CII-2023-Fall-Conference

CII 2023 Fall Conference: Next Frontiers in Governance

CII 2023 Fall Conference. I hope to see many of you there. I’m excited about the theme, “Next Frontiers in Governance.” CII offers unprecedented opportunities to network, share best practices, and learn from others. The CII 2023 Fall Conference will be in-person only. Register for the conference in Long Beach, California. In preparing to meet new collaborators and renew old acquaintances, the following post outlines some of my current interests: (Want to chat with John Chevedden, who had 146 proposals on proxies this year? Let me know and he may swing by.)

CII 2023 Fall Conference: Agenda

Discussion of the most exciting issues is limited to CII members early on Monday and all day Wednesday. Since I’m not a member, I hope a few members will give me a hint of policies discussed, including the ESG backlash, proxy proposals being formulated, and proxy voting concerns. I will be attending all the Plenary sessions on Monday and Tuesday.

CII 2023 Fall Conference: Pass-Through Voting

The breakout session on the evolution of pass-through voting may be the highlight for me. I’m particularly interested in Edward Rock’s opinions. He certainly predicted the minimal impact of proxy access, which I believe could have turned out differently if shareholders had not agreed to limit nominating groups to 20 members.

I agreed with Rock’s 2019 observation: “On the whole, our corporate governance world would be poorer if index funds could not vote their shares and proposals singling out index funds for regulation are unwarranted.” However, large index funds haven’t shown as much initiative in setting even corporate governance standards, let alone E&S standards, as some of us had hoped.

I wish Jill Fisch or Jeff Schwartz were going to be there to argue that because of the new focus on ESG, “institutional intermediaries—namely, pension and mutual fund managers—can no longer vote and engage on the affairs of their portfolio companies without seeking the input of the pension-plan participants and mutual-fund shareholders who are their beneficiaries.” Their call is not some right-wing attempt to circumvent market forces, which are discounting oil, but a genuine desire to deconstruct impediments to shareholder power and increase managerial accountability.

Yes, we will hear from BlackRock, Vanguard, and Broadridge on their efforts on their voting choice options. From what I understand, the options offered aren’t very granular. Will Goodwin, of Tumelo, may be building the most interesting options to be discussed. Few are really thinking in terms of surveys at the level of JUST Capital, which are far more granular but, unfortunately, are focused on popular opinion, not the desires of investors.

Willing to Adjust personal fuduciary duty

CII 2023 Fall Conference: Retail

CII is focused on institutional investors, not retail. Still, I hope some consideration is given to advanced disclosure of votes that could be used by platforms like Tumelo, fennel, iconikapp.com, and others. Katie Perry of Public.com recently posted The Retail Investor Report. I urge everyone to read it.

There were two points that initially struck me.

1. At first, I thought twice as many are willing to sacrifice some financial returns to further non-financial goals. But we don’t really know because the reported figures include both those who view ESG as positive and those who view ESG as negative. Elsewhere, the report finds 55% view considering ESG factors negatively, while 45% view it as positive. Some think ESG indicators can add value. Others assume they detract from value. The reality is that ESG indicators provide more information but not necessarily more knowledge. Additionally, there is little standardization of factors. Hopefully, European and SEC standards will help us arrive at common factors and measures. The race is on to determine which factors point to systematic risks. Confusion seems to reign, helped by disinformation campaigns from the Right.

My hope is that risks to a salubrious environment will eventually be reflected in market prices as much as reputational risk. But that is a big hope. We need much more information to determine if individual investors are willing to accept lower earnings for various positive non-monetary outcomes. Are investors only willing to save a salubrious environment or end systematic discrimination if such actions increase profits? I hope not. Fiduciary duty, as currently practiced by many, seems to bind institutional investors to destruction if that route is more profitable. Since individuals are not bound by fiduciary duty, we might make more progress with pass-through voting. retail engagement obstacles

2. Another grabber in the post was “lack of shareholder engagement is an issue of awareness, not apathy.” That makes it appear there is a desire for engagement. I desperately want that to be true, but I don’t see evidence in the information reported. Clearly, awareness is a first step. If shareholders want to have an impact, applications such as iconikapp.com can make it simple not only to engage but also to maintain records.

Many of these tools are being designed for retail but they should also appeal to small institutional investors. Boards can develop a proxy voting policy in a few minutes and can provide constituents with proxy voting records with ease. How many small fire districts or public employee retirement associations fail to vote their proxies in line with their values or keep records of votes made and the rationale used? I suspect the numbers are large.

CII 2023 Fall Conference: Advance Disclosure

I received an inquiry from Professor Zhao Shan, City University of Hong Kong, on my obsession for pre-disclosure by funds of proxy votes and reminding me of a few of my posts on that topic:

Zhao hopes to conduct systematic research on the impact of pre-disclosed votes. Any such effort is probably premature by a couple of years. A few of us mounted an effort to get funds to pre-disclose their votes years ago. There has been movement in that direction… especially with Norges announcing its votes and voting rationale five days in advance of the AGM. Unfortunately, many smaller funds have retrenched and are no longer posting their votes in advance.

Perhaps Zhao might be able to measure the impact of pre-disclose votes during the time of MoxyVote. More promising will be if Tumelo, fennel, iconikapp.com, and others develop a bit further, allowing retail and small institutional investors to copy pre-disclosed votes.

I suspect that pass-through voting of the type offered by OneFund may offer good data in a year or two. Hopefully, there will be data to compare votes cast by the fund before and maybe simultaneously to pass-through votes using iconik. Eventually, it would be interesting if researchers could parse out voting behaviors by demographic differentiators such as age, sex, political affiliation, etc.

I believe apps like iconik and others will need to supplement their current values approach with a tiered approach used by MoxyVote that allowed defaulting to disclosures by funds such as Trillium, Calvert, or CalPERS. Without such links to pre-disclosed votes, iconik will not be able to automatically assist subscribers with complex voting, such as in proxy contests. When that happens, and if the approach is also taken up by others such as fennel, Tumelo, Public.com, then we will see measurable impacts from pre-disclosing funds. See Shareholder Monitoring Through Voting: New Evidence from Proxy Contests (SSRN), which finds that “passive funds are diligent and effective monitors in pivotal, high-stakes voting events.” They would be even more effective if they disclosed such voted in advance of the AGMs.

The strength of iconik and perhaps others, is that it enables users to set hard and fast rules, such as vote against CEO pay exceeding 200 times the median employee pay at the issuer. Retail shareholders, who owe no fiduciary duty to themselves, can set #ESG guardrails that discourage externalizing costs (see The Shareholder Commons) The downside is that no one is likely to survey anyone’s full range of values, especially on unforeseen new issues and proxy contests. An example of a tiered or waterfall approach is as follows:

  1. Vote as I have directed on individual issues.
  2. If the issue hasn’t been covered, vote with As You Vote, Third Act, or other more extensive frameworks.
  3. If still not covered, vote with a pre-disclosing fund, such as Trillium.
  4. If they don’t own the issuer, so didn’t vote, vote with Calvert, Norges, ISS, or other options.

Bloomberg is, I believe, collecting and probably has a large database of predisclosed votes. SEC rules requiring data tagging and automated coverage by Bloomberg using AI, may lead to a resurgence of pre-disclosing funds, although I have not seen evidence yet. (hint of things to come) Currently being implemented SEC requirements to data tag N-PX filings and more public compilations by OX Prox and others will, no doubt, result in quicker disclosure and more impact.

CII 2023 Fall Conference: Can I Interest You in Overlooked Topics?

Jim McRitchie

Jim McRitchie

I would love to step back from filing so many shareholder proposals and spend more time on other activities. However, that’s hard to do in a world of climate crisis, inequality, fragile democracies, etc. If you are at the conference and have an interest in any of the following (or other concerns I have expressed elsewhere), I would love to connect at the conference and collaborate. Here’s what I look like, so you can find me.

Time to Vote

Are there any institutional investors interested in maintaining some of the elements of in-person AGMs that are often missing from virtual meetings? At an in-person meeting, everyone can easily see a show of hands when the moderator asks if anyone needs more time to vote. Not so at virtual shareholder meetings, which have quickly become the norm. Many companies allow absolutely no meaningful time to vote at virtual AGMs because they cut off voting the second the last proposal is presented.

Yes, I know, most votes are cast before the AGM. But isn’t being able to vote after hearing all the presentations, as well as questions and answers on the topic, worth preserving? Why am I the only one filing shareholder proposals on this issue? My proposal at Alarm.com, asking them to hold the vote open for a reasonable amount of time after the last presentation was made, only got 2.6% of the vote. Why did Glass Lewis recommend a vote against it? Do CII members oppose a request for time to vote? If so, that doesn’t make sense. Please enlighten me. Is the only purpose of requiring shareholders to present their proposal the possibility of knocking them off the proxy for two years if they fail to do so? That would be nuts.

I have written about this extensively at Broadridge No-Action Request Threatens Democracy and Broadridge Threatens Right to Proxy Voting. The heart of Broadridge’s no-action request is as follows:

The Proposal’s focus on the period of time reserved for votes to be cast or changed following the presentation of the final proposal does not address an issue that is any more substantive than these other matters governing the conduct of annual shareholder meetings.

However, my proposal speaks to the heart of the SEC’s mission: to protect investors and promote transparency in the financial markets, ensuring that shareholders have access to accurate and relevant information to make informed voting decisions. One of the Commission’s roles in the proxy process is to help ensure that shareholders can intelligently exercise their right to vote. (“Prior to the development of the Commission’s proxy rules,… [t]he stockholder was merely invited to sign his name and return his proxy without being furnished the information essential to the intelligent exercise of his right of franchise.”).

If you share my concerns, let’s connect at the conference or elsewhere. I am also concerned that no one else seems to be pushing companies to allow shareholders to meet with employees, directors, and each other before or after AGMs informally. There certainly are tools, such as Gather, that facilitate such interactions. My in-person interactions were critical to obtaining reforms at many companies, especially at micro-cap companies.

Advance Notice Bylaw Provisions

Again, I appear to be the only one filing proposals on this topic. Why does there appear to be little interest from institutional investors? Can I get some help? Better yet, will someone else take the lead?

I filed 30 proposals on this issue for the 2023 season. I reached agreements with some companies. Others were blocked by no-actions. About half were voted on, with results ranging from 4.4% at Workday to 20.4% at Cognizant Technology. Again, it appears support from proxy advisors and CII members was minimal or nonexistent.

In 2002, Les Greenberg and I petitioned the SEC for proxy access. At the time, CII said our action re-energized the battle. Our petition generated lots of comments. It took three rulemakings and a court battle, but more than 20 years later, 81% of S&P 500 companies have adopted something called proxy access. Unfortunately, almost all company bylaws require that nominating groups hold 3% for 3 years, and groups are limited to 20 members. Although CII reported years ago that limiting proxy access to 20 members made it unworkable, some CII members file proposals requesting companies adopt proxy access with that impossible 20-member limit.

That sets up a situation where proxy access can’t really be done without at least one of the Big Four fund families. But they administer retirement savings plans for companies and have never even filed a shareholder proposal, let alone initiated proxy contests. Therefore, proxy access has gone unused.

Now, after decades, the SEC adopted Rule 14a-19, allowing shareholders, under specified conditions, to split votes between board nominees and challengers without attending annual meetings. However, I am concerned that the universal proxy rule will go the way of so-called proxy access.

After reading bylaws adopted by Masimo, Bloomberg’s Matt Levine speculated that company bylaws might demand challengers submit disclosures on paper woven from unicorn manes, with requirements waived for the board’s nominees.

CII members should be able to agree to some limits on what Boards can require without seeking shareholder approval in advance or at least within a year or so of adoption. I am a social economist, not an attorney. CII and its members have the resources to delve into the legal issues involved.

See, for example, this memo from Wilson Sonsini. What follows are a few additional recommendations I have accumulated that are worthy of evaluation.

  • Limit disclosures to the shareholder and director candidates, not affiliated parties, especially family members
  • Limit disclosure to “material” items
  • Set forth a process for shareholders to respond to deficiencies, including allowing that process to extend beyond the end of the notice window (Abbott also makes this point).
  • Deliver to the nominating stockholder, within ten business days of receipt of the notice of nomination, notification (the “Company Notification”) that (i) either the notice of nomination has been accepted or (ii) the notice of nomination fails to comply with the issuer’s advance notice bylaw in any material way;
  • If the issuer does not accept the notice of nomination, the Company Notification must specifically identify any material deficiencies contained in the notice of nomination and what information must be provided by the nominating stockholder in order to cure such material deficiencies;
  • Following receipt of the Company Notification, the nominating stockholder shall have ten business days in which to cure the deficiencies identified in the Company Notification and deliver a revised notice of nomination to the issuer; and
  • If the revised notice of nomination still contains material deficiencies and the issuer’s board of directors determines to reject the notice of nomination, the issuer shall issue a Current Report on Form 8-K disclosing the rejection of the notice of nomination along with a description of the issuer and/or its stockholders would be injured if the notice of nomination were accepted despite the identified material deficiencies.

More at TAI (The Activist Investor), which has done a tremendous job covering UPC developments.

Middle Out Economics

Human Capital Disclosure petition

Human Capital Disclosure petition

I just finished reading (listening to) Marjorie Kelly’s book Wealth Supremacy. (attend book talk) I’ll write more about that at another time but she has me thinking more about proposals that would help build the economy from the bottom up and middle out instead of top down. I would like help creating the following templates:

CII 2023 Fall Conference: Related Posts

Virtual Meeting Problems Highlighted by CII

CII Guide to Disclosure of Board Evaluation Processes

Listing Standards Requested by CII

AES “Games” SEC: CII Seeks Correction

CII Fall 2014 Conference: Part 4

, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Comments are closed.

Powered by WordPress. Designed by WooThemes