Sarah Wilson on the Four Billion Reasons Not to Mess with Proxy Plumbing

Our deepest thanks to Sarah Wilson of Minerva Analytics for allowing us to post her thoughtful essay on the SEC’s proxy plumbing initiative, and for her support in our efforts to keep the Main Street Investors Coalition and their various other corporate-funded fake front groups from spreading disinformation about shareholders and proxy advisors.  Here is what she wrote:

Can the SEC resist the lobbying deluge and restore essential share ownership rights?

Since the GFC, regulators have been working to make markets and economies safer. Part of that process has been to encourage market disruption by fostering better competition and increasing diversity. Now it’s time for the end of the share owning process – the proxy plumbing. The Securities and Exchange Commission has announced the date for the first roundtable to look at US proxy plumbing. The meeting, scheduled for 15th November, will be the first opportunity in over 8 years to lift the lid on the problems that plague the system. BUT, looking at the flood of articles about proxy issues over the years, most of them are nothing to do do with the plumbing at all – they’re about proxy analysts. They’re hardly every about what really matters – the providers of capital, the shareholders, and what’s good for them.

In the past 6 months a new and well-resourced ($5 million) lobby was launched by the Main Street Investors Coalition, (MSIC) claiming to speak for unrepresented retail investors who are, allegedly suffering at the hands of institutional investors who don’t know how to vote properly. With some very slick graphics and a vocal social media campaign, they argue that it’s not the plumbing that’s busted, but the voting issues themselves. According to MSIC, voting for climate change mitigation, diversity, pay for long-term performance, board accountability and sound capital management, is “ideologically driven” and bad for markets. MSIC wants to give retail investors “choice”, but only MSIC’s own ideology it seems.

One of the side-effects of the political turmoil surrounding the Trump administration is that we’ve all been immersed, nay submerged, into the murky depths of political lobbying and exposed to the dark arts of buying influence. There’s no doubt that votes and political influence are bought, and while I can’t say that the US or UK are any better or worse, I do know is that UK-listed companies have significantly better disclosure and are required to get shareholders’ permission to spend corporate money on “political” donations. Unlike shareholders, market users don’t have protection from the adverse effects of lobbying. Vendors can spend multiple millions lobbying regulators to resist changes that would benefit clients, and indeed wider society. Operational efficiencies and infrastructure changes might be good for share owners, but they can be a major threat to the bottom line, disrupting deeply-entrenched business models which have long since outlived their usefulness.

MSIC is just one very small part of a highly organised and vocal lobby which has been fighting against proxy reform for almost two decades. It has involved academics, journalists, exchanges, politicians and think thanks like the US Chamber of Commerce and its European arm, AM-CHAM EU which targets the European Commission. It’s hardly surprising that the lobby has been so fierce, there is a lot of money at stake. Broadridge, the monopoly proxy administration company, has a market cap of around US$15.42 billion on revenues of US$4.1 billion. Which is testimony to the level of inefficiency in the US share administration infrastructure which works against shareholders and companies.

This isn’t just a US problem. Financial markets are global and it’s in the interests of incumbents to ensure that all markets follow the same models – who would want to have to change their software for 80 different jurisdictions if you could just use one broken system?

The GFC has taught us that opaqueness breeds mistrust, that lack of open architecture works against competition and innovation, and that Group Think is just plain bad all round, bad for markets, bad for society. For many, the SEC Proxy Roundtable will probably be about as exciting as watching paint dry, but it’s in these dark corners of financial services administration and company law that essential protections can slip away, un-noticed.

What can one small shareholder or one small proxy voting agency in the UK do against the weight of 4.1 billion you might ask? Quite a lot actually. You can write to the SEC, write to us, write to your custodian, your fund manager or broker. Let’s get more transparency into the system – it works. We only have to look at the fee transparency debate to see how far that has come in just a few months.

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