SEC urged to unleash sweeping changes to proxy system

As the SEC’s Proxy Plumbing saga rumbles on, the Commission
has signalled that public companies, shareholders and other stakeholders in the
US may soon get the transparency in the proxy system that many have been
demanding.

The investor advisory committee to the US Securities and
Exchange Commission has set out proposals to reform the proxy voting system
amid continued concerns about under-voting, over-voting and recounts, over the
past 20 years.

For many years, the debate around vote plumbing has focussed
almost exclusively on proxy advisors, but it now seems that the mechanics of
vote execution may finally be drawn into a new era of openness and closer
scrutiny.

Indicating a need for greater accuracy over vote counting
and more transparency, the SEC’s Investor-as-Owner Subcommittee announced
recommendations for changes in July, describing the proxy system as complex and
requiring a “multi-step approach to improve it over a long period of time.”

Areas needing urgent attention form the committee’s
immediate focus, such as the reconciliation between all parties of vote-related
information, but its paper notably added that it’s seeking a consensus and will
focus on changes that can be realised sooner, particularly given the vested
interests in maintaining the status quo.

The proposals can be broken down into four main pillars:

1.            The SEC
should require end-to-end vote confirmations to end users of the proxy system,
potentially starting with a pilot involving the largest companies;

2.            The SEC
should require all parties to cooperate in reconciling vote-related
information, on a regular schedule, including outside specific votes, to
provide a basis for continuously uncovering and remediating flaws;

3.            The SEC
should conduct studies on investor views on anonymity and share lending;

4.            The SEC
should adopt its proposed universal proxy rule, with modest changes to address
objections that have been raised to it.

Regulatory Enforcement for Proxy Plumbing

Under these over-arching changes, the committee suggested
specifics, such as actual enforcement of the duty in point two, to cooperate in
more routine, off-cycle reconciliations. The committee also talked of a
relaxation of current regulations that inhibit, or prevent, the private market
use of universal proxies.

Vote Confirmations

On point one, relating to confirmations, the committee said
issues occur when investors can’t determine whether their voting instructions
are carried out and counted. Neither companies nor intermediaries are obliged
to provide this information, which is just part of the problem, but it often
leaves investors unaware of discrepancies.

To remedy this the committee said confirmations should be
sent to end users, (individual investors and institutions), with final voting
authority over a given share. Confirmations could take “any reasonable form,”
the report states, such as electronic delivery for shareholders who don’t opt
for written confirmations or be combined with other shareholder communications.

Stock Lending and empty voting

The committee also highlighted a need to study how
securities lending affects voting rights in more detail. It recommended SEC
staff to conduct surveys on share lending and establish the extent to which it
contributes to errors, over-votes or under-votes.

Pressure and consensus

Proxy plumbing reform is not a new issue in the US. This is
the SEC’s second attempt since its ill-fated “Proxy Plumbing Concept Release”
almost a decade ago. While many organisations, including Minerva, have been
calling for changes in the plumbing, issuer pressure groups such as the US
Chamber of Commerce, have focussed their attention on proxy analysts.

But the committee is now seeking change by consensus and in
doing so, highlighted throughout its report the “routine problems” that emerge
in the current system.

Its report notes that SEC staff often receive complaints
from individual investors about the administration of the proxy system,
including “technical problems with electronic voting platforms offered by proxy
service providers and failures (by firms) to respond to shareholder
complaints”.

Summarising wider problems, the committee said “systematic
and high-profile flaws undermine confidence” in the process, adding: “No one is
satisfied with the current system.”

The report states: “Shareholders cannot determine if their
votes were cast as they intended; issuers cannot rapidly determine the outcome
of close votes; and the legitimacy of corporate elections, which depend on
accurate, reliable and transparent vote counts, is routinely called into
question.”

Cases in point are littered throughout the report. The
committee highlights the fact Yahoo was forced to recount votes in its
contested 2008 director election, and concluding that “Broadridge… had made
significant errors in reporting votes at (Yahoo’s) annual shareholder meeting.
The committee’s report adds that “Broadridge confirmed there was a truncation
error in the final printout sent to the tabulator.”

Overall, the raft of proxy plumbing recommendations have been
designed to fix the infrastructure of a process that’s evidently important when
put into context.

According to the SEC, more than 600 billion shares are voted
at more than 13,000 shareholder meetings every year. Amid this scale, the
committee hopes improvements to the proxy system will increase confidence in
how capital markets function.