Roundtable to focus on proxy process, Chairman Clayton says

The Securities and Exchange Commission (SEC) will host a roundtable on the proxy process, Chairman Jay Clayton said in a July 30, 2018, statement.

Clayton said the SEC wants to hear from public companies, investors and others about whether the its rules should be updated because there have been many changes in the eight years since the SEC issued Release No. 34-62495, Concept Release on the U.S. Proxy System. The July 2010 preliminary rulemaking document asked for comments about whether the U.S. proxy system is working effectively for shareholders who want to participate in public companies’ governance.

72 percent of the companies in the Standard & Poor’s 500 index reported engagement with shareholders in 2017, compared to 6 percent in 2010, according to Clayton. The range of topics for shareholder engagement has also increased. There have also been changes in technology and the way companies operate, he noted.

The agency plans to shortly announce the roundtable’s details.

After publishing the concept release, the SEC held roundtables or started work on rules focused on specific aspects of the proxy process. But after becoming chairman in May 2017, Clayton told lawmakers that he intended to look at the entire proxy system. Clayton set aside the October 2016 proposal in Release No. 34-79164, Universal Proxy, which proposed that public companies use universal proxy ballots in contested director elections, with both management-back nominees for board seats and independent candidates.

Clayton said he has asked the SEC staff to consider five topics for close examination during the roundtable, including shareholders’ ability to bring certain issues for a vote during shareholder meetings.

Many investors believe that independent shareholder proposals enhance a company’s performance, but some companies say independent proposals bear costs and that the costs can be lowered without limiting shareholder engagement. Clayton said he wants the roundtable to examine whether the current thresholds for minimum ownership are set properly.

Business groups argue a small number of activist shareholders abuse Rule 14a-8 of the Securities Exchange Act of 1934, which governs the process for bringing a shareholder proposal to vote. Companies say it is too easy to bring “idiosyncratic issues” that a reasonable investor does not care about because the rule’s share ownership requirement of holding $2,000, or 1 percent of a public company’s voting shares, for at least one year is too easy a bar to meet.

Investor advocates say the rule works well and should be left alone.

Clayton also wants to examine the likelihood of regulating proxy advisory firms, and he wants roundtable participants to discuss whether investment managers rely too heavily on the advisers for voting recommendations on executive compensation and board elections. He also wants to discuss whether companies are given an appropriate opportunity to raise concerns with the proxy adviser and shareholders if they disagree with a proxy adviser’s recommendations.

Investors say proxy advisers provide efficient research on tens of thousands of vote recommendations, and some institutional investors say they do not exclusively rely on the proxy firms but also do some independent analysis.

Businesses complain that the two dominant advisory firms may have conflicts of interest because they also offer consulting services to public companies which are often the subject of their vote recommendations. Critics also say proxy advisory firms are not transparent because companies do not know the policies or process used to arrive at a specific recommendation. Moreover, business groups criticized that the firms make mistakes that have unfair implications for the issuers.

Clayton said he is also interested in learning more about the mechanics of the voting process, and the practical difficulties of confirming whether an investor’s shares have been voted according to the instructions. In the 2017 proxy season, retail shareholders voted about 30 percent of their shares, while institutional investors voted about 91 percent of their shares, and Clayton said the roundtable should explore the reasons behind retail investors’ low voting rate.

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