The full text is linked below. From the introduction and summary:
We begin with three key points as context for this comment, all with one theme: the superiority of market tests over regulation whenever possible (unless there is a collective choice problem distorting the market, which is not the case here).
1. The determining issue for the level of stock ownership required to submit a shareholder proposal should not be how many proposals are filed by any individual but the level of support those proposals get from non-affiliated investors. Large institutions may for many reasons be unwilling to submit shareholder proposals but still wish to support them.
If proposals filed by a shareholder whose holdings are in the low thousands of dollars get support from a wide range of sophisticated financial professionals who are fiduciary investors with holdings in the hundreds of millions of dollars, that is the ultimate expression of exactly the kind of oversight that capitalism depends on.
Furthermore, the resubmission thresholds should remain where they are. A resolution does not have to get a majority vote to have merit or impact. As Michael Garland testified at the roundtable, resolutions are just one tactic in shareholder engagement, and a proposal can often lead to conversation and compromise that would not have been possible otherwise. If shareholder proposals constitute only four percent of proxy items and most companies receive none, the qualifying ownership and resubmission levels are clearly appropriate, if anything too high.
2. We are very deeply concerned by the distortion of this hearing by instantly discredited, CEO-funded, fake dark money front groups including the Main Street Investors Coalition (“MSIC”) which has no connection to Main Street or investors and is not a coalition, and its affiliate (same funders, same executive) the American Council on Capital Formation (“ACCA”). We note that a significant number of the comments purportedly coming from individual investors have been orchestrated by these groups. We are also very concerned that the 2004 letters to proxy advisors were rescinded before the proxy roundtable testimony with no explanation and apparently no underlying memoranda or meetings (see Appendix 2g).
Clearly, corporate executives would like to have the access to capital and limitations on liability of public financing while avoiding the oversight that is an essential component of the capitalist system, and they have had to give up on trying to defend outrageous pay packages and climate change denial directly and on the merits, even with full access to corporate resources and unlimited space in the company’s proxy to do so. They have thus resorted to using corporate funds to set up these sham and shoddy entities devoted to suppressing shareholder votes. But that is all the more reason that the SEC should be highly skeptical of these groups and their claims, which we address in more detail in the Appendices.
We note that at the roundtable, those who were complaining about proxy advisors used vague terms like “political,” provided no credible supporting data, and included misleading claims and outright falsehoods in their testimony. For example, Senator Gramm said at least twice that index funds are not subject to a fiduciary standard, which the Commission knows to be false, and Tom Quaadman from the Chamber of Commerce absurdly claimed that proxy advisors like shareholder proposals because they get paid by the proposal so it increases their revenue. On the contrary, proxy advisors get paid a flat fee, so if they have any incentive with regard to the number of proposals on the proxy it would be to reduce them. Quaadman’s surprise at the roundtable that there were individual shareholder proponents before James McRitchie and John Chevedden further demonstrated the superficiality of his understanding of the history and purpose of shareholder proposals.
Futhermore, Adam Kokas complained that a substantial number of votes for his company came in within a couple of days. But all of the items to be voted on that proxy were routine. There were no shareholder proposals or complex matters. How much time does he want his company’s shareholders to spend reviewing the election of unopposed directors and the approval of the auditor? Aren’t corporate executives satisfied that routine matters are treated as routine by their shareholders? If over 90 percent of recommendations from proxy advisors are to vote with management and proxy advisor clients depart significantly from recommendations to vote contrary to management, then what is the problem?
We note further that the shareholders and proxy advisors at the roundtable used actual data and factual references, including Jonas Kron’s testimony that companies average over seven years between shareholder proposals and that shareholder proposals make up less than four percent of proxy items voted on. We strongly urge the Commission to insist on more specifics in examining the claims and data from the business community, particularly the corporate-funded astroturf (fake grassroots) front groups. Even the ACCF’s own commissioned report on the accuracy and timing of proxy advisory analyses acknowledges, “[T]he relatively small data set (and the non-random survey methodology) do not allow statistically significant conclusions to be drawn.”
Furthermore, MSIC advisory committee chair Bernard Sharfman’s proposal to counter their specious and unsupported claims of “robo-voting” (link in Appendix 2g below) is to vote all proxies as the issuers recommend. In what way is that not “robo-voting” and a complete abandonment of any exercise of judgment a legitimate choice as a matter of legal obligation or risk/return assessment? For large institutional investors, the transaction costs of selling out of companies with whom they disagree is often far greater than the cost of voting a proxy and of course passive investors do not have that option. Voting only as management recommends gives them no choice but to watch the value of their holding diminish, with costs far greater than evaluating the proxy issues (with or without independent outside research) or engagement.
Abdicating the essential role of shareholder oversight on corporate governance would severely damage our corporations, our markets, and our credibility in the global economy. We recommend the Commission consider the findings in Citizens Disunited, written by our Chair, Robert A.G. Monks, showing that companies underperform when their primary investors are completely passive. We have included an excerpt in Appendix 3 for the record.
We note as well the extraordinary statement by Nick Dawson, Managing Director of ProxyInsight, definitively repudiating the bogus “study” released by the Chamber of Commerce and MSIC funder the National Association of Manufacturers purporting to show that professional fund managers were unduly influenced by proxy advisory firms. Not only was the data grossly distorted, it was used by third parties in violation of ProxyInsight’s client agreement. We trust that the Commission will find this as powerful an indicator of the Chamber’s and NAM’s absence of credibility on these issues as we do. We can only hope that the executives behind this fake news “report” are more competent in their in-house corporate work than they have been here. If they are not, as long as the SEC resists this pressure to suppress shareholder oversight, investors will be able to respond via proxy proposals and proxy votes.
3. As we pointed out eight years ago, when these same issues were being considered by the Commission (full text of the original comment appended below), proxy advisory firms produce research no one has to buy and recommendations no one has to follow. Their clients are sophisticated financial professionals subject to the strictest fiduciary standards, and those clients have a choice of providers. That is a textbook example of free market efficiency and the exact opposite of a justification for government intervention.
The data show that (a) overwhelmingly, the proxy advisory services recommend votes consistent with the recommendations of the issuer boards and executives, and (b) when they do not, the financial professionals who purchase the reports make their own minds about how to vote. The more complex and controversial the proxy issue (with business combinations at the top of both lists), the more the votes vary, showing that critics of the proxy advisory services have it exactly wrong; proxy advisory services are guided by their clients more than the clients are guided by the proxy advisory services. (See Appendix 2) Ning Chiu of Davis Polk reports, “On shareholder proposals, ISS recommended for social and environmental proposals 55.4% of the time, but funds only supported those proposals 25.2% of the time. Overall, ISS was in favor of shareholder proposals 64.7% of the time, yet funds voted for them only 34.6% of the time. But average support for shareholder proposals during the 2017 season was 39%,” indicating that of that 39% a substantial group may not be ISS clients at all.
The best determiners of the value of proxy proposals are shareholders and the best determiners of the value of proxy advisory services are the financial professionals who are freely able to decide whether to buy the reports, who to buy them from, and whether to follow their recommendations. Proxy advisory firms are the only independent source for evaluation of proxy issues. Shareholder proposals and say-on-pay votes are non-binding, so even if proxy advisors are as powerful as critics say (but are unable to prove as the data is all to the contrary), and even if there is a 100 percent vote against the wishes of management, the corporation does not have to do anything about it, as the testimony at the roundtable showed. Worst case scenario is that if all of the wild (and unsupported) allegations of proxy advisory firm critics are true, there is no risk of harm other than the hurt feelings of corporate insiders; and that is literally the reason we pay them the big bucks – to be able to respond to challenges with courage and integrity.
The very last people we should ask to evaluate the worth of proxy advisory services are the people they evaluate: corporate executives and board members. We don’t let students grade their own papers, and we don’t let manufacturers decide what toxins to pour into the air and water. We cannot let the squeamishness of corporate insiders about assessments they do not control (plus the millions of corporate dollars they spend on lobbyists and fake front groups) lead to any impediment to that independent assessment. The real question the SEC, as the investors’ advocate and protectors of the free flow of capital, should investigate here is why executives and directors do not want to hear from their shareholders in the most low-key, low-risk, low-cost manner possible.
Critics of proxy advisors are far more guilty of the sins they accuse proxy advisors of than the proxy advisors are themselves. Conflicts of interest? Fake dark money front groups funded by diverting corporate assets to promote suppression of shareholder votes and access to independent research are using shareholder money to insulate themselves from non-binding votes on CEO pay, climate change, and other corporate governance issues directly related to risk and return. Accuracy? We challenge any of the corporate funders of the fake front groups and their sock puppet chorus of undisclosed affiliated or the K Street firms that package these astroturf organizations that pour money into lobbyists, “oppo” and disinformation campaigns, PR operatives, and full-page newspaper ads to meet the ISS error rate record of under one percent. Undue delegation of authority to third parties? More than 80 large institutional investors have asked the member companies of NAM why they are funding this shareholder suppression effort. We suspect many of them have no idea they are doing so.