N-PX Data Tagging? Yes, that might be the most important rulemaking the SEC could undertake to move our economy in a positive direction. SEC Commissioner Allison Herron Lee gives voice to this small change that could have a dramatic impact on how America invests (about 7 minutes into the video below). Read the text. Structuring how proxy voting data is reported by funds, made available on EDGAR and through third parties, could be the most transformative change coming to the financial world. Competition around proxy voting could become a more powerful force than competition around fees or even returns.
N-PX Data Tagging: Knowing How Funds Vote
Knowing how funds vote is key to knowing if the fund uses its proxy vote in ways aligned with our values. Most Americans invest primarily through index funds. Our employers generally give us several options for our 401(k), Roth IRA, or other vehicles to save for retirement. We usually get some information on costs and returns but nothing about how the funds voted in corporate elections. N-PX data tagging, using XBRL or something similar, could change that, and that could, as they say, change everything.
Low-cost index funds mirror the return of large market segments (such as the S&P 500). Funds that mirror the same index perform much the same. Transaction costs have fallen to near zero. The only rational basis left to compare these large funds is voting records but we are not given that information.
Failed Attempt by SEC to Create Proxy Voting Accountability
In 2003 the SEC enacted a rule requiring funds to disclose their proxy votes using form N-PX. In contrast to stated intent (Final Rule), N-PX filings do not “enable fund shareholders to monitor their funds’ involvement in the governance activities of portfolio companies.” Filings do not shed light on mutual fund voting to “illuminate potential conflicts of interest and discourage voting that is inconsistent with fund shareholders’ best interests.” Filings do not enable shareholders to “evaluate how closely fund managers follow their state proxy voting policies, and to react adversely to fund managers who vote inconsistently with these policies.”
To my knowledge, no retail investors use N-PX filings for their stated purpose. Data reported on the N-PX is not freely available in a user-friendly format because NP-X data tagging is not required. Look at the sortable near real-time disclosure of Calvert in a structured format (click “+Expand” after entering a ticker symbol), which even includes the rationale for each vote. Now review the Vanguard Index Trust Total Stock Market Index Fund’s currently mandated disclosure, which requires a laborious effort to decipher.
Creating even a simple proxy scorecard to compare two funds’ voting records, such as Calvert and Vanguard, is difficult. That difficulty increases exponentially if we compare dozens, hundreds, or thousands of fund proxy voting records.
N-PX Data Tagging Will Drive Fund Competition and Corporate Behavior
The SEC could accomplish the original goals of Rule 30b1-4, including the empowerment of worker-investors, by requiring N-PX data tagging. SEC Chairman Jay Clayton claimed to focus on the interests of long-term Main Street investors. Yet, the letters he read into the record in support of rules to eviscerate small shareholders’ rights were generated by astroturf organizations.
No act of Congress is needed to incentivize mutual funds to stick up for workers. Five SEC commissioners from both sides of the aisle should be able to agree. Competition around proxy voting records will increase workers’ accountability and to other stakeholders, as espoused by the Business Roundtable (So Long to Shareholder Primacy).
Near Real-Time Reporting Should be Encouraged
On July 9, 2019, I (James McRitchie) filed a rulemaking petition with the SEC (File 4-748) requesting the SEC to require N-PX data tagging. I also wanted the SEC to require reporting in real-time. Rapid disclosure and reporting of proxy votes would foster public debate on the issues faced by corporations and investors. Funds would begin to compete based on cost and returns and how their votes align with the values of Main Street investors or Mr. and Ms. 401(k), as SEC Chairman Clayton calls working investors.
However, real-time reporting would be opposed by most mainstream funds for the following reasons:
- They do not want investors or others, asking them to change their votes. They vote thousands of proxies. Answering such inquiries would be a burden.
- They do not want frequent press reports comparing how they vote to their proxy voting guidelines or how other funds voted. That could be not very pleasant.
- If investors can easily compare funds, funds might need to expend more money to determine how customers want them to vote. That could eat into profits.
Mandating anything like real-time reporting would be “a bridge too far.”
N-PX Data Tagging Should Drive SEC Investor Eduction
Currently, the SEC’s education efforts (investor.gov) treat investors as consumers of investment products. Tools focus on understanding financial markets, advisors, products, etc. That information is important. However, there is little to nothing (Did I miss?) provided on the moral responsibilities investors should consider as owners. How can we ensure the companies we own behave responsibly toward investors, the environment, and our society?
Retail investors rarely vote their proxies. Reading through dozens, sometimes over 100, pages is just too much trouble. Plus, the proxy is written by the incumbent managers, except for a few shareholder proposals. Incumbents are not likely to point to their own short-comings. Most retail investors do not know enough about the ESG practices of comparable companies to compare and vote rationally with some degree of intelligence.
The SEC should encourage but not mandate funds to announce their proxy votes before annual meetings by posting links to look up how those funds voted on investor.gov. Investors could then copy the votes of favorite brands. Comparing voting records will help educate shareholders about the issues and lead us to switch when we discover brands more aligned with our own values.
N-PX Data Tagging: Conclusion
Minor amendments to a rule mandating an obscure reporting form could make all the difference in getting mutual funds to stick up for workers and other stakeholders. Proxy scorecards will take their place alongside scorecards comparing historical costs and returns. Mutual funds will become advocates for the workers they represent. Corporate directors will see worker-investors as important constituents. The world will change in a more salubrious direction.