Impact Blog
Proxy process under SEC review

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      By Shirley Peoples, AVP & Shareholder Engagement Assistant Manager, Calvert Research and Management

      Washington - Shareholder engagement is increasingly seen as a powerful tool of change, as more investors use shareholder proposals and proxy voting to move the corporate needle on a wide range of environmental, social and governance (ESG) issues. In recent years, however, various groups representing corporate interests have urged a review of the proxy process, citing concerns over transparency, accuracy and the influence of proxy-advisory firms.

      To tackle some of these issues, the Securities and Exchange Commission (SEC) last month held a roundtable that included three panel discussions on the mechanics of proxy voting; shareholder proposals and engagement; and the role of proxy-advisory firms. An array of stakeholders participated, including fund firms, issuers, stock exchanges and proxy-solicitation companies.

      The first panel focused on problems with voting transparency, vote tabulation, and the complex process and number of layers in the proxy-voting process. Panelists saw new voting technologies as a partial solution, but said comprehensive SEC guidance would be needed to review and implement them.

      Shareholder proposals and engagement

      The second panel revealed a disconnect between investor and issuer views. While investors argued that the shareholder proposal process is generally working well, issuers said it needs significant improvement. Specifically, issuers would like to see ownership and resubmission thresholds higher than the current requirements.

      Calvert shares US SIF's view of the shareholder process as "one of the most visible and verifiable ways in which investors can practice responsible ownership." We are concerned that increasing the ownership threshold could limit the ability of small shareholders to file shareholder proposals. This would undermine shareholder-driven governance and disrupt the flow of good ideas that can come from any investor, large or small. Raising resubmission thresholds could needlessly cut off debate and discussion on topics whose materiality may take time to be fully appreciated by investors. For example, proposals on board diversity and sexual orientation received low support in early years of filing, but these two concepts are now widely accepted as good corporate practice.

      Lens on proxy-advisory firms

      To kick off the third session, institutional-investor panelists discussed the role of proxy-advisory firms, noting they rely on proxy advisors to provide platforms for managing votes, data aggregation and research insights. However, they emphasized that rather than blindly follow the guidance of proxy advisors, investors, like Calvert, conduct their own analysis of issues and rely on their own custom proxy-voting guidelines to ultimately determine their voting decisions.

      Issuers, on the other hand, asserted that proxy-advisory firms lack transparency, have an inherent conflict of interest, as investors are their paying clients, do not correct erroneous data in a timely manner and have too much influence over how proxies are voted.

      Interestingly, when an SEC staff member asked whether proxy advisors should be subject to increased regulation, there was far from overwhelming support for the idea. Panelists worried that more regulation could raise investment-advisor expenses and agreed that proxy-advisory firms have improved their disclosure and conflicts of interest are better defined than before.

      Next steps

      In his December address to the SEC, Chairman Jay Clayton listed review of the proxy process as one of several priority initiatives for 2019. His speech highlighted the same issues and problems discussed at the roundtable and highlighted above. Notably, Chairman Clayton said the SEC should consider whether there are factors in addition to the amount invested, and length of holding period, that "reasonably demonstrate that the proposing shareholder's interests" are aligned with long-term investors.

      In our view, shareholder proposals and voting proxies are a key means for investors to influence corporate behavior on material ESG issues and protect or enhance shareholder value. Any decisions by the SEC should safeguard these key investor rights and fiduciary duties. At Calvert, third-party research is just one tool among many that we use in deciding how to vote our clients' proxies.

      Bottom line: Shareholder proposals and voting proxies are a key means for investors to influence corporate behavior on material ESG issues and protect or enhance shareholder value. Any decisions by the SEC should safeguard these key investor rights and fiduciary duties.