SEC chairman Clayton calls for new debate on US proxy process

The chairman of the US Securities and Exchange Commission (SEC) Jay Clayton has used a speech on governance and transparency at the PLI 49th Annual Institute on Securities Regulation in New York to propose that the regulator reviews the proxy process.

Clayton said that the important role the proxy process played in public company governance in the US meant that the SEC should be “taking a hard look at whether the needs of shareholders and companies are being met”. Matters for consideration included whether even if shareholders were well-informed were they able to effectively participate in the voting process?; what were the costs and burdens of the proxy system on companies, and how were they borne by shareholders? and how were proxy rules affecting the ultimate beneficial owners of public companies – a majority of whom, Clayton said are “silent” retail investors?

SEC US proxy process

SEC Chair Jay Clayton wants to review the US proxy process

He said he believed the SEC should consider reopening the comment file on the 2010 proxy plumbing SEC concept release and ask for updated feedback from market participants about what works and what does not work in the US proxy system. In his speech, he concentrated on two areas of concern: retail investors and shareholder resolutions.

Clayton said that he had become increasingly concerned that the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance. He said that the SEC estimated that over 66% of the Russell 1000 companies are owned by Main Street investors, either directly or indirectly through mutual funds, pension or other employer-sponsored funds, or accounts with investment advisers. If foreign ownership was excluded, that percentage approached around 79% Clayton said. Yet it was not clear whether in the SEC’s rulemaking processes the views and fundamental interests of long-term retail investors were being advocated fully and clearly, either by individual investors or groups that represent them, he said.

“A majority of Main Street America’s dollars are invested in vehicles where the investor – the person with their money at risk – is not the voting shareholder. Often voting power rests in the hands of investment advisers who owe a duty to vote proxies in a manner consistent with the best interests of the fund and its shareholders. A question I have is: are voting decisions maximising the funds’ value for those shareholders?

“In situations where the voting power is held by or passed through to main street investors, it is noteworthy that non-participation rates in the proxy process are high. In the 2017 proxy season, retail shareholders beneficially-owned 30% of the shares in U.S. public companies; however, only 29% of those shares voted. This may be a signal that our proxy process is too cumbersome for retail investors and needs updating.”

Moving to shareholder resolutions Clayton said that currently the stakeholders involved – companies, fiduciaries, individual investors, and investor groups – had established views on the appropriate set of rules for shareholder proposals, and there seems to be little ground for building a consensus. He said that he was searching for a way to reconcile common ground.

Clayton said “History has shown that shareholder proposals can gain traction and lead to corporate governance changes that better track the long-term interests of main street investors. They also create costs, including out-of-pocket costs and the use of board and management time that otherwise could be devoted to the operation of the company itself.

“Some are of the view that companies should focus as much energy on shareholder engagement as is demanded. Others want management to dedicate as much time as possible to company operations for the benefit of all shareholders. The shareholder proposal process is not the only piece of this puzzle, but it is a piece worth examining.”

He said that questions existed about the appropriate level of ownership that should be required to submit shareholder proposals, as well as whether our current resubmission thresholds are too low. He said currently there were concerns that resolutions could be repeatedly resubmitted without receiving much shareholder support. Clayton said one of his guiding principles was whether the SEC’s rules were serving the long-term interests of main street investors.

” We need to make sure that those investors have a seat at the table as we examine the proxy process,” Clayton concluded.

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