The U.S. securities regulator is set to review this month rules on corporate democracy, setting it up for a clash with investors who worry the agency will side with companies to diminish voting rights on charged issues like climate change and gun violence. On Nov. 15, the Securities and Exchange Commission will hold a roundtable on the “proxy process” by which big pension funds and other shareholders can force companies to vote on a range of environmental, social and governance matters.
For over a decade, corporate America has complained that voting rules have allowed special interests and proxy advisory firms that recommend how investors should vote to hijack corporate boardrooms with costly demands.
The SEC has heard out corporate concerns in the past, but has not pursued changes to rein in shareholder proposals, which have taken on a higher profile since the financial crisis as a mechanism for corporate oversight. Business groups are hoping this time is different with a business-friendly administration in power, while investors gear up for a battle to protect the influence they have gained.
The SEC is already taking written comments and might consider rule changes next year in areas where a compromise is possible, such as raising the bar on submitting proposals.
“It is important to regularly review whether our existing rules are achieving their objectives effectively in light of changes in our marketplace,” an SEC spokeswoman said in a statement.
Responding to social, environmental and governance concerns of investors, top fund firms, such as BlackRock Inc. and Vanguard Group lately have backed high-profile shareholder proposal campaigns at companies like gunmaker Sturm Ruger & Co. and energy giant Exxon Mobil.
Both fund firms declined to comment on the roundtable, but have previously said they vote based on clients’ long-term interests. Proposals put forth by smaller firms and pension funds on areas like workforce diversity and boardroom elections have also gained ground in recent years.
Business groups were heartened when President Donald Trump appointed as SEC chair Jay Clayton, a former Wall Street lawyer who pledged to ease burdens on listed companies. The Chamber of Commerce and the National Association of Manufacturers have dramatically stepped up their lobbying on proxy issues.
“The rules governing the U.S. proxy system have failed to keep up with the times and need to be modernized for the benefit of investors, public companies, and the capital markets,” said Tom Quaadman, an executive vice president at the U.S. Chamber.
A spokesman for the manufacturers association pointed Reuters to a letter it sent to the SEC last month calling for the regulator to further tighten rules on proxy advisers. In September, Clayton rescinded 14-year-old guidance that allowed funds to rely on recommendations from proxy advisors Glass, Lewis & Co. and Institutional Shareholder Services (ISS) when voting in company elections. Business lobbyists complained it gave proxy advisors too much power. Tougher oversight of proxy firms and raising the bar for submitting proposals will be up for debate at the Nov. 15 event.
Some investors push back.
“Some institutional investors say it’s not broke, don’t fix it. Why open the door to potential damage?” said Amy Borrus, deputy director of the Council of Institutional Investors, which represents state pension funds and other asset managers.
SEC officials have emphasized they see the roundtable as the beginning of a discussion and welcome all feedback.
“Just because something is contentious doesn’t mean we have to not deal with it,” Republican Commissioner Hester Peirce told Reuters.
One change pitched by business groups could subject proxy advisors to stricter conflict of interest disclosure rules, according to lobbyists and SEC sources.
Business groups say the two principal firms are potentially conflicted because ISS offers consulting services to the same companies on which it provides voting recommendations, while Glass, Lewis & Co is largely owned by activist Ontario Teachers’ Pension Plan.
KT Rabin, chief executive of Glass Lewis, said the company has worked to address potential conflicts and new regulation was unnecessary, but that she was “going to this meeting with an open mind.”
Steven Friedman, ISS general counsel, said in a statement the company welcomed the opportunity to explain its process, adding its recommendations were unbiased.
One change sought by business groups would increase the amount of stock an investor must own to submit a proposal from the current minimum of $2,000 in most cases.
The Council of Institutional Investors said the group would not oppose indexing that threshold to inflation. An attempt to raise it dramatically, however, would be met with resistance, other investors told Reuters.
Another idea being pushed by business groups is raising the threshold for resubmitting proposals. Currently, proposals can be resubmitted indefinitely if they get more than 10 percent of the vote, a figure lobbyists want to raise to 30 percent.
Some investors, however, worry a higher threshold would muffle legitimate shareholder concerns and lead to other damaging rule changes.
“As soon as the Chamber (of Commerce) has the door open one inch, they have 15 things they want to put on the table,” said Tim Smith, senior vice-president of Walden Asset Management, a well-known filer of resolutions.
(Reporting by Ross Kerber and Pete Schroeder; additional reporting and writing by Michelle Price in Washington; Editing by Neal Templin and Tomasz Janowski)
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