The SEC Thinks Its New Rules Would Improve Proxy Voting. CalSTRS’ Chris Ailman Thinks They Would Create the Next Enron.
The head of one of the largest American pension plans issued a strong rebuke to the SEC’s proposal to regulate proxy advisory firms.
One of the nation’s largest public pension plans has come out swinging against a Securities and Exchange Commission proposal to regulate proxy advisory firms, calling it a “terrible proposal” that would weaken shareholders’ ability to hold corporations accountable.
“Without a question, it would re-entrench management,” said Chris Ailman, chief investment officer of the $242 billion California State Teachers’ Retirement System, in a telephone interview with Institutional Investor. “We would go back in time to where we were in the ‘80s and ‘90s, with egregious management behavior. People have forgotten Enron and WorldCom. Where management gets entrenched, it leads to disasters. It hurts communities, workers, as well as shareholders.”
Earlier this year, the SEC voted to issue guidance around proxy advisory firms, which advise shareholders on how to vote on corporate governance issues, such as executive compensation, during proxy contests. On Wednesday, the agency formally proposed amendments to its existing rules “to improve the accuracy and transparency of proxy voting advice,” it said in an announcement.
The proxy advisory business has attracted scrutiny in recent years over fears that the firms have gained too much power and that investors rely too heavily on their recommendations. Critics of proxy advisory firms — chief among them the U.S. Chamber of Commerce — also contend that that issuers don’t get a fair shot at addressing information in the recommendations, including potential factual errors, and that proxy advisors may have conflicts of interest that could influence their recommendations.
The SEC’s proposed new guidance calls for proxy advisory firms to reveal how they arrive at their shareholder recommendations and warned that they need to ensure that information in their reports is accurate and “materially complete.”
CalSTRS said in a statement last week that it voluntarily contracts with proxy advisory firms “to obtain cost-effective independent research to help inform our proxy voting and engagement decisions” and that the proposed rules would impair the proxy voting process, which it calls its “fiduciary responsibility.”
One issue that critics of the proposals find particularly alarming relates to the issue of solicitation. Until now, the SEC has not viewed proxy advisory firms as attempting to solicit votes — as, for example, activist hedge funds do — but rather that they merely offered independent advice and left it to their clients to decide how to vote. That would change under the new proposals, which Ailman called “ludicrous.”
Another controversial proposed change would require proxy advisors to allow company executives to see and respond to advisors’ recommendations before they are permitted to distribute them to shareholders. The rule appears to address charges from companies that information in the proxy advisory firms’ reports isn’t always accurate.
Ailman argues that such disinformation may be the fault of the companies themselves, because they intentionally obfuscate information around executive pay.
“I’d blame them in the first place,” he said. “It’s so complex and convoluted, and they do that intentionally, and they complain when somebody might, in their view, misinterpret” language around executive compensation. “We have often said that nowadays most proposals require an MBA and a math degree to find out what’s really going on in executive comp.”
What’s more, giving the companies a chance to see the reports and then issue a rebuttal would add several steps that would hamper the advisory firms’ ability to provide recommendations within an adequate time frame to be useful to their clients, Ailman argued, adding that companies have other means of communicating directly with their shareholders if they object to the content of the proxy advisory firms’ recommendations.
The advisors would also be required to disclose material conflicts of interest in their proxy advice, which Ailman said he supports.
CalSTRS is not alone in its opposition to the plan. Last month, ISS filed a lawsuit against the SEC, claiming that the guidance it had issued on the matter earlier this year went too far.
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On Wednesday, the Council of Institutional Investors issued a statement arguing that the SEC’s proposed rules would undercut shareholders’ rights.
“The goal of the coordinated, corporate-funded campaign to promote proxy advisor regulation is not to protect investors or even promote capital formation,” said CII executive director Ken Bertsch in the statement. “Rather, it is to make it harder and more expensive for institutional investors to get the expert advice they need to hold executives accountable and, in turn, to make it less likely that investors vote against management or even vote at all.”
That is the exact scenario Ailman fears.
“The system is designed for shareholders to be able to elect their board and the board to hold management accountable,” he said, expressing concern at the trend of corporate regulations being rolled back. “In America, management has taken control of everything.”