The need for transparency and reform in proxy voting

A bipartisan group of U.S. senators recently introduced legislation that would require the Securities and Exchange Commission (SEC) to better regulate proxy advisory firms, which advise investment management companies on proxy votes. The bill seeks to limit the influence these advisers can have over corporate governance policies.

There is growing concern that proxy firms wield too much influence over the shareholder voting process and will, on occasion, nudge investment firms to place more emphasis on political concerns — such as gun control or the need to take action on climate change — instead of the pursuit of long-term profits.

{mosads}The legislation, the Corporate Governance Fairness Act, would require the SEC to regulate proxy advisers directly under the Investment Advisers Act. The authors argue for greater transparency and oversight and propose that proxy advisers be regulated in the same way that ratings agencies are. The bill would require the firms to be subject to regular SEC examinations to ensure there are no conflicts of interest in vote recommendations.

One of the bill’s main sponsors, Sen. Doug Jones (D-Ala.), noted: “For our public markets to thrive, investors need timely, accurate information about public companies. Proxy advisory firms play a critical role in providing that information to investors. Given their essential role in the marketplace, I believe it is prudent that these firms are properly regulated by the Securities and Exchange Commission, making sure that conflicts of interest are avoided and that proxy advisory firms are legally required to serve in their clients’ best interests. This commonsense oversight measure will increase confidence in our public markets, benefiting both investors and growing companies.”

The legislation has been endorsed by the Consumer Federation of America, the New York Stock Exchange and the Society for Corporate Governance.

The SEC recently hosted a roundtable to discuss these very concerns about the proxy process.  Many of the panelists, as well as the SEC officials participating, expressed fears that a lack of transparency, potential conflicts of interest, and politically motivated vote recommendations may be impairing corporate fiscal performance and weakening shareholder returns.

Many of the largest asset managers in the United States are weighing in on the issue as well.  Blackrock, which has over $6 trillion under management, recently announced that it would back tougher rules regarding shareholder advice and transparency when investors file resolutions at annual meetings. This statement from world’s largest asset manager delivered a blow to proxy advisers, who would very much like to keep the status quo.

While the issue may seem niche to folks outside of Wall Street, it has the potential to impact anyone invested in a retirement fund. Jason Furman, who chaired the Council of Economic Advisers under President Obama, argued that sacrificing small returns can lead to large reductions in retirement savings for middle-class Americans. While those investment activists who pursue political agendas via proxy advisory fights insisted that their goals promise to increase returns for affected shareholders, the Department of Labor recently announced that such rhetoric was misleading and should be stopped.

Ensuring that investors have confidence in the corporate governance of the firms in which they invest is an important responsibility of the SEC. Investing is hard enough for middle-class Americans; we need a market that puts their interests first.

Eric V. Schlecht is president of the consulting firm OnPoint Strategies and has worked on budget and economic issues in Washington, D.C., for more than 25 years, including as a legislative director for former Rep. John Shadegg (R-Ariz.), a tax, budget and economic policy analyst for the Senate Republican Policy Committee, and as a policy analyst for the National Taxpayers Union.