Fake dark money front group Main Street Investment Coalition is really getting in a lather about the upcoming November 15 SEC Proxy Roundtable. The instantly discredited CEO-funded astroturf organization is struggling to find anyone who is not self-interested to try to make the case that the only source of truly independent research about corporate governance should be regulated and/or controlled by the corporations themselves. And so, we get a chorus of sock puppets pretending to some semblance of the very independence they are trying so hard to extinguish.
Over at the we’ll print anything Seeking Alpha we have Jared Whitley who has not one single shred of actual point to make and so instead compares proxy advisory firms to rats in a restaurant. As my mother always says, insult is not argument. So we will refrain from returning in kind and stick to the substance, rather, the complete lack of substance in his sock puppet polemic.
Let’s start with two factual errors. First, he says that the “report” commissioned by the Main Street Investors Coalition affiliate shows a significant error rate in the reports of proxy advisory firms. Apparently, he did not read it, though. As we have previously noted, the error rate is under one percent, significantly lower than the error rate in Whitley’s essay. Unlike Whitley, we actually read the report and also unlike Whitley, we are able to quote it accurately, so we will remind him that its ultimate conclusion is: “[T]he relatively small data set (and the non-random survey methodology) do not allow statistically significant conclusions to be drawn.” Even a subsidized, non-peer reviewed “report” from a law firm specializing in lobbying cannot come up with anything stronger than that. We suspect an actual independent review by an group with expertise in statistical analysis would be unable to find more significant problems with proxy advisors.
Second, Whitley says that the SEC requires fund managers to vote. This is also not true. Fiduciary obligation requires careful cost/risk-benefit assessment of proxy votes. The SEC has never said that all proxies must be voted or that fund managers must retain proxy advisors. Proxy advisors provide independent research no one has to buy and recommendations no one has to follow. Their recommendations are over 90 percent the same as management. When they recommend contrary to management, (1) it is almost always on a non-binding proposal and (2) the proxy advisory clients diverge from these recommendations significantly enough to demonstrate that the proxy advisory recommendations are just one factor in evaluating the issues.
Finally, Whitley leaves out a piece of information we consider significant enough that its omission calls into question the credibility of his opinions. He works for Main Street Investor Coalition advisory council member Ike Brannon, who has also written a flimsy attack on proxy advisors and is presumably the sock puppet inside the sock puppet on this one.
The chair of the Main Street Investor Coalition’s advisory committee is Bernard Sharfman, and his sock puppet comment to the SEC is published on the Harvard Law School corporate governance blog. He says that these are his own views, and not necessarily those of the Main Street Investors Coalition. We hope that even the Main Street Investors Coalition would not try to make a credible argument that it is consistent with fiduciary obligation to defer proxy voting decisions to the very corporate boards being voted on. On the contrary, abdicating the fundamental oversight role of shareholders and failing to evaluate the risk/return of, say, a vote on mis-aligned CEO pay is a per se violation of fiduciary obligation. Fiduciaries must show “the punctilio of an honor the most sensitive” (Meinhard v. Salmon). Allowing decisions to be made by the very people who have the greatest incentive to benefit themselves over the shareholders would be catastrophic for the credibility of the capitalistic system and not consistent with any judicial ruling on the fiduciary standard. If Mr. Sharfman has any case law on fiduciary obligation to suggest the contrary, we encourage him to cite it.
Sharfman also suggests that proxy advisors be considered “information traders.” Since shareholder proposals are non-binding, even with a 100 percent vote in favor, and proxy voting has nothing to do with trading, that is not in the least analogous.
But what do we expect? They cannot get anyone who is not self-interested to support their positions and they cannot make a credible argument based on facts, logic, or the law. And so all they have is sock puppets, insults, distortions, misdirection and rats.