For the Record: Proxy Process in Corporate Governance

On July 13, BPC Senior Advisor Tim Doyle testified before the House Financial Services Subcommittee on Capital Markets on the proxy process. During the hearing. Rep. Frank Lucas (R-OK) asked for a description of the proxy process. Below further explains the testimony provided in response to that question.

Proxy Process in Corporate Governance

In the context of corporate governance, the proxy process is a mechanism to allow beneficial owners (shareholders) the ability to vote either by mail or to designate a fiduciary to act as their agent to vote on their behalf at annual general meetings. This is a practical solution to avoid having shareholders attend multiple meetings scheduled at various companies across the country.

Since the growth of public markets from the 1900s, and in particular since the end of World War II, there has been constant tension between shareholder rights and corporate boards and executive management. This tension has been at the center of the proxy process and has correspondingly resulted in a long history of litigation. The tension has been amplified by the fact that, since the 1990s, the ownership of publicly traded companies has become much more concentrated through investments managed by institutional investors.

As mutual funds, exchange traded funds (ETFs), and pension funds continued to grow over the years, encompassing ever larger and more diverse sectors of publicly traded companies, there was a perceived need to vote on proposals in an increasing number of annual meetings. This need was bolstered by SEC regulatory action and the Department of Labor’s issuance of the “Avon Letter” in the 1980s, which emphasized fiduciary duty and the importance of proxy voting. Ultimately, this need created the market for proxy advisors and their ability to review proxy materials at thousands of companies and provide analysis and recommendations. How they develop their recommendations and how those recommendations impact voting results is an issue of increasing concern.

Furthermore, in conjunction with the proxy process, Rule 14a-8 of the Securities and Exchange Act of 1934 provides the framework for shareholders to request that their individual proposals be voted on at corresponding shareholder annual meetings. These proposals, if not otherwise excludable under 14a-8’s provisions, would be included in the proxy materials provided to all shareholders before the next annual meeting.

As a result, the subject matter of suggested shareholder proposals and determining who ultimately decides how to vote on those proposals is increasingly debated. This issue is compounded by the fact that the beneficial owners of the shares have increasingly designated, by proxy, their voting rights to third parties, who in turn rely on proxy advisor recommendations for a variety of reasons. Further, under the current policy of the SEC, shareholder proposals dealing with broader societal issues, that might have otherwise been excluded under Rule 14a-8, are now being more readily included in proxy materials.

Conclusion

The changing process by which corporate policy is voted and acted upon makes the proxy process a vitally important part of corporate governance. The importance of the process has led to bipartisan calls for improving and reforming it for decades. Congress should continue to carefully analyze sustainable reforms to improve the proxy process.