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19 Nov. 2010 | Comments (0)

When the SEC issued its concept release on the U.S. proxy system, also known as proxy plumbing, in July, it was praised by many corporate secretaries as a way to update the archaic process used to elect directors and vote on proxy proposals. It was also seen by some shareholders as a way to take the mystery out of the proxy voting process. But it was also seen as opportunity by those sitting in the C-suite and boardrooms to rein in the powerful proxy advisors. Of the nearly 250 comment letters listed on the SEC Web site for the proxy plumbing release as of Nov. 16, (the comment deadline was Oct. 20) many focus on the following issues:
  • Possible regulation of proxy advisory services (i.e. Institutional Shareholder Services, Glass Lewis)
  • Empty voting (decoupling of economic and voting components of share ownership)
  • Company communication with Objecting Beneficial Owners (OBO) and Non-objecting Beneficial Owners (NOBO)
  • Need for voting instruction forms to meet same standards as proxies
If you need a refresher on the concept release, take a look at my July 15 post. The 151-page concept release addressed such issues as over voting, under voting, vote confirmation, empty voting, role of proxy advisory firms and possible conflicts of interest and proxy distribution fees. After combing through the letters, I singled out five that made arguments for or against the issues I mention above. The five letter writers range from a law firm specializing in securities law to an online corporate governance newsletter. Suffice it to say, the letters represent all sides of the proxy plumbing issue: the shareholders, management, the board, proxy advisors. Here are the letters that I believe are worth reading:
  • The Corporate Governance Network, James McRitchie, Publisher, Oct. 20. Excerpt: The issue of blank votes was previously discussed in my May 15, 2009 petition to the SEC to amend Rule 14a-4(b)(1). I incorporate those arguments here by reference to File 4-583.6 In that petition, as above in my comments relative to Dodd-Frank, I argue the SEC should amend Rule 14a-4(b)(1) to prohibit conferring discretionary authority to issuers with respect to non-votes on the voter information form or proxy. In this section I address the need for Voting Instruction Forms (VIFs) to meet the same standards as proxies. As mentioned in my May 15, 2009 petition, Broadridge's ProxyVote.com7 appears to fall short of full compliance with SEC regulations with regard to notifying the voter being solicited as to how blank votes are counted.
  • Wachtell, Lipton, Rosen & Katz, Oct. 19, Excerpt: …Recent developments that have had the effect of decoupling the economic consequences of share ownership from the associated voting and control powers (whether through innovations in derivatives, the increasing speed with which shares change hands, or the emergence of powerful intermediaries with great influence over corporate policy but no equivalent economic interest or "skin in the game") call for certain changes in order to restore the proper functioning of the proxy system. …The prevalence of empty voting, and the increasingly sophisticated and manipulative ways in which it is employed, risks allowing voters who are not economically aligned with a corporation and its economic shareholders to subvert the corporate machinery to the detriment of those shareholders, the corporations that they own and, ultimately, the American economy…. The singular role that proxy advisory firms play in the field of corporate governance and elections, and the broad reach of their influence, calls for comprehensive and particularized regulation by the Commission for the protection of all investors. We discuss more specific suggestions below, including requiring registration of proxy advisory firms under the Investment Advisers Act, creating a regulatory regime for proxy advisory firms that brings them within the reach of more of the federal proxy rules, providing issuers with the opportunity to review and rebut the proxy advisory firms' reports on them, and enhancing regulation of conflicts of interest.
  • The Corporate Library, Nell Minow, Chair, Oct.19. Excerpt: I would like to object in the strongest possible terms to the possible regulation of proxy advisory services. As the original general counsel and for one year CEO of ISS, I have observed this industry from the beginning…The recent Citizens United decision by the Supreme Court emphasized the importance of unfettered speech, justifying corporate participation in the political process explicitly through its accountability to investors because shareholder objections raised through the procedures of corporate democracy can be more effective today because modern technology makes disclosures rapid and informative…. I would support the UK approach of putting the burden of proof on institutional investors to show why they have not been actively engaged in exercising those rights, and I would support a vigorous enforcement program to address the issues of conflicts of interest we have documented in the repeated failure of institutional investors to vote against value-destroying compensation plans (even when proxy advisory services tell them to do so).
  • Center for Capital Markets Competitiveness (part of the U.S. Chamber of Commerce), Tom Quaadman, Vice President, Nov. 15. Excerpt: We propose the development of a Code of Standards (the “standards”) in the formulation and annual updating of ISS’ benchmark U.S. corporate governance policies (“policies”). These standards will establish a process to allow for input by all parties as well as to provide clear rules of the road to prevent arbitrary and capricious decision-making. While we believe that there needs to be the long-term development of a formal appeals process for those issuers who disagree with a report or recommendation, in light of your Process for Engagement on Proxy Voting Matters, we intend to review in more detail plans for its implementation…we recommend that the CCMC and ISS develop standards that would set forth a formal process that ISS would observe to formulate and update its corporate governance policies.
  • National Association of Corporate Directors, Barbara Franklin, Chair; Kenneth Daly, President and CEO. Oct. 20. Excerpt: The proxy voting system is a means to an end. The goal of the system is the accurate voting of shares in a transparent and informed manner in a process free of conflicts of interest. The Commission has identified other issues, including over-voting and under-voting (caused by imbalances in broker votes, securities lending, and failure to deliver), disclosure of voting by funds, proxy distribution fees, low retail investor participation in proxy voting, dual record dates, “empty voting,” and related “decoupling” issues. We believe that many of these problems can be solved by improvements in technology. New technologies and social media are changing the way boards garner information and sentiment from shareholders. Companies can do more to use technology in board-shareholder communications….Yes, we believe proxy advisory firms can significantly influence shareholder voting. We have anecdotal evidence that our members have altered their governance policies and practices to influence ratings and recommendations from the advisory firms. We do not believe that, for the most part, proxy advisory firms need additional regulation. However, if companies vote shares on behalf of owners, they should register as investment advisors.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

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