Senators Richard Durbin, Sherrod Brown, Brian Schatz, and Jack Reed have written to SEC Chairman Jay Clayton to object to the proposed rules on proxy advisors and proxy proposals in the strongest terms. The full letter is below. An excerpt:
The SEC fails to make a credible argument that errors in proxy advisor reports justify the proposed rule changes, and the data cited by the SEC on errors by proxy advisory firms raises alarming questions. We agree with the SEC Investor Advisory Committee that the Proxy Voting Proposal does not establish the need for such burdensome regulation to address errors in proxy advisor reports. For example, the Proxy Voting Proposal states there were over 17,000 shareholder votes in a three-year period from 2016 to 2018, but companies filed only 260 supplemental proxy statements claiming errors by proxy advisors. Of the 260, the SEC classified only 54 as “factual errors” and none of them as material or affecting the outcome of a vote, without further elaboration.
Yet, to address proxy advisor errors, the Proxy Voting Proposal overreaches by providing companies with two separate opportunities to review proxy advisor reports before the investors that paid for them have an opportunity to read these reports. The proposed rule also would allow companies more time to review proxy advisor reports the earlier they file the definitive proxy statement, providing as many as five business days for a proxy statement filed more than 45 calendar days in advance. In all cases, the Proxy Voting Proposal would allow companies another review of the proxy report for no less than two business days prior to final issuance. In total, a company could conceivably have as many as eleven calendar days to review a proxy advisor report before an investor gets it.
The SEC’s stated intent is to create “enhanced engagement between proxy voting advice businesses and registrants,” but the Proxy Voting Proposal creates obvious and needlessly burdensome obstacles forcing investors to wait longer for the reports they have paid to receive. In addition, this Proposal would create a problematic conflict of interest because companies now have the opportunity to interject their opinion into proxy advisors’ analysis. This advance review makes as much sense as requiring a teacher to let a student review and negotiate her report card not once but twice before she has to take it home.
hareholder proposals have also served as a driving force for greater corporate awareness, and voluntary disclosure, of environmental and social risks, such as climate change risk management, and sustainability reporting. Indeed, since 2009, shareholder proposals have been key to the increase in sustainability reporting among S&P 500 companies—as of 2018, 86% of S&P 500 companies provided sustainability disclosure. In a letter to clients earlier this year, the CEO of BlackRock explained the continued need to improve sustainability disclosure, “[g]iven the groundwork we have already laid and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management when companies have not made sufficient progress.” As institutional investors focus on the sustainability of their investments, we expect shareholder engagement on environmental and climate issues to intensify and shareholder proposals to become even more important.
Each time a company enhances its disclosure or upgrades its corporate governance policies in response to a shareholder proposal, it reinforces the effectiveness of, and the benefits created by, shareholder proposals. Accordingly, the SEC has historically been thoughtful when considering the submission threshold. The SEC last raised the dollar value threshold from $1,000 to $2,000 in 1998 “to adjust for the effects of inflation since the rule was last revised.”  The Commission stated in that rule, “although several do not believe the increase is great enough to be meaningful . . . we have decided to limit the increase to $2,000 for now, in light of rule 14a-8’s goal of providing an avenue of communication for small investors.” Under the proposed rule, small investors would no longer have that avenue of communication—the $2,000 level from 1998 adjusted for inflation would be approximately $3,170 in today’s dollars, well below the proposed level of $25,000.