The US Securities and Exchange Commission (SEC) has proposed changes to the proxy voting process that it claims will improve accountability and transparency. However, there is concern that the SEC-proposed amendments could undermine investors’ abilities to influence large firms on climate change and other pressing environmental, social, and governance (ESG) issues.
The Proposed Changes
Many institutional shareholders outsource their voting rights to proxy voting advisory firms, in many cases with significant cost and efficiency advantages, in lieu of dedicating internal resources to appropriately cast votes. This market is highly concentrated, as Institutional Shareholder Services (ISS) and Glass, Lewis & Co. together control 97% of the proxy advisory services industry. One part of the SEC-proposed amendments aims to compel these firms to disclose conflicts of interest and allow companies to review and provide feedback on proxy voting advice before it is issued.
The other proposed change involves raising the bar for resolutions put forward at company meetings. At present, to file a proposal, investors must own $2,000 of stocks for at least one year, according to the Forum for Sustainable and Responsible Investment (US SIF). The SEC is proposing to significantly increase the value of shares that must be held before a shareholder can file: $25,000 for one year, $15,000 for two years, or between $2,000 and $15,000 for three years.
US SIF notes that the SEC also plans to raise the threshold of support that shareholder resolutions must receive in order to be resubmitted following initial failure. The new rules would see the current support thresholds of 3% in the first year, 6% in the second year, and 10% in the third year raised to 5%, 15%, and 25%, respectively. Finally, the SEC rule changes would enable companies to omit resolutions from the proxy vote if support has decreased 10% from the prior year.
A Mixed Reception
In particular, it is the SEC-proposed amendments on submitting and resubmitting resolutions that have raised concerns among shareholder advocacy proponents and asset managers. Raising ownership and support thresholds could keep certain proposals off the table and make it harder for motions to garner majority shareholder support over time, resulting in fewer ESG-aligned shareholder resolutions succeeding.
Investment managers Neuberger Berman and Robeco, along with data provider Morningstar, are among those who have called on the SEC to rethink its plans.
As shareholder advocacy nonprofit As You Sow points out, “This sets up a bizarre scenario where a proposal that loses support from 49% to 44% in the fourth year (a 10% decline from 49%) can be omitted, but a proposal that remains steady at 27% on the fourth year’s vote can be resubmitted.”
SEC commissioners approved the changes to the proxy voting process in November 2019 by a majority of 3–2. The rule changes have received support from business groups such as the US Chamber of Commerce, which claims the current proxy voting advice structure has allowed “special interest groups to push narrow agendas.”
Now that the public consultation period has ended, and the SEC must decide whether to implement the rule changes in their current form. If it does, ESG resolutions may face new challenges in the 2020 proxy season.