October 8, 2010
Comments regarding proxy voting system reform File Number S7-1410
Ladies and Gentlemen of the U.S. Securities and Exchange Commission:
Thank you for permitting me to comment on the Concept Release on the U.S. Proxy System. I am a retired business lawyer, CPA, investment advisor, senior executive of a NYSE company and business consultant. Today I earn a living as an active private investor and am a PhD Candidate in Jurisprudence and Social Policy at the U.C. Berkeley School of Law, working on corporate governance issues. I am unaffiliated with any issuer, firm or institution.
There are myriad problems with the current proxy voting system and vast opportunity for improvement. But my comments relate to the inclusion of an apparently minor and less germane issue, the role of proxy advisory firms.
For the last several years, I have been immersed in a review of the literature on the role of institutional investors in corporate governance. This literature suggests that the vast majority of institutional proxy voting is accomplished through proxy advisory firms. The literature indicates that institutional investors have few serious issues or complaints about proxy advisory firms. In particular, there is no indication that institutional investors think proxy advisory firms vote against their interests, or in anyone else's interest, or in any manner except as institutional investors intend. Rather, the concerns about these firms appear to have arisen very recently and appear to come from issuers, from the Commission on Corporate Governance at the New York Stock Exchange and from the U.S. Chamber of Commerce.
Proxy advisory firms undoubtedly have significant influence on proxy voting, but their role is as an agent for the shareholders. It is the shareholders who chose to use them, chose which one to use, decide whether to follow their advice, decide whether to retain or fire them, and, frankly, decide whether they need to be more firms to chose from. The obligations of proxy advisory firms are to their clients, the shareholders, not to the issuers or the market. If shareholders are permitted to make arbitrary decisions or ill-informed decisions or self-interested decisions, they should be permitted to do so through proxy advisory firms as readily as if they had voted the shares personally.
The concern, then, is that the effort to impose seemingly reasonable standards on proxy advisory firms could, in fact, be an effort to impose upon them obligations to issuers or the market that would interfere with their provision of a service which shareholders want. Standards of transparency, for instance, may force proxy advisory firms to disclose standards, policies, practices, systems, and information which they might owe to their clients, but to which issuers and the market have no right. Standards of fairness and openness may simply be a means to force proxy advisory firms to respond to issuers' complaints, challenges and demands, which no shareholder would ever have to satisfy.
The rallying cry that shareholders should not impose "one size fits all" standards on companies is not grounded in empirical research and is not an obligation of shareholders to begin with. Shareholders have the right to impose "one size fits all" solutions if they see fit, and they should have as much right to do so through proxy advisory firms as to do so directly. It is entirely plausible that shareholders could be better off with standardized corporate governance rules that provide network benefits of familiarity and predictability, even considering the loss of the value of creative and customized rules that might be crafted by issuers. This could be a very rational choice for shareholders who must deal with over 10,000 issuers.
The focus of issuers on changing the rules applicable to proxy advisory firms could well have the effect of increasing the cost of conducting the proxy voting process to an extent which exceeds the market value to shareholders, with the effect of driving the proxy advisory firms out of business and leaving shareholders with less information and advice. Standards of care, precision, quality of information, and access can be addressed by institutional investors in their contracting for proxy advisory services, without issuer or regulatory involvement, and there is very little indication that institutional investors have concerns about these.
Finally, it seems odd that the Commission would consider imposing higher standards of care, access, transparency, and accountability on proxy advisory firms than are imposed on issuers. It might be more appropriate to inquire why corporate resources (which ultimately belong to the shareholders) are being utilized by issuers to attempt to burden and restrict the exercise of shareholder rights in this manner. Issuers already have the ability to utilize corporate resources in support of their positions on proxy votes and will likely gain greater access to shareholders directly, as a result of the many other proxy mechanics reforms sought by issuers in this proceeding.
The one area of appropriate concern is to seek honesty and fairness between the proxy advisory firms and their clients, the shareholders. I am not aware of any particular problems, but it is likely that these firms already meet high standards of fiduciary care and loyalty toward their clients. Most such clients probably presume that proxy advisory firms are required to meet these fiduciary duties and it may be reasonable to impose them formally to insure that no proxy advisory firm "cheats" on these expectations. It is possible, for instance, that proxy advisory firms need to be reminded to disclose conflicts of interest, such as the simultaneous provision of services and access to issuers for compensation by issuers. But again, the focus should be on the duties of the proxy advisory firm to their clients, and not on the creation of any new duties to issuers or the market, beyond those that a shareholder might have if they voted directly.
Thank you for your consideration of these views.
S. Davis Carniglia