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SEC Roundtable on Proxy Voting

Securities and Exchange Commission (SEC)  

Roundtable on Proxy Voting

February 19, 2015 

Key Topics & Takeaways

  • Improvement Ideas: SEC Chair White said the proxy voting process is very important to shareholders, companies, and the SEC, especially as “ideas evolve,” and noted that the SEC has set up a comment file on its website to solicit public comment on how a universal proxy ballot would work and how to achieve “greater and more meaningful” participation by retail investors
  • Costs of Voting: Commissioner Gallagher said retail shareholders are “famously rationally ignorant” and that the cost to an individual shareholder “tends to outweigh the benefits of voting.”
  • Vote vs. Negotiation: GWU Law’s Fairfax said universal ballots will lead to greater uncertainty of vote outcome which may mean that companies and activists will negotiate better to avoid issues being taken to a vote.
  • Retail Information: Panelists stressed the need for retail investors to have access to independent proxy assessment information and the need to explore limitations of client-directed voting. 

Commissioners and Participants

Opening Statements

Chair White

Mary Jo White, Chair of the Securities and Exchange Commission (SEC), stated that the proxy voting process is very important to shareholders, companies, and the SEC, especially as “ideas evolve” on ways to improve the process “in light of technological advances.”  She noted that the SEC has set up a comment file on its website to solicit public comment on how a universal proxy ballot would work and how to achieve “greater and more meaningful” participation by retail investors. 

Commissioner Aguilar

Commissioner Luis Aguilar, in his statement, reiterated that shareholders must be able to vote and “exercise their rights in a meaningful way,” and expressed concern that current rules limit voting choices in contested board elections. He also highlighted that technology changes should have made it easier for retail investors to participate in voting and said the “end goal” for the SEC is to increase “informed participation” in the voting process. 

Commissioner Gallagher

Commissioner Daniel Gallagher, in his statement, said retail shareholders are “famously rationally ignorant” and that the cost to an individual shareholder “tends to outweigh the benefits of voting.” While he said he is “not sure we can fundamentally alter this dynamic,” the SEC “would be remiss if we did not try.” He suggested exploring ways to reduce the overall number of votes to be taken, improving voting mechanics, and allowing individuals to delegate the ability to cast their ballots. 

On universal ballots, Gallagher said he is “trying to keep an open mind” and that the challenge in this space is that “there’s a lot going on.” He said shareholder activists are “becoming louder and more assertive by the day” and that the current corporate governance framework is “driving companies towards excessive short-termism.” The responsibility of the SEC in the corporate governance arena, Gallagher stated, is “a limited one” and is to ensure that the rules establish a level playing field.  He suggested taking an approach of “putting all the issues on the table and seeking to reach a compromise on the right combination of policies.” 

Commissioner Stein

Commissioner Kara Stein explained that shareholders who attend annual meetings in person receive a universal ballot but that those who do not attend, and vote by proxy, do not receive a universal ballot and must choose from board nominees or shareholder nominees. She said the role of the SEC should be to ensure that voters can intelligently cast their votes and allow for proxy voting to function as nearly as possible to in person voting. 

Commissioner Piwowar

Commissioner Michael Piwowar said he is interested in hearing a “clear articulation” of the problem that universal ballots are intended to address. He also noted that the electronic proxy rules put in place in 2007 are in need of a “long overdue” retrospective review.   

Panel 1 – Universal Proxy Ballots

Michele Anderson, Chief of the Office of Mergers and Acquisitions in the SEC’s Division of Corporation Finance, opened the discussion by explaining that shareholders cannot vote for a mix of candidates unless they attend meetings in person. She then asked the panel if the use of universal ballots can change the outcomes of votes and if their use would conflict with any state laws. 

Lisa M. Fairfax, Leroy Sorenson Merrifield Research Professor of Law, The George Washington University Law School, said shareholders are asked to pick a mix of candidates but the problem for proxy voters is that they do not have the ability to freely choose because their choices are imposed on them by either the company or activist shareholders. She said there have been increases in shareholder fights, short slate ballots, change in control contests, and the success of activist campaigns. She said this lack of choice “creates a picture of unfairness” and confusion amongst shareholders, and can lead to disenfranchisement.  

David A. Katz, Partner, Wachtell, Lipton, Rosen & Katz LLP, said issuers do not like the short slate model but have “grown to live with it.” He said dissidents have been able to gain control of company boards by “gaming the system” and forcing shareholders to choose one voting card or another, but added that having a universal ballot could be costly, “extremely confusing,” and would further empower activist shareholders.

Anne Simpson, Senior Portfolio Manager and Director of Global Governance, CalPERS, stressed the importance for a company to have a competent and diverse board of directors to promote the company’s long term sustainability. She said the SEC should adjust its rules so that proxy ballots reflect the universal ballots available at the meetings because many shareholders are not able to incur the expenses of traveling to meetings. 

Frederick H. Alexander, Counsel, Morris, Nichols, Arsht & Tunnell, LLP and Advisor for Legal Policy, B-Lab, explained that the current “last in time” rules specify that the last vote card received by a company is “the one that counts” and said he did not think state laws bar the ability of a company to give limited proxies. 

Steve Wolosky, Partner, Olshan Frome & Wolosky LLP, said he had concerns with universal ballots because each side, the company and the activists, will still have their own universal ballot. 

Anderson then asked if there should be eligibility requirements for a nominee to appear on a ballot.

Alexander said companies can amend their bylaws to regulate eligibility and that this may lead to private ordering of how nominees are listed. 

Simpson said having more candidates on the ballot would be a “healthy outcome” because it would promote dialogue between governance and the shareholders. She said the SEC should not impose “artificial barriers to entry” that would limit choice.

Chris Cernich, Managing Director, M&A and Contested Elections, Institutional Shareholder Services, said Canada is a good test case because it allows universal ballots. He said half of the number of proxy contests go to a vote in Canada compared to the U.S. and that having a universal ballot does not necessarily mean there will be a “flood” of new nominees. 

Fairfax said universal ballots will lead to greater uncertainty of vote outcome which may mean that companies and activists will negotiate better to avoid issues being taken to a vote. 

Sarah B. Teslik, Senior Vice President – Communications, Public Affairs and Governance, Apache Corporation, said that as an issuer she is not afraid of accountability, but is “glad we have not had to deal with universal ballots.”  She stressed that “virtually every issue” that is addressed in a vote can be solved without a contest if the right people are brought together “in the same room.” She added that every great company became great because of thoughts and insights that no one else had and that these types of unconventional choices may be prevented if shareholders vote on all of them. 

Charles Penner, Partner, Chief Legal Officer, JANA Partners LLC, said universal ballots do not always help activist investors. Penner said that as a participant in the capital markets a universal ballot “probably makes sense” because it “encourages people to focus on the right thing.”  He also said it would “be nice to remove the gamesmanship” from the ballot process. 

Bruce H. Goldfarb, President and Chief Executive Officer, Okapi Partners, said the implementation details of a universal ballot will be important, noting that name placement and formatting can create strategic advantages. 

Katz noted that smaller companies do not have the resources to adjust to a more complicated universal ballot process which makes it easier for activist shareholders to gain seats on the board of these companies. He also worried that this would cause more “short-termism.” He said the SEC needs to “fix the machine” and not just this small part of it and expressed concern that moving to universal ballots would have unintended consequences. 

Fairfax said the “devil is in the details” on how to implement a universal ballot and that it is important to have uniformity. While she agreed that the entire system has problems, she said addressing universal ballots is something the SEC can do. 

Panel 2 – Retail Participation in the Proxy Process

David Fredrickson, Chief Counsel and Associate Director, Division of Corporation Finance, began the second discussion by saying the vast majority of shares are voted through solicited proxies and asked what is impeding retail shareholder engagement. 

Robert Schifellite, President, Investor Communication Services, Broadridge Financial Solutions, said 85 percent of outstanding shares are “street shares” and 15 percent are registered shares. The “street shares,” he added, are 70 percent institutional shareholders who vote at a 90 percent rate and 30 percent retail shareholders who vote at a 30 percent rate.  He also noted that 18 percent of votes are returned if a paper notice is sent to investors, 23 percent are returned if electronic notice is sent, and 41 percent are received if a full package of information is sent through the mail. 

Reena Aggarwal, Robert E. McDonough Professor of Finance, McDonough School of Business, Georgetown University, said the reason for low retail participation is a lack of information and the feeling of retail shareholders that they cannot make a difference. She said, however, that retail investors can have an impact and that it just takes 20-30 percent of dissenting votes to make a difference today. 

Donna Ackerly, Senior Managing Director, Georgeson Inc., said her firm helps other companies achieve quorum at their meetings by sending out mailings, allowing voting by phone, and setting up websites. 

Alan Beller, Senior Counsel, Cleary Gottlieb Steen & Hamilton LLP, said the “principal obstacle” is a “communication problem” and cited the SEC’s NOBO/OBO (non-objecting beneficial owners/ objecting beneficial owners) rules as a part of the issue. He noted that proxy solicitation firms are paid very well to find retail investors and get them to vote because 20-30 percent of a vote “is the new 50.” 

Niels Holch, Executive Director, Shareholder Communications Coalition, said the “proxy plumbing” mechanical rules from the 1980s have “outlived their usefulness” and that the system is now bifurcated between known and unknown share owners. He said the privacy concerns raised when the NOBO/OBO rules were put in place are “not the same now” and that they too are no longer useful as the distinction is not meaningful in the proxy space. 

Schifellite said OBO shares account for about 75 percent of the total and that they vote at the highest rate. He added that the lowest vote participation is from registered shareholders. 

Nell Minow, Co-Founder, The Corporate Library; Founder and Former Board Member, GMI Ratings, said the SEC can lead investors to dense disclosure language but that does not mean they will read it. She said it is important to communicate to investors that it “will cost them” if they do not vote and that shareholders need access to independent assessments of proxy statements. 

Cornish F. Hitchcock, Principal, Hitchcock Law Firm PLLC, agreed that retail investors have less access to information and noted that institutional investors have access to internal analysis, proxy advisory firm analysis, and engagement with the companies themselves. He said the SEC should allow third parties to provide information to retail investors. He expressed concern about the unwillingness of brokers to refer vote information to third parties for investors due to restrictions by the SEC and said these should be addressed. 

James McRitchie, Publisher, CorpGov.net, said voters need to be “pushed” to vote and said it would be helpful if the SEC required all proxies to be XBLR coded so that third parties can create programs to compare a wide range of proxy statements and present them in a way that is easier to digest for shareholders. He also said this could help facilitate a client directed voting platform. 

Beller said client-directed voting began with the idea to allow retail investors to instruct their brokers on how they wanted their shares voted ahead of time. However, he said, there are legal impediments to this under Rule 14a-4(d) that prevent brokers from soliciting proxies before the release of proxy materials.  He said there is a tension between encouraging retail voting and promoting informed voting but that the system should not promote un-informed voting. He also highlighted that advisors have the ability for vote on their clients’ behalf but said the distinction between advisors and brokers is “meaningless.” 

Schifellite said that there are systems where institutional investors can vote automatically based on their preferences and policies. 

John Bajkowski, President, American Association of Individual Investors, said the most frequent request he hears from investors is to receive more concise summary information about the proxy statement that highlights the main points and goes into detail later on. He also noted that investors are interested in hearing what the each director’s vision and mission are for the company, rather than be provided with more résumé type information. 

For more information on this event and to view a webcast, please click here.