 30 percent or more at a public company. Given the influence of ISS, Glass Lewis and the like – who have no share ownership themselves – it is unsurprising that the focus on them has been intense.
The SEC has taken an especially close interest in their practices in recent years. In particular, in August 2019 it released informal guidance regarding the applicability of federal proxy rules to proxy voting advice, including that of proxy advisory firms. In November 2019, the SEC proposed new rules that would codify its informal guidance that proxy voting advice is a solicitation subject to Section 14(a) of the Exchange Act. In order to continue to rely on an exemption from compliance with the filing requirements for solicitations under the Act, the proxy advisory firms would need to satisfy certain disclosure and procedural requirements.
Amid claims that the August guidance threatened the proxy advisory business model, ISS filed a suit shortly before the rule proposal was released, arguing that the guidance:
- exceeds the SEC’s statutory authority under the Exchange Act;
- is procedurally improper under the Administrative Procedure Act; and
- is “arbitrary and capricious”.
SEC skirmish continues, but for companies it is business as usual
While the proxy advisory firms and the SEC continue to have a public skirmish over regulation, it has become clear that the SEC’s intention is not to regulate proxy advisory firms out of business. Therefore, for companies entering the 2020 proxy season, it is, in almost all respects, business as usual, with the proxy firms continuing to release their voting policy updates and provide specific voting recommendations on management and shareholder proposals.
Part of the drive behind the SEC’s focus on regulation is the increasing frustration that many feel with the way the firms operate. Companies recognize the proxy firms’ power, but some find it difficult to engage with them and drive change, or feel unable to have their individual circumstances appreciated. It can be hard for companies to take measured and considered action (especially if done in consultation with their shareholders) only to be told that their policies and practices do not fit in the “check-the-box” mold of the voting policies and scorecards and as a result are generating “against” votes.
It can be hard for companies to take measured action only to be told that their policies and practices do not fit in the check-the-box mold and as a result are generating “against” votes.
For companies considering how to manage votes and their relationships, engagement and disclosure remain the best strategy to counteract the pressures they face. As shareholder bases continue to be dominated by large institutional investors that maintain their own voting policies and practices, proactive engagement permits companies to drive their own narrative and explain potential differences with the proxy advisory firms’ approaches. Further, disclosure of significant engagement efforts and the results of those shareholder interactions can be useful in getting proxy firms – which are also ultimately accountable to their customers – to consider a company’s particular circumstances.
Engagement will not be feasible for every company, nor will every investor be available for in-depth discussions. This underscores the importance of sufficient specific and expository disclosure that can drive a narrative even when facetime is not possible. While this creates more work for management, and often the board, companies that engage in these exercises well are increasingly finding that the investment is worth the cost.
Engagement will not be feasible for every company, nor will every investor be available for in-depth discussions. This underscores the importance of sufficient and expository disclosure that can drive a narrative even when facetime is not possible.