These are tumultuous times at the US Securities Exchange Commission (SEC) as the agency undertakes efforts to revise rules governing shareholder rights and corporate accountability. The SEC has proposed extensive changes in two areas: rules governing proxy advisory firms, which provide institutional investors with data and analysis to support proxy voting decisions; and rules governing the filing of shareholder proposals.
It must be noted that in neither case is there any evidence that the existing rules were not functioning, nor was there any demand from investors for changes. Rather, there has been a concerted corporate lobbying effort aimed at Trump appointees to the SEC to roll back investor protections and insulate CEOs from accountability to shareholders. The lobby effort has been accompanied by transparent “astroturf” lobbying in which corporate-funded organizations submitted fake letters supposedly written by average retirees who had no idea letters were being submitted in their names, and shoddy YouTube videos by prominent Republican political operatives anonymously posing as “main street” pension beneficiaries. In fact, SEC Chairman Jay Clayton even had to backtrack after he was found to be quoting from some of the fake letters received, to justify his regulatory proposals.
So what is the fuss all about?
First, the new rules restrict the right of shareholders to file resolutions, setting new ownership thresholds and restrictions on re-filing proposals that will disenfranchise smaller share owners and take critical ESG issues off the ballot if they aren’t immediately recognized by shareholders on the first vote. If those rules had been in place earlier, many key corporate governance reforms that are now commonly accepted would have been struck from the shareholder ballot due to low initial support, and shareholders’ ability to hold boards accountable would be even more limited.
Second, the new rules will allow corporate issuers to challenge the recommendations that proxy advisory firms provide to their clients, and in fact would require those firms to provide their recommendations to corporations for review before issuing them to clients. That interference with private advice is unprecedented and unwarranted, especially as clients are under no obligation to vote according to the advice received and there is precious little evidence that the advice provided is factually inaccurate – just that the advice differs from the opinion of the corporation’s board.
Differences of opinion in corporate governance are a given, and should not be the subject of regulatory interference.
SHARE is working with a large coalition of US investors to challenge the rule changes, and we will be issuing our own comment letters to the SEC before the deadline at the end of January.