Posted by & filed under ESG, Regulatory.

By Ann C. Logue

As ESG investing becomes more common, proxy voting matters have become more important. Decades ago, money managers would argue that they didn’t need to vote proxies; they would just sell the stock if they didn’t like what management was doing. Of course, that was never realistic. Endowments, foundations, and trusts often hold restricted stock, and passive strategies don’t allow securities trades unless there are changes in the underlying index. Proxies carry power, and money managers need to use it wisely.

One way to give shareholders more power to give them more voting flexibility. That’s why the SEC announced a change to voting in contested elections. Instead of shareholders voting proxies for either one slate or another, they will be able to vote for the specific candidates that they prefer. This may allow for removing problematic directors while keeping the others, creating continuity that could help with a corporate turnaround. It could also make it easier for dissident shareholders to get a seat on the board without nominating an entire slate. Previously, the only way that shareholders could do that was to attend the meeting in person, and who wants to do that?

The SEC also announced a proposed change to the proxy research process this week. Many shareholders use outside research services to provide them with advice on voting. These firms are not registered as investment advisors, but they are subject to some regulations in exchange for some shields against litigation. In 2020, the SEC announced that proxy advice firms would need to submit their findings to the company management and then distribute any management response to their clients. While management teams liked this rule, it made it more difficult for shareholders to receive timely reports from proxy advisors. The SEC is looking for public comment, should you have an opinion on the change.

The SEC is an interesting organization because it doesn’t fit the standard left versus right narrative in US politics. Both corporate and shareholder interests are traditionally associated with the Republican party, but the basics of what SEC rules affect which groups are less partisan. Proxy voting procedure gets into the weeds of corporate governance, but the rules matter.

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