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10 Feb. 2020 | Comments (0)

As the U.S. Securities and Exchange Commission (SEC) has initiated proposed reforms to the proxy voting process, retail investors—whose retirement accounts, savings and private investments fuel the markets—have become more aware of the role proxy advisors play in the system. With greater knowledge of proxy advisors’ influence comes greater support among retail investors for increased SEC oversight.

These trends are clear in the results of a recent survey of 5,000 retail investors by Spectrem Group that updates their views on proxy advisors and shareholder proposals from a previous survey in April 2019. This survey probed retail investor sentiment and opinions on some of the very topics the SEC has explored over the past year: concerns about flaws in the proxy advisory industry and system, the firms’ conflicts of interest, a lack of transparency and the troubling practice of robo-voting. Importantly, the survey presented its descriptions of these issues and policies in a comprehensive, even-handed, and objective manner.

The initial survey conducted in April found a growing disconnect between retail investors’ expectations and the increased influence of proxy advisors. It also indicated less awareness than we see today of proxy advisors and some of their more concerning issues, such as errors in recommendations, lack of engagement with companies, robo-voting, and conflicts of interest.

Spectrem’s survey shows that retail investors support the SEC’s recent progress in these areas and are looking to the SEC to serve out its mission of protecting investors, maintaining fair and efficient markets, and facilitating capital formation.

The SEC is clearly listening, as Chairman Clayton referenced retail investors when unveiling the proposed rule changes, and their concerns “that their financial investments - including their retirement funds - were being steered by third parties to promote individual agendas, rather than to further their primary goals of being able to have enough money to lessen the fear of ‘running out’ in retirement or to leave money to their children and grandchildren."

Those worries are rooted in investors’ core focus on returns, which this survey confirms. When given a choice between maximizing returns or pursuing social and political goals, 91% of investors prefer maximizing returns.

These findings mirror the results of the initial Spectrem survey but paint a very different picture than the conventional wisdom being espoused by some investor groups and many in the financial press about Environmental, Sustainability and Governance (ESG) investing. Their rhetoric around ESG investing, which is often reflected in voting recommendations from top proxy advisors Institutional Shareholder Services (ISS) and Glass Lewis, does not match actual retail shareholders’ preference to focus on maximizing returns.

Chairman Clayton recognized the diversity of shareholder interests in announcing the newly proposed rules:

“We must recognize that there is a myriad of investor interests and preferences. Many of these interests overlap substantially, such as the thirst for information material to an investment decision. But there are many others that do not and may be in direct conflict, such as a desire for a company to sell or buy a particular business or undertake a particular study or course of action. Understanding and responding to these interests, including both common and conflicting interests, in a fair and efficient manner is an important function of corporate governance and our proxy rules are intended to facilitate that function.”

A notable change since the last Spectrem survey is a growing awareness among retail investors of the problems surrounding proxy advisors, as those with even a slight awareness of the firms grew from 50% to 57%. In fact, investors would like to see the SEC expand its reforms to areas such as robo-voting, which unfortunately is not covered in the otherwise robust recent rule proposals but is of utmost concern to retail investors.

This survey is therefore most relevant as the commission moves forward on new rules, because key investor priorities are revealed here. In contrast, the voices of retail investors and overwhelming support shown in this survey constitute a more direct representation of how the investing public view these governance issues—free of bias and pulled from a wide sample of respondents.

While this analysis largely focuses on the survey’s findings regarding proxy advisors, it’s important to note and briefly discuss the other subject of the SEC’s proposed rules: shareholder proposals. Shareholder proposals effectively function as a tax on company shareholders. As originally contemplated by state corporation law, proposals for shareholder vote could be brought independently, with those proposing the vote having the option to pay for their own proxy solicitation costs.

The SEC created a second avenue for shareholder proposals on the company ballot, paid for by all shareholders in the company. In effect, they must subsidize the small group of shareholders using this alternative method for engagement. The SEC’s proposed reforms only affect this subsidized method for shareholder engagement, but even those shareholders impacted by these reforms remain free to pay for their own proxy solicitations for their proposals.

Critics of the SEC’s shareholder proposal reforms claim they will impede shareholder democracy. These survey results show the opposite is true. When asked whether the proposed SEC changes would affect the likelihood of engaging with companies before or after a proxy submission, only 12% of retail investors said it would make them less likely to engage; more than a third said that the rules would make them more likely to do so.

These proposals do not affect the basic shareholder voting rights provided under state law to vote for board elections, major transactions, and charter and bylaw amendments. What the SEC proposal does affect is the federally created subsidy for shareholder proposals.

Survey respondents support all proposals contained in the SEC’s rule proposal, including identification of the proposing shareholder, requiring the proposer to meet with the company, limiting proposals to one per shareholder, increasing eligibility thresholds, increasing resubmission thresholds, and allowing investment advisors to abstain from voting. These proposals all received between 65% and 77% total support.

  • About the Author:J.W. Verret

    J.W. Verret

    J.W. Verret is an associate professor of law at the Antonin Scalia Law School at George Mason University and member of the Securities and Exchange Commission’s Investor Advisory Committee.…

    Full Bio | More from J.W. Verret


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