U.S. Chamber: Proxy Advisory Industry and Shareholder Proposal System Need Reform

Tuesday, October 9, 2018 - 1:30pm

Two New Reports Examine Influence of Unreliable Proxy Advisory Firms and Impact of Outdated Shareholder Proposal System

WASHINGTON, D.C. — American businesses and investors continue to face sustained challenges due to the outsize influence of proxy advisory firms and an outdated shareholder proposal system, according to two new reports released today by the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC).

In the first report, CCMC’s fourth annual proxy season survey, which was compiled jointly with Nasdaq, companies indicated that few material improvements have been observed in the proxy advisory system over the past year.

“It hasn’t gotten any easier to be a public company, and that’s depriving retail investors from benefiting from the success of many of our nation’s fastest growing companies,” said David Hirschmann, president and CEO of CCMC. “There are many reasons for the decline in public companies, but no solution is more important than bringing long-overdue transparency and predictability to unreliable and conflict-ridden proxy advisory firms.”

According to the survey, while companies are bringing more issues to the attention of proxy advisory firms, they still find it difficult to engage in constructive discussions that lead to better-informed voting recommendations. Of companies that participated in the survey, only 39 percent said they believe proxy advisory firms carefully researched and took into account all relevant aspects of the particular issue on which it provided advice.

Conflicts of interest still pervade the industry, with more companies reporting this year that they have brought identified conflicts to the attention of proxy advisory firms. 

“The SEC has made it clear with recent decisions that fixing the broken proxy advisory system will be a near-term priority,” continued Hirschmann. “That’s a major step in the right direction, and we hope to see the SEC and Capitol Hill take the initiative to enact meaningful reform.”

An overwhelming 97 percent of companies indicated their support for the Corporate Governance Reform and Transparency Act of 2017, which passed the House in December.

The report on the proxy season survey concludes by outlining five overarching principles for proxy advisory firms, portfolio managers, public companies, and other stakeholders in the proxy advisory industry:  Fiduciary duty, shareholder value, freedom from conflicts, portfolio manager discretion, and compliance.

Additionally, a second report released by CCMC today highlights how the outdated shareholder proposal system continues to be a drag on public companies.

The second report examines the issue of “zombie” proposals, or those that are submitted three or more times without garnering majority support, and it argues for raising the resubmission thresholds to rebalance a broken system in favor of public company shareholders.

“Main Street investors lose when failed and tired shareholder proposals resurface year after year, and all shareholders bear the costs of those ‘zombie’ proposals,” said Hirschmann. “Raising the thresholds for resubmitting a proposal that hasn’t received adequate support is a straightforward, common-sense strategy that will modernize the system.”

The report on the proxy season survey is available online here, and the shareholder proposal report is available online here.