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Part Two of a Two-Part Post
Yesterday, in a rare expression of unanimity, the five SEC Commissioners all voted to approve a Concept Release that proposes sweeping revisions of the US proxy voting system. This is akin to quadruple bypass surgery on the body politic of free enterprise: after decades of poor habits and lack of exercise leading to what we might call “corporate-carditis”, the arterial system for corporate governance may finally get fixed. What’s more, Doctors Dodd and Frank (in the Congressional bill bearing their names that the Senate passed today) are recommending a parallel procedure: opening up the board nomination process to shareowners – so-called proxy access – a common sense remedy that the SEC approved long ago but failed to implement due to resistance from the business community.
The Concept Release contains a number of significant proposals that include:
- improving investor education;
- enhancing investor-to-investor communication;
- advancing brokers’ Internet platforms; and
- increasing use of the Web for distribution of proxy materials.
As Ted Allen of RiskMetrics wrote in his summary, the SEC certainly has its work cut out with these and other reform recommendations contained in the Dodd-Frank Act, such as proxy access, which corporate voices such as the Chamber of Commerce and Business Roundtable oppose for bestowing power on shareowners. Peter DeSimone, program director at the Social Investment Forum, pointed out that the Commissioners’ unanimity in approving the Concept Release broke down regarding how to elicit public comment. “Commissioner [Luis A.] Aguilar was adamant that the SEC needed to take a comprehensive survey of investors on this topic before proceeding with a recommendation on rule making,” DeSimone said.
DeSimone noted the Concept Release also calls for the SEC to “explore the usefulness of XBRL and other data tagging techniques to tag executive compensation and director qualification information in proxy statements.” The SEC Investor Advisory Committee first recommended this move, extending it to include environmental, social, and governance (ESG) data that typically are covered in shareowner resolutions voted on in the proxy.
The SEC acknowledged that “it has been many years since we have conducted a broad review of the system”—more than 30 years, in fact. In this time, many significant changes have occurred, including new technologies, changes in the nature of stock ownership, consolidation of proxy distribution service providers, and the emergence of new kinds of proxy services as well as financial products.
“The proxy is often the principal means for shareholders and public companies to communicate with one another, and for shareholders to weigh in on issues of importance to the corporation,” said SEC Chairman Mary L. Schapiro at yesterday’s meeting. “To result in effective governance, the transmission of this communication between investors and public companies must be timely, accurate, unbiased, and fair.”
Once the Concept Release is published in the Federal Register, the public will have 90 days to review the proposal and submit comments.
More than 600 billion shares are voted at more than 13,000 shareholder meetings every year, the SEC said in its press release and impressive fact sheet. Unfortunately, due to “corporate-carditis”, most shareholders do not know what issues are on the corporate ballot, how these issues are voted, and what the results are. Yesterday’s action seeks to rectify that.
All in all, an impressive intervention to help revive a laggard market system that was on taxpayer-financed life support not too long ago. Let’s hope the recovery process proceeds smoothly. While it will be awhile before the invasive procedure is finished, the system will need to remain under observation as it develops new habits in order to remain healthy and avoid relapse.
