Articles Posted in Proxy Access

The US Securities and Exchange Commission is looking at whether proxy advisers have become so influential when it comes to corporate elections that rules should be imposed in them to create greater transparency. At a recent SEC-hosted meeting, brokers, institutional investors, business groups, and unions debated about the role that proxy advisors Glass Lewis & Co. LLC and Institutional Shareholder Services Inc. have played in shareholder voting.

According to Bloomberg, research from non-profit organization Conference Board reports that with the growth in institutional investors’ percent of voting shares going up by over 50% there has been a growing demand for proxy research. However, there is concern by some that proxy advisors have a lot of power over the governance decisions of public companies yet they don’t have to contend with much Commission oversight. Critics think proxy advisors influence shareholders to vote blindly on proxy measures without getting disclosures about possible conflicts. Meantime, supporters of proxy advisors say that they provide an important service—especially to small institutional investors that lack the resources to assess every vote they make.

Mutual funds, pensions, and other mutual funds tend to be proxy advisers’ typical clients. SEC Commissioner Daniel Gallagher attributes proxy advisers’ “outsized role” to policy guidance issued by the agency in 2009 telling investment advisers they could fulfill an obligation to vote in the best interests of shareholders by depending on third party research.

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is reviewing the proxy process to determine how information is transmitted to shareholders and the public. They are also studying how shareholder votes are counted.

She says the exam will focus on the role of proxy advisory firms, the types of conflicts they deal with, the way these issues affect their business and the voting process, and the role that the agency should play when it comes to regulate proxy advisory firms. She expressed commitment to a “top-to-bottom review of proxy infrastructure” and the role that proxy advisory firms face.

Schapiro made her remarks in front of the Economic Club of New York last month. At the event, she also noted that although the Obama Administration has increased the SEC’s budget—the Dodd-Frank Wall Street Reform and Consumer Protection Act did not give the agency the ability to oversee its own budget—she said that she still would like the SEC to be self-funded.

The financial regulatory reform legislation did provide the SEC with reserve funds to go toward hiring and technology upgrades. Schapiro says that the agency has been successful in its efforts to recruit from hedge funds, trading desks, institutional and retail investment firms, and credit ratings agency analysts.

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Chairman Mary L. Schapiro,

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Assistant Professor J.W. Verret of George Mason University’s School of Law has issued a research paper that suggests a number of unique strategies that boards can use to defend against proxy access challenges. The paper is called “Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank.”

It was just this August that a divided US Securities and Exchange Commission approved rule changes that put in place an access regime that lets shareholders include their director nominees in proxy materials as long as they meet eligibility requirements. In his paper, Verret notes that even with the new regime, Delaware law still allows for the “limiting or expanding of the reach of proxy access.” He says that corporate boards that want to defend themselves against such challenges should refer to corporate governance arrangements with a “secondary effect on the shareholder franchise and the shareholder nomination process” as seen by the “SEC’s proxy access rule.”

Verret has said that the federal mandate for proxy access will negatively affect retail shareholders in the long run. His defense tactic recommendations include:

• Defenses related to board characteristics
• Defenses that up insurgents’ costs
• Structured shareholder-voting related defenses

Verret’s paper argues that rule amendments by the SEC likely cannot preempt all state laws, which the boards can then use. He believes that federal pre-emption is not a high risk to the defenses that he is suggesting.

Related Web Resources:

Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank, Social Science Research Network

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