SEC Commissioner Robert Jackson dissented from his SEC colleagues’ proposal on how to reform proxy advisors regulation. New rules, he argues, would introduce a tax on firms who recommend that shareholders vote in a way that executives don’t like. Jackson’s analysis also shows that the proposed changes will remove key CEO accountability measures from the ballot.
Editor’s note: This is an edited version of Commissioner Robert Jackson’s statement on the SEC’s proposal regarding “Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice“. The proposal has a 60-day public comment period. To submit comments, send an email to firstname.lastname@example.org
One week ago, the Securities Exchange Commission proposed rule changes that would limit public-company investors’ ability to hold corporate insiders accountable. We haven’t examined our rules in this area for years, so updating them makes sense—and these issues have been thoughtfully debated for decades. But rather than engage carefully with the evidence produced by those debates, today’s proposal simply shields CEOs from accountability to investors. Whatever problems plague corporate America today, too much accountability is not one of them, so I respectfully dissent.
Tilting Corporate Elections Toward Management
Holding executives accountable for the way they run America’s corporations is difficult and expensive, and investors lack the time and money to do it. That’s why investors use proxy advisors, who make recommendations about how shareholders should vote. Today’s proposal imposes a tax on firms who recommend that shareholders vote in a way that executives don’t like.
To see why, consider a proxy advisor deciding how to advise shareholders in a proxy fight driven by poor performance. Recommending that investors support management comes with few additional costs under today’s proposal. But firms recommending a vote against executives must now give their analysis to management, include executives’ objections in their final report, and risk federal securities litigation over their methodology. Taxing anti-management advice in this way makes it easier for insiders to run public companies in a way that favors their own private interests over those of ordinary investors.
Proxy advisors play an important role in striking the right balance in allocating power between corporate executives and investors. And it is, indeed, a balance, which is why I’ve supported common-sense ideas like rules ensuring that proxy advice is based on accurate facts. But under today’s proposal, the SEC is interfering in decades-long relationships between investors and their advisors in a way that will significantly skew voting recommendations toward executives. That will be especially true in cases, such as investor proposals to strengthen the link between CEO pay and performance, where proxy advisors have historically engaged in the careful, firm-specific analysis that such proposals require.
|Between 2004 and 2018, investors filed 191 proposals at public companies on the link between CEO pay and performance. Management recommended that shareholders vote ‘no’ on 100 percent of those proposals; Institutional Shareholder Services recommended investors vote ‘no’ on 40 percent and ‘yes’ on 60 percent.|
Tilting corporate voting toward incumbent management in this way will have consequences—including reducing the already-scant competition among proxy advisors—that we could and should have studied extensively before making any other changes in the balance of power between CEOs and shareholders. But instead, my colleagues are also proposing changes to the shareholder proposal process that will further insulate corporate managers from accountability.
Taking CEO Accountability Off the Corporate Ballot
Last week’s release also significantly raises the vote required for resubmission of a shareholder resolution. To understand the effects of that rule on the balance of power between insiders and investors, we should examine the kinds of proposals that will be taken off the ballot—and their effect on firm value. Last week’s release does not even attempt to do that. Instead, the proposal simply assumes that high levels of support indicate a good proposal—and that lower levels of support suggest that a proposal is bad.
That has not been the SEC’s historical approach to shareholder proposals—and for good reason. Because investor interest in a subject takes time to coalesce, the Commission has long recognized that short-run voting results are not the only factor in determining a proposal’s merits. For example, when we first developed rules requiring disclosure of executive pay, the Commission’s release used results from shareholder proposal votes at nine public companies as a basis for our new rule. All but one of those executive pay proposals fell short of the third resubmission threshold my colleagues proposed last week. The assumption that vote totals reflect the merits of proposals risks depriving investors and the Commission of information that has long produced crucial transparency on corporate governance matters.
A better approach is to examine how these new rules would affect shareholder proposals that enhance value by making management more accountable to investors. So that’s what my Office did. We dug into the data to see what kinds of investor initiatives would be excluded by today’s rule. And the evidence shows that the proposed changes remove key CEO accountability measures from the ballot.
Take, for example, proxy-access proposals—initiatives to allow significant shareholders to put their own candidates up for election to the board. These are popular proposals: they hold underperforming executives’ feet to the fire with a more realistic threat of a contested election. The evidence shows that these proposals often add value for shareholders over the long run. But today’s rule would remove 40 percent of these proposals from the ballot after three tries—and keep them off for three years.
Or consider shareholder proposals to limit CEOs from selling stock they receive as compensation. Between 2004 and 2018, more than 100 US companies received these proposals. Executives at these companies cashed out a total of $7 billion in stock in the year when investors raised these proposals. Here, too, research suggests that these proposals probably enhance firm value over the long run. But under today’s rule, more than half of these proposals would be removed from the ballot after three votes. Whatever one’s personal view of the merits of these particular investor initiatives, all should agree that we should have considered the costs and benefits of removing them from the ballot before proceeding. Yet the release offers no analysis of that question at all.
There are other wide-ranging consequences that the release does not carefully consider. Raising our resubmission thresholds would shift the landscape of negotiations between investors and management that often lead to voluntary resolutions that satisfy both sides. Raising the thresholds at the same time we are imposing a tax on anti-management advice gives us no opportunity to observe the effects of that tax on the levels of support proposals should be expected to receive. And raising the thresholds at firms with dual-class structures would make it easier for executives at those companies to use their outsized voting power to keep shareholder proposals off their ballot.
The Path Ahead
Last week’s proposal is especially regrettable because, to the degree we have identified a problem worth solving, there’s a straightforward alternative supported by a close review of the evidence. If we’re worried about the classic problem that arises when one person is empowered to spend someone else’s money, we should ask whether our shareholder-proposal rules allow a few investors to impose excessive costs on ordinary investors. And we should study and propose a rule designed to solve that problem.
Important work has shown that many investor initiatives are advanced by a small group of individuals sometimes derisively called “gadflies.” And recent research suggests that the long-run value implications of those proposals may be meaningfully different from the effects of other kinds of proposals. As I’ve said, there is simply no analysis of the long-run implications of including proposals on the corporate ballot in today’s release. So my staff and I examined the evidence to see what we could learn about the link between the shareholder proposal process and the actual interests of ordinary buy-and-hold investors.
The results are striking. On average, we show, inclusion of shareholder proposals from individual investors by an American public company tends to be associated with long-term value increases. But so-called gadfly proposals—those brought by the ten most frequent individual submitters each year—appear to have the opposite effect, leading to long-run value decreases for ordinary investors:
Link Between Proposal Inclusion and Long-Run Value, By Proponent Type
Exactly how to address this evidence is a hard question deserving close study. We could, for example, pursue rules that encourage individual shareholders to focus their limited resources on a smaller number of companies or issues. Any such rules would, of course, have to balance those considerations with the increasingly limited supply of investors willing to spend time and money holding CEOs to account. Unfortunately, last week’s release doesn’t engage with those questions—instead adopting pro-management changes that swat a gadfly with a sledgehammer.
Last week’s proposal ignores decades of debate about the role of the Commission in striking the right balance between corporate executives and the investors they serve. That debate, and the evidence it has produced, has a great deal to teach us about how to make sure shareholder democracy creates long-run value for ordinary American investors.
Fortunately, however, the SEC’s proposal is just that: a proposal. I look forward to working with my colleagues on the Commission, the staff, and in the Division of Economic and Risk Analysis over the coming months to further engage with my office’s analysis. I am grateful to the staff for their work on today’s proposal. And I hope shareholders of all kinds will come forward to engage with the Commission on how to best help American investors hold corporate executives accountable.
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