Rep . Garrett Roundtable on Corporate Governance
Rep. Scott Garrett (R-N.J. )
Corporate Governance Roundtable
Monday, November 16, 2015
Key Topics & Takeaways
- Modernizing the SEC’s Disclosure Regime: Katz argued that activist investors benefit from information asymmetries in the market, since they can coordinate with other shareholders like “wolfpack” investors. Gallagher argued that modernizing the Securities and Exchange Commission’s (SEC’s) “antiquated” disclosure rules (13D and 14a-8) would be difficult and likely would become a “holy war” because of the “vested interests” that understand the current regime. Schorr and Sheehan cautioned against making changes to the 13D disclosure regime, and Sheehan suggested that the SEC bring in stakeholders that represent a cross-section of the industry to discuss the impact of such potential changes.
- Returning to Regular Order: Gallagher called for a return to regular order, whereby the SEC would examine an array of issues on corporate governance and advise Congress on the best way forward. However, he explained, regular order is not being followed due to Dodd-Frank and other congressional mandates.
- Increased Fiduciary Focus on Environmental and Social Concerns: Rep. Hill (R-Ark.) wondered whether the rise of shareholder proposals on social or political issues undermined the role of fiduciaries under the ERISA guidelines, which requires fiduciaries to act in the economic interest of their clients, but not necessarily in their political or social interest. Gallagher explained that the Department of Labor recently clarified that ERISA fiduciaries can consider environmental, social and governance (ESG) factors that are not directly tied to economic interest when casting votes or making investment decisions. Retelny countered that ESG metrics, such as pollution, do have a relevant impact on financial performance of a company. Borrus argued that economic interests remain to be the deciding factor for most funds, and that they find it imperative to vote based on the investment return, not on ESG factors; however Copland disagreed, stating that “if that were true, Secretary Perez would not have changed the guidance to include sustainability concerns.”
Speakers
- Dan Gallagher, Former Commissioner, Securities and Exchange Commission
- Troy Paredes, Former Commissioner, Securities and Exchange Commission
- David Katz, Partner, Wachtell, Lipton, Rosen, Katz
- Brian Schorr, Chief Legal Officer & Partner, Trian Fund Management
- Zach Oleksiuk, Americas Head, Corporate Governance & Responsible Investment, BlackRock
- Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System
- Jesse Fried, Dane Professor of Law, Harvard Law School
- Ed Knight, Executive Vice President, General Counsel and Chief Regulatory Officer, NASDAQ
- Jim Copland, Senior Fellow & Director, Manhattan Institute for Policy Research
- Tom Quaadman, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
- Darla Stuckey, President and CEO, Society of Corporate Secretaries and Governance Professionals
- Gary Retelny, President and CEO, Institutional Shareholder Services
- Amy Borrus, Interim Executive Director, Council of Institutional Investors
- Rep. French Hill (R-Ark.)
Introduction
Opening Remarks by Rep. Scott Garrett (R-N.J.)
Garrett opened by stating that corporate governance issues are of interest to the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, which he chairs. He noted that robust corporate governance is fundamental to maintaining efficient capital markets and that the term ‘investor activism’ takes many forms and should be considered to determine whether ‘investor activists’ are helping improve long-term shareholder value for investors. Garrett also expressed three broad concerns on the topic: 1) the rise of politically-motivated activism; 2) intensified pressure for companies to beat quarterly earnings; and 3) whether being a public company in the U.S is still attractive to American businesses.
Panel 1: Examining the Current State of Corporate Governance and Investor Activism in the United States
Ed Knight, Executive Vice President, General Counsel and Chief Regulatory Officer, NASDAQ
Knight claimed that economic data illustrates that the market is becoming more focused on short term results due to activist investors, which is reflected by shorter holding periods, among other things. Knight conveyed his belief that both short and long-term investors should participate in shareholder voting to provide oversight on issues such as executive compensation, so that a firm’s management has its “feet held to the fire.” To improve shareholder participation, Knight suggested changing listing standards such that an issuer could not list on NASDAQ, for instance, if it is getting paid by a third party to be a director. This, he said, “should be disclosed, at a minimum.” Knight also suggested instituting parallel rules for short-selling that are already applicable to long-selling strategies (or at least requiring disclosure). Knight also suggested: 1) making proxy advisory firms more transparent and responsive; 2) modernizing the disclosure system through e-filings and making quarterly disclosure requirements optional for smaller companies; and 3) revisiting time-weighted voting to encourage long-term investment.
Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System (CalSTRS)
Sheehan explained that public equities is the largest asset class in which CalSTRS is invested, and noted that its long-term investment horizon and role as fiduciary make it very active and interested in corporate governance issues. She also noted that CalSTRS developed internally its own corporate governance principles that shape and drive its proxy voting activity. Sheehan also maintained that CalSTRS manages a portfolio of activist funds, which she believes provides an important benefit to the market, particularly where other investors are unable or unwilling to engage.
Zach Oleksiuk, Americas Head, Corporate Governance and Responsible Investment, BlackRock
Oleksiuk claimed that the proliferation of activist investors, as well as the 24/7 news cycle, can contribute to short-term performance pressures for issuers, which he said he heard from many of his clients has become an “undue focus.” Still, Oleksiuk said he believes that activist investors have improved long-term value creation for firms and markets alike. He also noted that there has been a “positive trend” whereby corporate boards are taking more time to understand a wide range of perspectives within a shareholder base. However, Oleksiuk noted that the threat of potential activist investors often becomes a “real distraction” for boards and management. Ultimately, he argued, firms must resist short-term pressures and articulate a convincing strategy for long-term, sustainable growth based on credible metrics to avoid such pressures.
David Katz, Partner, Wachtell, Lipton, Rosen, Katz
Katz argued that activist investors are focusing so much on short-term performance metrics that companies are limiting long-term investments, and he expressed concern that long-term growth will be “harmed” as a result of this trend. He suggested rethinking the overall disclosure regime and insider trading rules, which he argued is “long overdue.” Katz elaborated by stating that the SEC disclosure requirements distract the management and boards of public companies and takes away time from focusing on long-term value creation opportunities for shareholders. Ultimately, he explained, the disclosure requirements impose an additional “tax” on public companies.
Troy Paredes, Former SEC Commissioner
Paredes noted three broad trends in corporate governance which he argued warrant attention: 1) shareholder influence over firms is increasing; 2) there is “increasing federalism” of corporate law (due to Dodd-Frank and 14a-8 requirements); and 3) Federal securities laws are being used by some investors to advance broader social goals. Paredes explained that increased regulatory demands take away from a firm’s management and board focusing on business strategy that will drive long-term value creation. He suggested that SEC cost-benefit analyses account for the opportunity cost of taking away from focus on a firm’s business strategy to fulfill new regulatory requirements.
Professor Jesse Fried, Dane Professor of Law, Harvard Law School
Fried explained that the U.S. is the “undisputed leader” in innovation and job creation in the world, which he said stems from the free market system which efficiently allocates capital and labor. Fried explained that there are two roles for activist investors: 1) inducing managers to improve the operation of businesses; and 2) facilitating the deployment of capital and labor from “old timer” firms to younger “upstart” firms that can deploy resources more efficiently. These influences, he argued, are necessary for a market economy.
Brian Schorr, Chief Legal Officer and Partner, Trian Fund Management
Schorr explained that Trian is categorized as an “activist” investor, but he cautioned against using such broad terms since the universe of “activist” investors is not homogenous. Schorr explained that Trian invests in companies that underperform either historically or relative to their peer groups, and explained that its long-term, activist investment strategy often leads to value creation and capital appreciation for all shareholders.
Panel Discussion
Katz argued that it is problematic that activist investors benefit from information asymmetries in the market, since they can coordinate with other shareholders like “wolfpack” investors, however the issuer’s management team he argued is subject to rules of engagement. Schorr and Sheehan cautioned against making changes to the 13D regime, and Sheehan suggested that the SEC bring in stakeholders that represent a cross-section of the industry to discuss the impact of such potential changes. Gallagher argued that modernizing the SEC’s “antiquated” disclosure rules (13D and 14a-8) would be difficult and likely would become a “holy war” because of the “vested interests” that understand the current regime. Katz also added that modernizing the 13D disclosure rules would provide quicker disclosure and make markets more efficient, but he also argued that many modern corporate boards are compliance (rather than strategic) boards.
Increasing Shareholder Engagement
Paredes suggested that the rules allow for more private ordering and increased investor choice in assessing corporate governance, explaining that inducing investors to make their own individual judgments on such issues would open the door for more shareholder engagement. Gallagher cautioned that investors are “too scared” to engage in this debate since “it is a pitched battle,” and he suggested that policymakers and market participants “calm down the rhetoric” to come up with constructive ideas. Knight suggested improving “meaningful” shareholder engagement on firms’ capital structures by moving to a time-weighted voting structure. Oleksiuk advocated for improved proxy access and increased shareholder engagement on broader strategic issues (in contrast to very specific issues such as say on pay).
Gallagher recommended a return to regular order, whereby the SEC would examine an array of issues and advise Congress on the best way forward. However, he explained, regular order is not being followed due to Dodd-Frank and other congressional mandates. Sheehan suggested that the SEC hold a roundtable discussion on this topic to elicit information from a wider group of stakeholders, which she explained would allow the Commission to then make recommendations to Congress on any necessary legislative action. Fried suggested making quarterly reporting optional which would, in his opinion, indicate whether there is demand for such information in the free market.
Panel 2: Examining the U.S. Proxy System: Is It Working for Everyone?
Garrett opened by explaining that the second panel would examine whether the U.S. proxy system was functioning to benefit all shareholders or whether it is subject to abuse.
Troy Paredes, Former Commissioner, SEC
Paredes explained that the SEC’s disclosure regime is a necessary component of the governance system, which he argued often leads to “information overload” and could be “counterproductive.” Paredes suggested that the SEC conduct a disclosure effectiveness review to address those concerns.
Tom Quaadman, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
Quaadman stated that the declining number of public companies illustrates that the “public company model is not as successful as it used to be,” and he highlighted instances in which management took their companies private to avoid shareholder fights. Quaadman also questioned what the SEC is doing to promote capital formation, one aspect of its tripartite mission.
Darla Stuckey, President and CEO, Society of Corporate Secretaries and Governance Professionals
Stuckey questioned whether developing a universal proxy system should be on SEC Chair Mary Jo White’s agenda, given resource constraints. She also argued that proxy access is the private ordering “battleground.” Stuckey suggested that the SEC improve retail shareholder communications, shorten proxy statements, and reform the 14a-8 regime because “the system is definitely broken.”
Gary Retelny, President and CEO, Institutional Shareholder Services (ISS)
Retelny explained that ISS uses a “transparent analytical framework” for making vote recommendations, and argued that proxy voting processes are designed to promote long-term investor value creation and risk mitigation.
Dan Gallagher, former Commissioner, SEC
Gallagher conveyed his belief that “proxy plumbing” comprises a “core blocking and tackling work” of the SEC. He explained that the SEC’s 2014 Staff Legal Bulletin 20 clarified existing law and reminded fiduciaries to serve as such. However, he argued that the concept release focused solely on “political aspects” which “should not have been engaged in.” Gallagher expressed interest in hearing from market participants as to whether the staff guidance has improved behavior in the proxy advisory system and stated that he hoped congressional intervention would be staved off by fiduciaries acting as such.
Jim Copland, Senior Fellow and Director, Manhattan Institute for Policy Research
Copland argued that a small number of shareholders “dominates” the 14a-8 process, and that 42 percent of shareholder proposals concerned social or political issues, which he claimed “essentially never pass.” Copland argued that institutional investors’ reliance on proxy advisors is problematic because they make “one-size-fits-all” recommendations and wield “enormous influence” over shareholder voting.
Panel Discussion
Changes in Voting Behavior
Gallagher explained that the SEC’s staff legal bulletin clarified that investors do not need to vote every share, however he “never thought that [investors] would abandon the vote.” For small and medium-sized advisors, Gallagher understood that they cannot afford to resource those votes, but in that case those advisors should “avail [themselves] of relief.” However, Gallagher explained that he had not seen that change in voting behavior yet.
Insufficient Time Allowed for Determining Voter Preferences
Quaadman exclaimed that the time period that proxy advisory firms allow for collecting voting preferences of shareholders is “very troubling,” considering a recent ISS benchmark policy survey/request for comment only allowed ten days to comment, but then committed to release the decisions ten days later. Quaadman argued that such a short time horizon for releasing the voting preferences suggests that it is “not an open and deliberative process.”
Use of Proxy Advisory Voter Recommendations
Amy Borrus, Interim Executive Director, Council of Institutional Investors, agreed that the SEC’s 2014 guidance provided a “timely reminder” about fiduciary obligations. However, she argued that “correlation is not causation” in the sense that votes may correlate with ISS recommendations because shareholders actually agree with the underlying position, not necessarily because they are completely reliant on the voting recommendations.
Increased Fiduciary Focus on Environmental and Social Concerns
Rep. French Hill (R-Ark.) wondered whether the rise of shareholder proposals on social or political issues undermined the role of fiduciaries under the ERISA guidelines, which requires fiduciaries to act in the economic interest of their clients, but not necessarily in their political or social interest. Gallagher clarified that the Department of Labor recently clarified that ERISA fiduciaries can consider environmental, social and governance (ESG) factors that are not directly tied to economic interest when casting votes or making investment decisions. Retelny countered that ESG metrics, such as pollution, do have a relevant impact on financial performance of a company. Borrus argued that economic interests remain to be the deciding factor for most funds, and that they find it imperative to vote based on the investment return, not on ESG factors; however Copland disagreed, stating that “if that were true, Secretary [Thomas] Perez would not have changed the guidance to include sustainability concerns.”
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Rep. Scott Garrett (R-N.J. )
Corporate Governance Roundtable
Monday, November 16, 2015
Key Topics & Takeaways
- Modernizing the SEC’s Disclosure Regime: Katz argued that activist investors benefit from information asymmetries in the market, since they can coordinate with other shareholders like “wolfpack” investors. Gallagher argued that modernizing the Securities and Exchange Commission’s (SEC’s) “antiquated” disclosure rules (13D and 14a-8) would be difficult and likely would become a “holy war” because of the “vested interests” that understand the current regime. Schorr and Sheehan cautioned against making changes to the 13D disclosure regime, and Sheehan suggested that the SEC bring in stakeholders that represent a cross-section of the industry to discuss the impact of such potential changes.
- Returning to Regular Order: Gallagher called for a return to regular order, whereby the SEC would examine an array of issues on corporate governance and advise Congress on the best way forward. However, he explained, regular order is not being followed due to Dodd-Frank and other congressional mandates.
- Increased Fiduciary Focus on Environmental and Social Concerns: Rep. Hill (R-Ark.) wondered whether the rise of shareholder proposals on social or political issues undermined the role of fiduciaries under the ERISA guidelines, which requires fiduciaries to act in the economic interest of their clients, but not necessarily in their political or social interest. Gallagher explained that the Department of Labor recently clarified that ERISA fiduciaries can consider environmental, social and governance (ESG) factors that are not directly tied to economic interest when casting votes or making investment decisions. Retelny countered that ESG metrics, such as pollution, do have a relevant impact on financial performance of a company. Borrus argued that economic interests remain to be the deciding factor for most funds, and that they find it imperative to vote based on the investment return, not on ESG factors; however Copland disagreed, stating that “if that were true, Secretary Perez would not have changed the guidance to include sustainability concerns.”
Speakers
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Introduction
Opening Remarks by Rep. Scott Garrett (R-N.J.)
Garrett opened by stating that corporate governance issues are of interest to the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, which he chairs. He noted that robust corporate governance is fundamental to maintaining efficient capital markets and that the term ‘investor activism’ takes many forms and should be considered to determine whether ‘investor activists’ are helping improve long-term shareholder value for investors. Garrett also expressed three broad concerns on the topic: 1) the rise of politically-motivated activism; 2) intensified pressure for companies to beat quarterly earnings; and 3) whether being a public company in the U.S is still attractive to American businesses.
Panel 1: Examining the Current State of Corporate Governance and Investor Activism in the United States
Ed Knight, Executive Vice President, General Counsel and Chief Regulatory Officer, NASDAQ
Knight claimed that economic data illustrates that the market is becoming more focused on short term results due to activist investors, which is reflected by shorter holding periods, among other things. Knight conveyed his belief that both short and long-term investors should participate in shareholder voting to provide oversight on issues such as executive compensation, so that a firm’s management has its “feet held to the fire.” To improve shareholder participation, Knight suggested changing listing standards such that an issuer could not list on NASDAQ, for instance, if it is getting paid by a third party to be a director. This, he said, “should be disclosed, at a minimum.” Knight also suggested instituting parallel rules for short-selling that are already applicable to long-selling strategies (or at least requiring disclosure). Knight also suggested: 1) making proxy advisory firms more transparent and responsive; 2) modernizing the disclosure system through e-filings and making quarterly disclosure requirements optional for smaller companies; and 3) revisiting time-weighted voting to encourage long-term investment.
Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System (CalSTRS)
Sheehan explained that public equities is the largest asset class in which CalSTRS is invested, and noted that its long-term investment horizon and role as fiduciary make it very active and interested in corporate governance issues. She also noted that CalSTRS developed internally its own corporate governance principles that shape and drive its proxy voting activity. Sheehan also maintained that CalSTRS manages a portfolio of activist funds, which she believes provides an important benefit to the market, particularly where other investors are unable or unwilling to engage.
Zach Oleksiuk, Americas Head, Corporate Governance and Responsible Investment, BlackRock
Oleksiuk claimed that the proliferation of activist investors, as well as the 24/7 news cycle, can contribute to short-term performance pressures for issuers, which he said he heard from many of his clients has become an “undue focus.” Still, Oleksiuk said he believes that activist investors have improved long-term value creation for firms and markets alike. He also noted that there has been a “positive trend” whereby corporate boards are taking more time to understand a wide range of perspectives within a shareholder base. However, Oleksiuk noted that the threat of potential activist investors often becomes a “real distraction” for boards and management. Ultimately, he argued, firms must resist short-term pressures and articulate a convincing strategy for long-term, sustainable growth based on credible metrics to avoid such pressures.
David Katz, Partner, Wachtell, Lipton, Rosen, Katz
Katz argued that activist investors are focusing so much on short-term performance metrics that companies are limiting long-term investments, and he expressed concern that long-term growth will be “harmed” as a result of this trend. He suggested rethinking the overall disclosure regime and insider trading rules, which he argued is “long overdue.” Katz elaborated by stating that the SEC disclosure requirements distract the management and boards of public companies and takes away time from focusing on long-term value creation opportunities for shareholders. Ultimately, he explained, the disclosure requirements impose an additional “tax” on public companies.
Troy Paredes, Former SEC Commissioner
Paredes noted three broad trends in corporate governance which he argued warrant attention: 1) shareholder influence over firms is increasing; 2) there is “increasing federalism” of corporate law (due to Dodd-Frank and 14a-8 requirements); and 3) Federal securities laws are being used by some investors to advance broader social goals. Paredes explained that increased regulatory demands take away from a firm’s management and board focusing on business strategy that will drive long-term value creation. He suggested that SEC cost-benefit analyses account for the opportunity cost of taking away from focus on a firm’s business strategy to fulfill new regulatory requirements.
Professor Jesse Fried, Dane Professor of Law, Harvard Law School
Fried explained that the U.S. is the “undisputed leader” in innovation and job creation in the world, which he said stems from the free market system which efficiently allocates capital and labor. Fried explained that there are two roles for activist investors: 1) inducing managers to improve the operation of businesses; and 2) facilitating the deployment of capital and labor from “old timer” firms to younger “upstart” firms that can deploy resources more efficiently. These influences, he argued, are necessary for a market economy.
Brian Schorr, Chief Legal Officer and Partner, Trian Fund Management
Schorr explained that Trian is categorized as an “activist” investor, but he cautioned against using such broad terms since the universe of “activist” investors is not homogenous. Schorr explained that Trian invests in companies that underperform either historically or relative to their peer groups, and explained that its long-term, activist investment strategy often leads to value creation and capital appreciation for all shareholders.
Panel Discussion
Katz argued that it is problematic that activist investors benefit from information asymmetries in the market, since they can coordinate with other shareholders like “wolfpack” investors, however the issuer’s management team he argued is subject to rules of engagement. Schorr and Sheehan cautioned against making changes to the 13D regime, and Sheehan suggested that the SEC bring in stakeholders that represent a cross-section of the industry to discuss the impact of such potential changes. Gallagher argued that modernizing the SEC’s “antiquated” disclosure rules (13D and 14a-8) would be difficult and likely would become a “holy war” because of the “vested interests” that understand the current regime. Katz also added that modernizing the 13D disclosure rules would provide quicker disclosure and make markets more efficient, but he also argued that many modern corporate boards are compliance (rather than strategic) boards.
Increasing Shareholder Engagement
Paredes suggested that the rules allow for more private ordering and increased investor choice in assessing corporate governance, explaining that inducing investors to make their own individual judgments on such issues would open the door for more shareholder engagement. Gallagher cautioned that investors are “too scared” to engage in this debate since “it is a pitched battle,” and he suggested that policymakers and market participants “calm down the rhetoric” to come up with constructive ideas. Knight suggested improving “meaningful” shareholder engagement on firms’ capital structures by moving to a time-weighted voting structure. Oleksiuk advocated for improved proxy access and increased shareholder engagement on broader strategic issues (in contrast to very specific issues such as say on pay).
Gallagher recommended a return to regular order, whereby the SEC would examine an array of issues and advise Congress on the best way forward. However, he explained, regular order is not being followed due to Dodd-Frank and other congressional mandates. Sheehan suggested that the SEC hold a roundtable discussion on this topic to elicit information from a wider group of stakeholders, which she explained would allow the Commission to then make recommendations to Congress on any necessary legislative action. Fried suggested making quarterly reporting optional which would, in his opinion, indicate whether there is demand for such information in the free market.
Panel 2: Examining the U.S. Proxy System: Is It Working for Everyone?
Garrett opened by explaining that the second panel would examine whether the U.S. proxy system was functioning to benefit all shareholders or whether it is subject to abuse.
Troy Paredes, Former Commissioner, SEC
Paredes explained that the SEC’s disclosure regime is a necessary component of the governance system, which he argued often leads to “information overload” and could be “counterproductive.” Paredes suggested that the SEC conduct a disclosure effectiveness review to address those concerns.
Tom Quaadman, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
Quaadman stated that the declining number of public companies illustrates that the “public company model is not as successful as it used to be,” and he highlighted instances in which management took their companies private to avoid shareholder fights. Quaadman also questioned what the SEC is doing to promote capital formation, one aspect of its tripartite mission.
Darla Stuckey, President and CEO, Society of Corporate Secretaries and Governance Professionals
Stuckey questioned whether developing a universal proxy system should be on SEC Chair Mary Jo White’s agenda, given resource constraints. She also argued that proxy access is the private ordering “battleground.” Stuckey suggested that the SEC improve retail shareholder communications, shorten proxy statements, and reform the 14a-8 regime because “the system is definitely broken.”
Gary Retelny, President and CEO, Institutional Shareholder Services (ISS)
Retelny explained that ISS uses a “transparent analytical framework” for making vote recommendations, and argued that proxy voting processes are designed to promote long-term investor value creation and risk mitigation.
Dan Gallagher, former Commissioner, SEC
Gallagher conveyed his belief that “proxy plumbing” comprises a “core blocking and tackling work” of the SEC. He explained that the SEC’s 2014 Staff Legal Bulletin 20 clarified existing law and reminded fiduciaries to serve as such. However, he argued that the concept release focused solely on “political aspects” which “should not have been engaged in.” Gallagher expressed interest in hearing from market participants as to whether the staff guidance has improved behavior in the proxy advisory system and stated that he hoped congressional intervention would be staved off by fiduciaries acting as such.
Jim Copland, Senior Fellow and Director, Manhattan Institute for Policy Research
Copland argued that a small number of shareholders “dominates” the 14a-8 process, and that 42 percent of shareholder proposals concerned social or political issues, which he claimed “essentially never pass.” Copland argued that institutional investors’ reliance on proxy advisors is problematic because they make “one-size-fits-all” recommendations and wield “enormous influence” over shareholder voting.
Panel Discussion
Changes in Voting Behavior
Gallagher explained that the SEC’s staff legal bulletin clarified that investors do not need to vote every share, however he “never thought that [investors] would abandon the vote.” For small and medium-sized advisors, Gallagher understood that they cannot afford to resource those votes, but in that case those advisors should “avail [themselves] of relief.” However, Gallagher explained that he had not seen that change in voting behavior yet.
Insufficient Time Allowed for Determining Voter Preferences
Quaadman exclaimed that the time period that proxy advisory firms allow for collecting voting preferences of shareholders is “very troubling,” considering a recent ISS benchmark policy survey/request for comment only allowed ten days to comment, but then committed to release the decisions ten days later. Quaadman argued that such a short time horizon for releasing the voting preferences suggests that it is “not an open and deliberative process.”
Use of Proxy Advisory Voter Recommendations
Amy Borrus, Interim Executive Director, Council of Institutional Investors, agreed that the SEC’s 2014 guidance provided a “timely reminder” about fiduciary obligations. However, she argued that “correlation is not causation” in the sense that votes may correlate with ISS recommendations because shareholders actually agree with the underlying position, not necessarily because they are completely reliant on the voting recommendations.
Increased Fiduciary Focus on Environmental and Social Concerns
Rep. French Hill (R-Ark.) wondered whether the rise of shareholder proposals on social or political issues undermined the role of fiduciaries under the ERISA guidelines, which requires fiduciaries to act in the economic interest of their clients, but not necessarily in their political or social interest. Gallagher clarified that the Department of Labor recently clarified that ERISA fiduciaries can consider environmental, social and governance (ESG) factors that are not directly tied to economic interest when casting votes or making investment decisions. Retelny countered that ESG metrics, such as pollution, do have a relevant impact on financial performance of a company. Borrus argued that economic interests remain to be the deciding factor for most funds, and that they find it imperative to vote based on the investment return, not on ESG factors; however Copland disagreed, stating that “if that were true, Secretary [Thomas] Perez would not have changed the guidance to include sustainability concerns.”