Commissioner Allison Herren Lee, a Democrat, agreed after the vote that “there is nothing inherently wrong” with changing the rules, “particularly if data suggests the need to correct some imbalance. But what does the data show about proxy voting? That the vote recommended by management carries the day some 90% of the time. Management’s views nearly always prevail. That is the context in which we consider these two proposals that would tilt the scales even further against shareholders,” said Ms. Lee, who voted against the proposal.
The proposed changes are now subject to a 60-day public comment period. During that time, investor advocacy groups like CII, US SIF: The Forum for Sustainable and Responsible Investing, Ceres and the United Nations-backed Principles for Responsible Investment vow to challenge SEC staff to produce data justifying the changes.
Business groups welcomed the changes after years of campaigning for tighter controls on proxy advisers that they saw as having too much influence and no process for companies to correct errors, particularly the dominant firms Institutional Shareholder Services Inc. and Glass, Lewis & Co. The new rules are designed to “facilitate issuer and shareholder engagement (and) provide clarity to market participants,” the SEC said.
Aeisha Mastagni, a portfolio manager in the sustainable investment and stewardship strategies unit of the $242.1 billion California State Teachers’ Retirement System, West Sacramento, doesn’t see that happening by requiring proxy advisers to consult with companies.
“That methodological weakness is highly concerning to me because I think it is vague and I think it could delay our ability to vote. It causes delays in an already time-constrained proxy season and it affects my fiduciary ability to vote these proxies,” she said.
Even large asset managers rely on proxy advisers for recommendations. “No institutional investor could vote their proxy without a proxy adviser,” said one asset manager who declined to be identified. Others, like BlackRock Inc. and Vanguard Group Inc., are studying the lengthy proposals and plan to weigh in during the comment period.
Mike McCauley, senior officer, investment programs and governance at the $195.6 billion Florida State Board of Administration, Tallahassee, disputes that proxy advisers drive the voting outcome. “If you look at the stats, it’s just not true. It leads to support levels, but that does not mean it drives the vote,” he said.
Higher shareholder proposal thresholds were needed, corporate groups said, in part because of the increased concentration of stock ownership by institutional shareholders that are more likely to support shareholder proposals.
They would also help control activist investors “that cause companies to focus on political issues at the expense of company growth,” said Jay Timmons, president and CEO of the National Association of Manufacturers said in a statement after the vote.
SEC Commissioner Robert Jackson Jr. argued that there could have been a more nuanced approach to dealing with gadfly investors. Instead, “what we’ve done is swat a gadfly with a sledgehammer,” he said on a press call after the vote.
The changes to the shareholder proposal process raise the minimum amount of stock held and the time held — currently $2,000 and one year — to at least $2,000 in stock held for three years, $15,000 for two years, or $25,000 for one year. Shareholders could not aggregate their holdings with others and must be available to meet with the company to discuss the proposal.
Changes to thresholds for resubmitting proposals, last updated in 1954, are more dramatic. Currently, proposals must get 3% of shareholder support in the first year, 6% in the second year and 10% in the third year. Now, a first-time proposal would need 5% support to be eligible for resubmission in the following three years, while those submitted two and three times in the previous five years would need 15% and 25% support, respectively. Companies also gain the right to exclude a proposal if the most recent vote captured less than 50% and there was a decline in votes.
The effect “would be pretty chilling,” said Mr. McCauley of Florida SBA. “I think you are going see a pretty significant decline in shareholder resolutions.”