Corporate America is once again in a fight over regulation. Except this time, large businesses have switched sides: they’re actively asking the government to impose new rules.
The bizarre shift is being led by the US Chamber of Commerce and the National Association of Manufacturers, two powerful groups that often plead with Washington to cut red tape.
The corporate lobbies are now urging the SEC to add extra scrutiny on a little-known but critical pocket of the investment world: proxy advisory firms.
Led by Glass Lewis and Institutional Shareholder Services, proxy advisers help pension funds and large asset managers decide how to vote their shares by arming them with independent research and guidance. A recommendation from ISS or Glass Lewis to reject a pay package or oust a director can be quite influential.
Corporate America, with companies that include Boeing (BA), Chevron and Wynn Resort, argue that proxy advisers wield too much power, have conflicts of interest and are mistake-prone.
The Chamber of Commerce and NAM even launched a $1 million digital and print ad campaign last year aimed at highlighting the “dangers” of proxy advisory firms.
But others say business groups are going after proxy advisers to silence shareholders by cutting them off from the rigorous research needed to scrutinize gaudy pay packages and evaluate complicated proposals on topics such as climate change and minimum wage hikes.
“The attempt to curb necessary independent research should be opposed,” New York City Comptroller Scott Stringer told CNN Business in a statement.
The critics of proxy advisory firms, Stringer noted, are the board members and corporate executives who are the subjects of the research.
“Now they’re spending big bucks to pull curtains and point at problems that do not exist,” he said.
Notably, the push for enhanced oversight of proxy advisory firms isn’t coming from grassroots organizations, corporate governance groups or even institutional shareholders. Instead, it’s coming from well-heeled lobbies that frequently complain about excessive regulation.
“It’s extremely ironic,” said Eleanor Bloxham, the CEO of The Value Alliance, a firm that advises boards on corporate governance practices. “Those who want the market to work on its own and want no regulation for themselves are calling for greater regulation.”
Charles Crain, NAM’s director of tax and domestic economic policy, insisted that business groups are merely seeking reforms that protect investors by providing effective oversight.
“We aren’t trying to regulate proxy firms out of existence,” Crain said in an interview.
More than 300 companies, led by Nasdaq (NDAQ), wrote a letter to the SEC last month urging the agency to take “strong action to regulate” proxy advisory firms. The letter proposed giving companies the ability to “identify and correct errors” made by proxy advisors, the disclosure of conflicts of interest and the opportunity to address “significant disputes.”
“Proxy advisory firms are putting your 401K at risk,” a website set up by the Chamber of Commerce and NAM warned.
Regulators are taking the complaints seriously. The SEC held a roundtable on the proxy process in November and could announce new rules in the coming months.
But at least one SEC official has voiced serious skepticism about the looming crackdown.
Last September, SEC Commissioner Robert Jackson called efforts to regulate proxy advisers “misguided” and noted this has “long been a top priority of corporate lobbyists.” Jackson added that there is “little proof” that proxy advisers have too much power.
Contentious board fights
T. Rowe Price knows proxy advisory firms well. The publicly traded asset manager pays to gain access to proxy advisers’ research and is also a subject of the research for its own shareholder votes.
In a letter to the SEC, T. Rowe Price (TROW) expressed “significant concerns” with proposed regulatory changes that would “sacrifice the objectivity” of proxy advisory research or delay the voting process. And T. Rowe warned that the proposed changes could allow companies to “inappropriately influence” this research.
“There is a real concern amongst our clients that any dramatic changes will impact the ability of ISS and other proxy advisory firms to deliver the services on a timely and cost-effective basis,” Steven Friedman, general counsel at ISS, said in an interview.
Proxy advisers are often caught in the middle of heated board fights.
For instance, ISS urged shareholders to oust most of Wells Fargo’s board of directors in 2017 and accused the board of having “failed” for years to provide the kind of tough oversight required to prevent “unsound” banking practices. Glass Lewis similarly took Wells Fargo’s board to task for “failings” that led to the scandal.
All of Wells Fargo (WFC)’s directors were re-elected during that contentious shareholder meeting but several directors received unusually-low levels of support. Those directors eventually left the Wells Fargo (WFC) board.
“A new regulatory regime for proxy advisors simply isn’t necessary,” Glass Lewis CEO Katherine Rabin said in a statement. She said new regulation would likely make it “more difficult” for institutions to do their jobs on behalf of millions of savers.
Some believe the push to clamp down on proxy firms is really about a desire to protect executive pay. The 2010 Dodd-Frank reform law required companies to hold nonbinding votes on compensation packages, giving shareholders a way to voice disapproval.
Much to companies’ dismay, proxy advisory firms have at times called out what they see as excessive pay packages.
In 2017, proxy advisory firms criticized EpiPen maker Mylan (MYL) for rewarding executives with lavish pay despite controversy over the drug maker’s price hikes and tumbling stock price. Glass Lewis gave Mylan (MYL) an “F” for its compensation decisions and ISS urged shareholders to oust the company’s entire board.
While Mylan’s board survived, shareholders rejected the company’s compensation package.
Not surprisingly, Mylan has been involved in lobbying around a bill that would require greater oversight of proxy advisory firms, according to 2018 Congressional records.
“This is an issue of power and control,” said Bloxham. “Weakening proxy advisory firms might be viewed as a way to weaken the shareholder votes against a company.”