At an event hosted yesterday by the Chamber of Commerce’s Center for Capital Markets Competitiveness, SEC Chairman Jay Clayton and CorpFin Director William Hinman talked about revising aspects of the shareholder proxy submission rules and revisiting the role of proxy advisors, particularly as it relates to asset managers’ fiduciary duties. Disclosure was also a topic of the event, with Representatives Carolyn Maloney (D-NY) and Gregory Meeks (D-NY) taking the stage to discuss the board diversity bill that recently passed out of the House Financial Services Committee with bipartisan support.
The proxy process and advisory firms. The Clayton-Hinman discussion focused on the proxy system and disclosure regime. Clayton said that shareholder engagement is strong, but he identified three areas with room for improvement: the system itself, which he called “antiquated”; the engagement process; and the actual voting process. On this last issue, Clayton said that the SEC is reviewing the use of proxy advisory firms. He noted that asset managers are fiduciaries to their funds and clients, and while outsourcing is not a bad thing in itself, it may go too far when the fund holder or client is counting on the asset manager to make voting decisions in the client’s best interest.
Hinman said that the Division of Investment Management is very focused on these fiduciary duties and will be putting out guidance on what the duty actually means. He stressed that the exemptions proxy advisory firms enjoy should come with an obligation to be careful about how they put their recommendations together, be willing to work with issuers so that they can review the material before it goes out, and make it easier for fiduciaries or others acting on the recommendation to find the issuer’s view. For its part, CorpFin is reviewing the proxy submission and resubmission rules, aspects of which have not been updated since 1954, to see whether the thresholds still make sense. Hinman wants to ensure that the thresholds require a meaningful stake in the company without silencing smaller shareholders.
Hinman added that every year, CorpFin puts together a “SWAT team” to focus on the proxy season, but this year lost a month or more to the government shutdown. The lesson the Division took away from its leaner review is that perhaps not every no-action letter requires a formal response. Going forward, if CorpFin does not feel it is adding value, it may not issue a letter. Hinman posited that this may improve engagement: “We get out of the way.” Clayton said he couldn’t agree more. The rules are designed to facilitate engagement, so it’s not good if they are actually hindering dialogue. However, he cautioned that striking this balance is easy to say, but hard to do.
Disclosure and engagement. Clayton and Hinman agreed that they want to see more IPOs, and IPOs earlier in a company’s life cycle. Clayton said that while the “use of proceeds” section of a prospectus used to focus on investments in plant, property, and research, today the use is liquidity. Public investors today do not have as many opportunities to invest in a company through its growth stage. Hinman said he encourages direct listings such as those conducted by Slack and Spotify without firm commitment underwriting. The Division is also reviewing the SEC’s rules to look at where the rules create burdens without a corresponding benefit to shareholder protection.
More broadly, Clayton said that his predecessors at the SEC made a choice to allow companies to run their businesses how they see fit—but that they have to disclose how they will run the business, and the SEC will hold them to that disclosure. In this country, Clayton added, “the ‘we’ll hold you to it’ has real teeth.” A company that diverges from its disclosures has to answer to the SEC, state attorneys general, and the private bar.
Hinman said that stock buybacks are a great example of this principle. Despite the backlash against them, it is not up to the SEC to decide how to make capital allocations. The agency focuses on the company’s disclosure: how compensation committees disclose how they take buybacks into account in compensation decisions, or how a liquidity section discusses why a buyback was chosen over other options. Clayton agreed. While the SEC has never regulated buybacks beyond the mechanics of the actual transaction, it does want the company to explain its thought process.
Finally, to segue into the next panel, the moderator asked for the officials’ views on board diversity. Clayton said that if he knew how best to advance that goal, he would get the Nobel prize. Internally at the agency, however, he said that the SEC is doing a better job on gender—half of his direct reports are women—but needs to improve African American and Hispanic representation, especially at the senior level. When he looks at these metrics, Clayton asks if the agency is in some way depriving people of opportunity.
In terms of disclosure, both Clayton and Hinman said they have spent a lot of time with this and are sensitive to the privacy of individual board members. Specifically, Hinman said that companies were reluctant to push directors to disclose demographic information if they did not proactively self-identify. He added that the required disclosures under Items 401 and 407 of Reg S-K have not been very useful because companies spoke in general terms, or would say that they had a diversity policy but go no further. The recent C&DIs remind companies that if a board member self-identifies diversity characteristics and consents to their disclosure, the company must disclose.
Board diversity legislation. Representatives Maloney and Meeks then took the stage to discuss board diversity, particularly H.R. 1018, the Improving Corporate Governance Through Diversity Act of 2019, which recently passed out of the Financial Services Committee. Meeks sponsored the bill and Maloney, who spearheaded the diversity effort by ordering a GAO study of the issue, is a cosponsor. The Chamber of Commerce supports the bill, and Maloney credited the Chamber with helping to convince Republicans to vote for it. Only two Republican committee members voted against the bill, she said, which bodes well for getting it to the floor and passing it.
Maloney said that when she arrived in Congress, there were not many women around, so she took on a role as an advocate not just of her New York constituents but of women generally. Meeks said that he grew up in public housing and was bussed to a school downtown where there were not many other African Americans. When more arrived, both as students and teachers, the quality of education improved for everyone.
Asked about the bill’s tactic of requiring disclosure, rather than a quota system like that passed by California, Maloney said it is very hard to pass something that changes a business practice. Disclosure does not do so, and it is not burdensome when it merely tacks another three disclosure items (ethnicity, gender, and race) to a form that is already being filed. She added that women on boards are there for their merit and do not want to feel like the token in the room. Meeks said that diversity is being driven by competition: when companies brag about what they’re doing, others want to do the same thing. He predicted that with the infighting and “hardness” between the political parties in Congress, it may be the private sector that leads the country forward.
Hinman said that the Division of Investment Management is very focused on these fiduciary duties and will be putting out guidance on what the duty actually means. He stressed that the exemptions proxy advisory firms enjoy should come with an obligation to be careful about how they put their recommendations together, be willing to work with issuers so that they can review the material before it goes out, and make it easier for fiduciaries or others acting on the recommendation to find the issuer’s view. For its part, CorpFin is reviewing the proxy submission and resubmission rules, aspects of which have not been updated since 1954, to see whether the thresholds still make sense. Hinman wants to ensure that the thresholds require a meaningful stake in the company without silencing smaller shareholders.
Hinman added that every year, CorpFin puts together a “SWAT team” to focus on the proxy season, but this year lost a month or more to the government shutdown. The lesson the Division took away from its leaner review is that perhaps not every no-action letter requires a formal response. Going forward, if CorpFin does not feel it is adding value, it may not issue a letter. Hinman posited that this may improve engagement: “We get out of the way.” Clayton said he couldn’t agree more. The rules are designed to facilitate engagement, so it’s not good if they are actually hindering dialogue. However, he cautioned that striking this balance is easy to say, but hard to do.
Disclosure and engagement. Clayton and Hinman agreed that they want to see more IPOs, and IPOs earlier in a company’s life cycle. Clayton said that while the “use of proceeds” section of a prospectus used to focus on investments in plant, property, and research, today the use is liquidity. Public investors today do not have as many opportunities to invest in a company through its growth stage. Hinman said he encourages direct listings such as those conducted by Slack and Spotify without firm commitment underwriting. The Division is also reviewing the SEC’s rules to look at where the rules create burdens without a corresponding benefit to shareholder protection.
More broadly, Clayton said that his predecessors at the SEC made a choice to allow companies to run their businesses how they see fit—but that they have to disclose how they will run the business, and the SEC will hold them to that disclosure. In this country, Clayton added, “the ‘we’ll hold you to it’ has real teeth.” A company that diverges from its disclosures has to answer to the SEC, state attorneys general, and the private bar.
Hinman said that stock buybacks are a great example of this principle. Despite the backlash against them, it is not up to the SEC to decide how to make capital allocations. The agency focuses on the company’s disclosure: how compensation committees disclose how they take buybacks into account in compensation decisions, or how a liquidity section discusses why a buyback was chosen over other options. Clayton agreed. While the SEC has never regulated buybacks beyond the mechanics of the actual transaction, it does want the company to explain its thought process.
Finally, to segue into the next panel, the moderator asked for the officials’ views on board diversity. Clayton said that if he knew how best to advance that goal, he would get the Nobel prize. Internally at the agency, however, he said that the SEC is doing a better job on gender—half of his direct reports are women—but needs to improve African American and Hispanic representation, especially at the senior level. When he looks at these metrics, Clayton asks if the agency is in some way depriving people of opportunity.
In terms of disclosure, both Clayton and Hinman said they have spent a lot of time with this and are sensitive to the privacy of individual board members. Specifically, Hinman said that companies were reluctant to push directors to disclose demographic information if they did not proactively self-identify. He added that the required disclosures under Items 401 and 407 of Reg S-K have not been very useful because companies spoke in general terms, or would say that they had a diversity policy but go no further. The recent C&DIs remind companies that if a board member self-identifies diversity characteristics and consents to their disclosure, the company must disclose.
Board diversity legislation. Representatives Maloney and Meeks then took the stage to discuss board diversity, particularly H.R. 1018, the Improving Corporate Governance Through Diversity Act of 2019, which recently passed out of the Financial Services Committee. Meeks sponsored the bill and Maloney, who spearheaded the diversity effort by ordering a GAO study of the issue, is a cosponsor. The Chamber of Commerce supports the bill, and Maloney credited the Chamber with helping to convince Republicans to vote for it. Only two Republican committee members voted against the bill, she said, which bodes well for getting it to the floor and passing it.
Maloney said that when she arrived in Congress, there were not many women around, so she took on a role as an advocate not just of her New York constituents but of women generally. Meeks said that he grew up in public housing and was bussed to a school downtown where there were not many other African Americans. When more arrived, both as students and teachers, the quality of education improved for everyone.
Asked about the bill’s tactic of requiring disclosure, rather than a quota system like that passed by California, Maloney said it is very hard to pass something that changes a business practice. Disclosure does not do so, and it is not burdensome when it merely tacks another three disclosure items (ethnicity, gender, and race) to a form that is already being filed. She added that women on boards are there for their merit and do not want to feel like the token in the room. Meeks said that diversity is being driven by competition: when companies brag about what they’re doing, others want to do the same thing. He predicted that with the infighting and “hardness” between the political parties in Congress, it may be the private sector that leads the country forward.