February 12, 2020

Proxy Advisor Regulation: The Sublime. . .

Well, we thought that the comment process for the SEC’s proposed proxy advisor regulations was going to be a free-for-all, and it hasn’t disappointed. Lynn blogged last week about some investor comments, but representatives of other constituencies also weighed in.

Insightful comments from advocates for the proposed rules include this letter from the Society for Corporate Governance, which, among other things, highlighted the reports of its members concerning the prevalence of errors in proxy advisor reports. Leading pro-regulation advocate Bernard Sharfman also submitted a comment letter analyzing the implications of the “collective action problem” in shareholder voting that he contends is central to understanding the need for proxy advisor regulation.

On the other side of the ledger, Glass Lewis weighed in with concerns about the paperwork burdens associated with both complying with the proposed rules & satisfying the conditions for exemptions from them.  This Olshan letter on the rule’s potential implications for proxy contests is also worth checking out.

And if you’re looking for “fair & balanced,” then check out this debate on proxy advisor regulation between U of Chicago B-School Prof. Steven Kaplan & ValueEdge Advisors’ Nell Minow.

And The Ridiculous . . .

On the other hand, there’s also been some commentary on the proposed rules that can most charitably be described as  propaganda. Take this video, for example. Among other things, it blames proxy advisory firms for submitting climate change, abortion, gun control & other shareholder proposals on their “ultra left wing political agenda.”

There are all sorts of agenda-driven shareholder proposals – and not just from the left. One of my beefs about the proxy advisor industry is that it’s set up to cater to the “shareholders good, management bad” worldview of the investors who subscribe to them. But dreaming up lefty shareholder proposals isn’t part of what proxy advisors do.

Proxy advisors are business to make money, and that means giving their customers what they want – and their customers want to have the last word at the companies in which they invest.

How Did Proxy Advisor Regulation Get to Be Left v. Right?

The fundamental sales pitch in the video is that proxy advisor regulation is a political, “liberals v. conservatives” issue. While the video gets a lot wrong, it appears to have that part right. With the exception of a few prominent Republicans associated with activist hedge funds, this really does seem to have devolved into a left v. right issue.

I guess the short answer to the question of why proxy advisor regulation became a political litmus test is that it’s America in 2020 and everything is polarized. But what’s kind of interesting to me is how the sides align in this particular debate. Think about it – how is it “conservative” to restrict how capital providers use their advisors? How is it “liberal” to champion an unfettered free market for capital providers who continue to insist that their interests trump those of other constituencies, like workers?

Maybe I’m just trying to justify my own idiosyncratic position on this issue. I consider myself slightly left-of-center on many issues, but I absolutely agree that proxy advisors should be regulated. I don’t know, but perhaps the cause of the odd “left v. right” split here is the governance paradigm that views corporations as analogous to nation-states, and the presumption among progressive types that since that’s the case, shareholder democracy is a moral imperative. From my perspective, that’s a highly debatable proposition.

My own view is that the separation of ownership from control that characterizes the Berle & Means corporation is a feature, not a bug. I think that control of the world’s largest business enterprises by corporate managers is fundamentally less dangerous to society than putting them in the hands of an ever smaller number of institutions holding an ever increasing share of the world’s wealth. Managers are just greedy, so their agenda is pretty transparent. I don’t feel the same way about the agenda of public pension funds & giant asset managers.

John Jenkins