Friday, February 21, 2020

Comments highlight social, competitive effects of SEC proxy proposals

By Anne Sherry, J.D.

The SEC heard from the U.S. Department of Justice and from Sen. Tammy Baldwin (D-Wis) on its two November 2019 proposals affecting shareholder proposals and proxy advisors. Commenting on the proposal to raise the thresholds for submitting shareholder proposals, Baldwin said that the proposed rule would hinder progress against workplace discrimination affecting LGBTQ employees. The DOJ wrote that the proposal to regulate aspects of the proxy advisory business would improve transparency but could increase costs, resulting in a mixed effect on competition.

The SEC’s twin proxy proposals take aim at two related issues. One of the proposals would institute a tiered threshold such that larger investors could make proposals sooner than smaller investors, who would not have to hold as much stock but who would have to abide by a longer holding period. That proposal also would increase the resubmission thresholds that govern the amount of support required and the time frame for keeping a shareholder proposal alive. The second proxy proposal would subject proxy advisers to requirements on conflicts of interest and transparency that would allow companies reviewed by these firms to raise objections to proxy recommendations.

Shareholder proposals and LGBTQ rights. Baldwin’s comment letter observes that shareholder proposals led to a high adoption rate of workplace non-discrimination policies that include sexual orientation and gender identity. Fewer companies would have such policies under the proposed rule, damaging not only LGBTQ employees but also the companies and shareholders that would be deprived of their contributions. Baldwin cites a 2016 Credit Suisse report finding that companies with LGBTQ-friendly policies outperformed both a global index and a basket of peer companies. She adds that exposure to LGBTQ individuals, often in the workplace, greatly increases support for their equal rights.

The senator also criticizes the SEC’s analysis of previous shareholder proposals for going back only to 2011, by which time the LGBTQ rights movement was already underway. The analysis also overlooks changes that were driven by shareholder proposals but adopted through negotiation rather than majority votes on the proposal. Finally, and most concerning to Baldwin, the analysis uses probability to justify the likelihood that a proposal would be excluded based on the new thresholds. "I am disappointed that the Commission seems to believe the values of democracy can be done away with in lieu of probabilities," she writes.

Competition among proxy advisors. Commenting on the proxy advisory proposal, the DOJ approached the issue from its standpoint as the agency primarily responsible for promoting and protecting competition. The Department said it is aware of concerns that the proxy advisory industry is a duopoly, with two firms maintaining 97 percent of advisory services. DOJ also is aware that economies of scale create high barriers to entering the industry or to performing the same functions in-house.

The Department believes the proposal could create a foundation for greater competition by promoting accuracy and transparency in proxy voting advice and thus increasing demand for such advice. Furthermore, if clients had access to higher quality advice, their other compliance costs could decrease.

However, the proposal would also increase costs on proxy advisors themselves, which could decrease competition by causing some firms to exit the industry (or deter others from entering). The costs would be more significant to smaller businesses, which would be less able to absorb cost increases than larger, wealthier firms. DOJ also emphasized that care needs to be taken when increasing regulatory costs because these costs tend to be stable or increase over time. Ultimately, the comment letter defers to the SEC to strike the right balance if it concludes that the rules risk diminishing competition.