Through my years of public service and efforts to improve government for the American people, it has become clear that one endeavor stands above the rest in producing better outcomes: increasing transparency. One of the latest calls for improving openness surrounds the proxy voting process for investors and shareholders.
Consequently, the Securities and Exchange Commission hosted a roundtable event to discuss reforms and rule changes to the shareholder proxy voting process. Although the proxy advisory firms argued that they do not need more regulations for greater transparency, the SEC should continue pursuing options to increase the transparency of the proxy advisory process.
It is becoming increasingly clear that the shadowy procedures for shareholder proxy voting is in desperate need of reform. Members of the business community and the government alike have qualms with the existing process.
For some, investment decision-making has become too politicized, allowing those who vote at shareholder meetings to pursue their own agendas instead of focusing on increasing returns for all shareholder and beneficiaries. For others, it is the fact that over 97 percent of the proxy advisory market is controlled by two companies: Institutional Shareholder Services and Glass Lewis. This leads to significant conflicts of interest, as the same organization often represents competing shareholders.
Ultimately, the overall opacity of the process leaves it without accountability, without a clearly stated fiduciary responsibility, and in darkness to many stakeholders, including everyone from pension fund beneficiaries to oversight agencies and the public itself.
With the current structure, advisory firms provide recommendations or decisions, but are not responsible for proving the financial advantage of that decision. By creating a more transparent process, advisers will be held more accountable in their decision making. This accountability will ensure that proxy advisers must adhere to their fiduciary duty and not to outside interests.
For example, this spring, a contentious battle between Nelson Peltz and Proctor and Gamble shows the repercussions of the proxy system. More than $100 million dollars was spent to pull voting investors in different directions and 2 billion votes, many of which were submitted by paper, were counted and recounted. While Peltz ultimately lost the vote to become a board member, he had the support of ISS, and was ultimately appointed to P&G’s board anyway. This demonstrates the increasing weight placed on the recommendations of ISS and Glass Lewis, and highlights the important role brokers play in contests of corporate governance.
After hearing from various stakeholders of the current proxy voting system, the SEC has a rare opportunity to make an important change without overstepping its bounds. By increasing transparency in proxy voting, the SEC can take an important first step in updating the process without implementing onerous regulation.
Improving transparency will empower investors through information. Fund managers and individual investors will be able to gauge whether their interests are being represented accurately, both through proxy advisory firms and the voting process itself.
Furthermore, improving transparency will provide the SEC with greater insight into the process of proxy voting, and give it more information to make smarter regulatory decisions down the road.
For all its faults in its current form, proxy voting remains an essential part of the institutional investing practice and a core pillar to effect corporate change. The SEC should consider the comments of the roundtable participants and stakeholders but continue to focus on creating greater transparency in the proxy voting process.
Christopher Cummiskey, a 25-year veteran of federal and state governments, is a board member of the Institute for Pension Fund Integrity, a nonprofit that fights for increased transparency and to keep politics out of the management of public pension funds.