Bipartisan Senate Proxy Advisory Firm Bill Rises Above the Fray in Senate Committee Hearing; Clayton Says Proxy System Needs "Major Overhaul"
December 8, 2018
The Senate Banking Committee held a hearing this week featuring discernible support for action on proxy advisory firms that stood out from the partisan debates common to the hotly-contested topic. Meanwhile, in a speech given the same day, SEC Chairman Jay Clayton cited a "growing agreement that some changes [to proxy advisory firms] are warranted" and voiced support for further Commission action.
Senate Hearing Reinforces Bipartisan Reform: Committee Ranking Democrat Sherrod Brown (D-OH) complimentedSenator Jack Reed’s (D-RI) “Corporate Governance Fairness Act,” which would give the SEC new powers to examine proxy advisory firm advice and conflict of interest policies, as a bipartisan achievement. Senator Brown’s praise came only after he harshly criticized corporate buybacks and what he characterized as efforts to encroach on the “independence” of proxy advisory firm advice under the guise of correcting errors and miscalculations.
Conflict of interest problems acknowledged by Senators and witnesses: Senators pressed the witnesses on conflicts of interest, specifically those presented by ISS and its consulting services arm.
“The practice of selling services to companies they provide ratings on does constitute a conflict of interest,” acknowledged Mike Garland, Assistant Comptroller, Corporate Governance and Responsible Investment for the New York City Comptroller's office, in response to questions from Senator John Kennedy (R-LA). Mr. Garland also called for “transparency with respect to conflicts with the issuers.” However, in written testimony, he characterized conflicts as "our problem as investor clients" of proxy advisory firms, not something about which issuers should be concerned.
Shadow of House proxy advisory firm bill present in hearing:TheHouse proxy advisory firm reform billwas discussed, especially by Senate Democrats, including Senator Chris Van Hollen (D-MD), who referenced a letter from an institutional investor in his state criticizing the bill. The criticisms of the House bill in the hearing seemed to have the effect of buttressing support for the Senate’s proxy advisory firm bill.
Bill positioned for re-introduction in 2019:With little time remaining this year, the Senate’s proxy advisory firm reform now shifts to the next session of Congress where proponents hope to pick up more supporters from both sides of the aisle.
In a wide ranging speech on SEC initiatives and other securities laws topics, SEC Chair Jay Clayton referenced the recent proxy process roundtable in identifying the proxy process as an agency initiative in need of "major overhaul" and in doing so specifically identified proxy advisory firms and shareholder proposals as areas of concern. On proxy advisory firms, Clayton referenced a growing consensus for a need for change, identifying conflicts of interest, reasonable opportunities for company responses, and concerns over over-reliance on proxy advisory firms as specific issues in need of attention. On shareholder proposals, Mr. Clayton said he believed it was time to review the ownership and resubmission thresholds for shareholder proposals.
The Center On Executive Compensation will continue to work with policy makers on the hill and at the SEC to pursue effective proxy advisory firm reform. The current discussion of proxy advisory firms is significant and is providing crucial momentum for working for change that the Center is working to maximize.