Risk & Compliance

SEC Reviewing Proxy Process

The SEC takes the first step toward a possible overhaul of the corporate proxy system.
Alix StuartJuly 27, 2010

Shareholder suffrage has never been a hotter topic. Just last week, public-company investors won the right to vote on executive compensation, and many are continuing the fight for the right to help create the agenda of items put up for vote in a proxy statement, such as how management is running the company.

But while shareholder democracy may be on the rise, the proxy voting system remains flawed, say critics. Most of the votes that come in on proxy items don’t come from shareholders; instead, most shares are voted by brokers, or by other firms to which the brokers may have lent out the shares, with little direction from the owners. The votes may or may not be correctly counted, and there’s almost no way for an outsider to verify the count. And public companies have little recourse in the matter, thanks to the multilayered architecture of shareholding these days, which shields the identity of many retail shareholders from the companies whose shares they hold.

On July 14, the Securities and Exchange Commission issued a challenge, in the form of a concept release, to the convoluted 40-year-old system of proxy distribution and voting. That release invited comment on nearly every aspect of the current proxy process — from the Byzantine mailing and distribution process to the vote-tabulation stage — anytime between now and late October.

To be sure, there are no signs that the proxy statement will disappear or radically change in its content. In fact, “no one should expect anything to happen right away,” says Barbara A. Jones, a corporate attorney with Greenberg Traurig, noting that questions constitute at least half of the 150-page concept release. However, Edward Rock, business law professor at the University of Pennsylvania law school and author of a paper on the problems with the proxy process, says there are elements in the release “that strike me as potentially revolutionary.”

For one, Rock says that the SEC could disrupt the monopoly that Broadridge Financial Solutions has over distributing proxies. Currently, Broadridge is the only company with the ability to obtain the identity of all shareholders, including the estimated 50% to 60% of them who are so-called objecting beneficial owners, electing to remain anonymous. In most cases, broker-dealers hire Broadridge to send out the proxies, but Broadridge bills the company, which must pay the fee without any negotiation.

In the release, the SEC acknowledged the frustration many public companies have regarding the difficulty of determining who their shareholders are, and the fact that they have “little or no control” over the process of communicating with them. The agency also raised questions about “the appropriateness of fees” that Broadridge charges to corporate issuers, and floated the idea of creating more competition in the marketplace, at least for the distribution of materials.

The National Investor Relations Institute is a big fan of that proposal. “Companies need to have a choice outside Broadridge, and they don’t right now,” says NIRI president Jeffrey Morgan. One possible solution discussed in the release would be to split up the data-aggregation process and the proxy-mailing process, something that would spark “a whole host of [firms] jumping into the market if they opened that up,” says Morgan.

The SEC also raised questions about the role of proxy advisory firms and the possible conflicts of interest they may face in servicing both public companies and their shareholders. The agency said it is looking for feedback on whether or not the firms should be subject to greater SEC oversight, due to their role in providing investment advice, or if they should disclose situations in which they are advising both a corporate issuer and its investors.

Beyond those topics, the SEC got into what it calls the “plumbing” of the proxy, addressing matters such as how far in advance of the annual meeting the “date of record” should occur, given that many shares change hands after that point, and what an appropriate vote-tabulation process would look like.

Comments submitted so far have reiterated various frustrations the SEC has identified, and injected a dose of reality into the discussion. Commenting on her own behalf, Cheryl A. Carter, corporate secretary of publicly traded Synalloy, wrote that she believes “most investors are not interested and/or don’t have the time to read annual reports, 10-Ks, and proxies,” and reckons that most of her company’s shareholders threw their materials in the trash last year, based on voting levels. Further, she added, she personally would like to be able to direct her broker and the companies in which she invests “to not send me any SEC filings, since for me, they just waste the company’s money. I know the material is readily available on the SEC[‘s] and the company’s website should I want to read it.”

Still, others hope that helpful changes to the proxy process will come from the SEC’s review — changes that will “promote greater efficiency and transparency in the system and enhance the accuracy and integrity of the shareholder vote,” as the concept release puts it. That can’t happen fast enough as far as NIRI’s Morgan is concerned. “The new financial regulations [including say on pay] will go into place for the 2011 proxy season, but we’re not going to see any changes in the proxy system next year,” he says. “I think everyone’s fear is that you’re going to have some real close votes, and everyone will wonder if they’re right.”

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