Comments to the SEC on Proxy Voting by Retail Investors

proxyvoteWe have submitted a comment to the SEC to extend and amplify the comments at their January hearing on improving proxy voting participation by retail investors.  Other comments, including those by James McRitchie, CII, and the Fellows of the Corporate Governance of Harvard Law School, are well worth reading.

Our comment focused on responding to some of the claims made by the other participants at the hearing.  Here is the text:

I very much appreciate the opportunity to appear before the Commission to testify about improving participation by retail investors, and would like to briefly amplify and extend my comments.

The Commission traditionally and understandably tries to get a range of views in considering policy and regulatory changes, in particular, with representatives of the “issuer” and shareholder perspectives. In reality, however, those who purport to represent corporate interests are more often, as we saw in this proceeding, arguing on behalf of executives and directors, not on behalf of corporations and ensuring the sustainable growth that will benefit their investors, employees, suppliers, customers, and community. In this particular case, the interests of the corporation are arguably better represented by shareholders than by those retained by management.

Some of the testimony presented at the hearing was clearly on behalf of executives, in particular those executives who are desperately trying to avoid any oversight, even the most mild and limited, from the very people the SEC is there to advocate for, the people capitalism is named after, the providers of capital.

Having largely failed to persuade the Commission to clamp down on the exercise of free speech by the proxy advisors and the exercise of free market choice by proxy advisor clients (institutional investors), the corporate executive community now turns to an alternative for diluting the impact of sophisticated, thoroughly informed, and reliably involved investors. Rather than fiduciary, long-term, significant, knowledgeable voters making a rational economic decision to be informed by outside, independent advisors in casting proxy votes, the testimony from “issuer” representatives demonstrates that executives believe that their best bet is to dilute the informed votes by getting more votes cast by those who cannot afford access to outside analysis.

This was made clear in two ways. First, in suggesting that giving shareholders more oversight would dramatically increase the number of proxy contests, no one mentioned the actual current number, generally under 50 a year. Even if that gets doubled, it is still a tiny fraction of the companies issuing proxies each year. Second, and most important, if the purported representatives of “issuers” cannot acknowledge that the bottom 50 (or 500) companies each year merit some kind of shareholder engagement, then it is clear the goal is entrenchment, not protection of shareholder value. Until they are willing to concede that shareholder engagement is constructive, not disruptive, they make it clear that their only interest in shareholder votes is meeting quorum requirements, preferably with retail investors who do not have access to detailed analysis of proxy issues, and not in the investor oversight that is the foundation of the system of capitalism.

As I said in my testimony, some retail investors are rationally apathetic about proxy voting. We should not try to cajole votes from people who do not have enough of an economic interest to read the proxy with its many often-dense but legitimately required disclosures. We cannot do much to increase the benefit of voting for these investors. The collective choice problem is insurmountable for them. All we can do is try to reduce the cost of voting, through better access to information (they should be able to free ride on the analysis of institutional investors they admire by having those voting decisions widely available online) or better opportunities for engagement (the SEC should put “bullet-proof” safe harbor shareholder proposals online so they can submit them without fear of reprisal or expensive defense costs). The SEC should also have a guide to voting proxies for retail investors available on its website as well, with information about various management and shareholder proposals and the levels of support they typically receive.

As the Commission and staff continue to explore this issue, I would be happy to submit further testimony or comments.

Nell Minow

Vice Chair, ValueEdge Advisors

March 28, 2015