As lawmakers, public health officials, doctors, volunteers, and the general public scramble to adjust to the ‘new normal’ of living through a global pandemic and find ways to mitigate its effects, the Securities and Exchange Commission is in the final stages of updating its rules surrounding the proxy voting process. If the rules are ratified, they will include the first amendments to the process in decades.
SEC's Efforts To Operate Financial Markets
As an individual investor, I applaud the SEC for being on the leading edge of federal agencies in their efforts to do everything possible to enable our financial markets to continue to operate as close to normal as possible during this tumultuous period. For instance, in recent weeks the Commission has provided guidance on virtual AGMs, financial disclosures, extending filing periods and published daily updates on its SEC COVID-19 Response page.
At the same time, Commissioner Lee has also suggested that the SEC should temporarily suspend its ordinary course of business, including finalizing the proxy voting updates. In a recent statement she argued, “A careful balancing of interests, including the burdens we all face in coping with the economic and social challenges of protecting ourselves, our families, and our nation, suggests that regulatory action in the near term not related to the exigencies created by COVID-19 would rarely be warranted.”
While I agree with the Commissioner that the priority must be on responding to the pandemic, I do not believe that this automatically equates to the cessation of the entire SEC’s existing regulatory agenda. As the country begins to square up to the biggest economic crisis we have seen in over a decade, we need our financial markets to operate efficiently more than ever in order to successfully recover, and any reform that can help achieve this goal and enhance investor confidence should be also considered.
Elad Roisman, the Commissioner leading the review of the proxy process, hit on this very point in his own statement last week noting that the SEC’s agenda “is designed to prioritize regulatory actions that we believe will fulfill our mission in ways that further the interests of investors (retail and institutional), as well as many other market participants. Blanket inaction would do a disservice to these stakeholders as well as the commenters who took the time to share their views with us over the past several weeks and months.”
Trends In The Corporate Governance System
As a retail investor who has been concerned about trends in the corporate governance system in the past few years, I couldn’t agree more. Modernization of America’s proxy voting process is long overdue and will help enhance our financial markets precisely at the time when we most need them to adhere to their fiduciary duty to retail and institutional shareholders to maximize profits.
In particular, I am heartened that the Commission is highlighting the role played by proxy advisors. A study authored by Chester Spatt at the Milken Institute last year, stressed that they have considerable influence over voting results, but recommend votes that appear to have motivations outside the maximizations of shareholder value. “Proxy advisory firms should make recommendations that maximize shareholder value, but their advice sometimes reflects other considerations,” Spatt concluded.
The proposed rule awaiting SEC approval will help deliver value creation by ensuring investors have easy access to all relevant information they need to vote on shareholder proposals. This is critical for retirees and other investors concerned that many asset managers who vote on behalf on their clients are blindly following the recommendations of proxy advisors. The rule will also allow companies to save valuable resources needed at this moment in history to easily and efficiently communicate with shareholders when they believe there are factual issues with the analysis from proxy advisors.
With the markets in turmoil, public companies large and small are being forced to take measures to conserve cash and weather the storm. And by finalizing the rules on proxy voting, the SEC will help enhance investor confidence in a critical component of our corporate governance system by ensuring that votes are based on accurate, objective analysis.
As the SEC and other federal agencies continue to pursue every avenue to help us restore our economic equilibrium from COVID-19, I encourage the Commission to persist with its long overdue modernization of the proxy voting system. Updating the rules will not only strengthen our corporate governance system, they will provide retail investors like me with more faith in the system and help the public markets to rebound as soon as possible.