by Mitch Kokai
Senior Political Analyst, John Locke Foundation
[A]s businesses grew and evolved to pursue ever-more disparate business activities, the matters relevant to the performance of the firm increased in complexity, yielding greater disagreements among shareholders and between them and management. This has led to a system in which proxy advisory firms — the two overwhelmingly dominant ones are Glass Lewis and Institutional Shareholder Services — emerged to make recommendations to shareholders and managers about how to vote their shares on various questions.
It is crucial to delineate what has changed with the advent of politicized regulation by the Securities and Exchange Commission, in particular under the chairmanship of Gary Gensler. Previously, companies had the right to respond to the recommendations made by the proxy advisers, correcting factual errors, pointing out analytic mistakes, inconsistencies between shareholder interests and the proxy advice, and the like. In addition, SEC rules allowed firms to seek a “no action” determination (SEC Rule 14a-8) by the SEC staff allowing management to exclude specific shareholder proposals from the annual proxy vote, in particular ones irrelevant to the performance of the firm, or those certain not to enjoy more than marginal shareholder support.
Oh, how matters have changed under Gensler. The right of management to respond to proxy recommendations has been revoked. The application of Rule 14a-8 has been changed to force consideration of resolutions of “wider societal interest,” yielding a predictable surge in the number of proposals having far less to do with shareholder value than with the latest fashions in environmental, social, and governance political imperatives. Now, during companies’ annual shareholder meetings, both activists and the proxy advisory firms pursue the timeless joy of spending other people’s money on such topics as climate change.
This shift in SEC priorities away from the disclosure of material information in pursuit of shareholder protection and economic efficiency has had substantial adverse effects. …