A debate on the viability of responsible investing is bubbling underneath the reaction to a recent U.S. Senate bill, aiming to further regulate proxy voting firms.
Proxy voting firms help institutional investors complete shareholder votes, analyzing data and establishing votes that are reflective of a fund’s house views, while incorporating an increasing universe of potential concerns.
On Nov. 14, 2018, six senators introduced the Corporate Governance Fairness Act, which would require the U.S. Securities and Exchange Commission to regulate proxy firms directly under the Investment Advisers Act. Stakeholders were quickly divided on whether such direct regulation was necessary, or indeed helpful, to the implied aim of the bill, namely to ensure that proxy firms act honestly on behalf of the investor clients they represent.
Institutional investors are engaging more than ever on issues like climate change, boardroom diversity and sexual harassment and assault, responding to a mixture of shifting sentiments and tangible risks. But this engagement has garnered some pushback from organizations like the Main Street Investor Coalition, which believes proxy voting must be more heavily scrutinized and regulated, with the aim of defending the voice of retail investors.
Institutional investors, the group argues, are engaging on “pet political causes,” leaving individual stockholders to potentially suffer when these causes outweigh the aim of generating the best return. Notably, the National Association of Manufacturers, a coalition including Exxon Mobil Corp., the Goodyear Tire & Rubber Co., Ford Motor Co., Intel Corp., Lockheed Martin Corp., Pfizer Inc., Microsoft Corp. and Verizon Communications Inc., to name a few, is part of the MSIC.
In August 2018, Walden Asset Management and the California State Teachers’ Retirement System took issue with the association’s affiliation with MSIC, particularly around shareholder resolutions. In a release, Walden and CalSTRS called the affiliation an attempt to discredit shareholder engagement, particularly on climate change.
“The irony is that many companies on the NAM board are active business leaders on climate change,” said Timothy Smith, director of ESG shareowner engagement at Walden, in a release. “They understand the very real risk to our environment and have active forward-looking policies and programs on climate. Yet their dues to NAM are funding an aggressive attack against the very investors they meet with regularly to address climate change. We are appealing to these companies to clearly state their opposition to these positions taken by NAM and Main Street Investors Coalition. It is important to do so to protect their company reputations and integrity.”
While the introduction of the Corporate Governance Fairness Act is one example of recent action, it came one day before the SEC’s roundtable on Nov. 15, 2018 on the same topic. In response to the latter, the United Nation’s Principles for Responsible Investing released a report on the recent discussions of regulatory changes to proxy voting and shareholder resolutions. PRI’s report expressed concern that potential changes could be counterproductive to the work it’s been doing to highlight the importance of engaging on environmental, social and governance issues.
The SEC’s roundtable listed several issues with the proxy voting system as it currently stands, including: determining whether broker-dealers are voting more shares or less shares than authorized; ensuring that an investor’s shares are voted as directed; providing investor communications to equity holders with shares through brokerage accounts; encouraging retail shareholders to participate in the proxy process; and looking at whether changes should be made regarding eligibility for investors to submit shareholder proposals, such as minimum number of shares.
In particular, the UN PRI raised the alarm on the issue of minimum shares. “Shareholder proposals are an important tool to help companies manage new and emerging risks, especially regarding ESG factors,” the report said. “They have increasingly driven ESG engagement, with a growing number of proposals being withdrawn due to corporate management developing workable solutions with investors.”
Proxy voting firm Glass Lewis & Co., jointly owned by the Ontario Teachers’ Pension Plan and the Alberta Investment Management Corp., said the new bill’s proposals simply doesn’t make sense. The proposal that proxy voting firms should be regulated under the Investment Advisers Act suggests the Senators misunderstand these firms’ role in the overall investment process, noted Glass Lewis in a release.
“The Investment Advisers Act was not originally designed to oversee and monitor the nuanced activities of a proxy advisory firm, but was tailored with the investment adviser in mind,” the release noted. “Proxy advisors neither advise their clients whether to purchase, sell or hold securities nor do they manage client investments. The Investment Advisers Act is principally about disclosure, with only a few substantive requirements, most of which would not apply to proxy voting advice. Ultimately, this regulatory framework primarily requires that investment advisers disclose to their clients what services they will provide and that investment advisers actually perform the services agreed to.”
However, the SEC still sees a need to update the proxy system as it stands, which commissioner Kara Stein called “arcane at best” in her opening comments before the roundtable. Glass Lewis agrees, expressing in its release that a different approach that includes “validating the standards of conduct already implicitly enforced by the industry, coupled with a mechanism to monitor and ensure compliance” would be worth exploring.
What do you think of the current proxy-voting system, especially as it relates to accelerating ESG issues? Is it time for an overhaul? Have your say in the latest online poll here.
The previous poll asked whether organizations should return to sick notes after the Ontario government amended the Employment Standards Act to allow employers to require them. Most (70 per cent) respondents said they won’t make their employees provide them and they’re a waste of time, while 30 per cent said they’ll require them and they make sense as a human resources management tool.