Society backs governance reforms

Jul 05, 2018
Bills would require proxy adviser registration and speedier disclosure by activist investors

The Society for Corporate Governance is backing legislative proposals that address proxy advisers and activist investors and, in doing so, are intended to encourage public ownership of companies.

In testimony submitted to the US Senate banking committee last week, society president and CEO Darla Stuckey offers support for HR 4015, which has passed the US House of Representatives, and tackles proxy advisory firms that she describes as operating ‘with very little regulation or oversight.’

‘HR 4015 would provide badly needed improvements to the accuracy and processes of these firms,’ Stuckey writes. She outlines a number of concerns about such entities, including what she calls their ‘outsized influence in the proxy voting process’ and the accuracy and accountability of their work.

The major proxy advisory firms – ISS and Glass Lewis – have consistently denied such criticisms from public companies or others in the industry.

The bill under consideration would, among other things, require proxy advisory firms to register with the SEC and provide more information about their procedures and methodologies, give companies a mechanism to review draft reports before they are issued and correct any mistakes. ‘For these reasons, the society strongly supports HR 4015 and urges its passage through the Committee on Banking, Housing and Urban Affairs,’ Stuckey writes.

She notes that several institutional investors and the proxy advisory firms have opposed the legislation due to fears about the increased costs it would impose. ‘The society understands the need that institutional investors and their proxy voters have for summaries and analyses of proxy materials, particularly those that hold every US equity and are required to vote thousands of meetings each year,’ she adds. ‘The society is mindful of these concerns and is more than willing to work with the committee to improve the legislation in a manner that accomplishes its goals, while also reducing its compliance costs.’

The society is further giving its support to a measure known as the ‘Brokaw Act,’ which is being sponsored by Senator Tammy Baldwin, D-Wisconsin and co-sponsored by Senator David Perdue, R-Georgia. The legislation would tackle what Stuckey notes is another disincentive to companies going public: the potential for being attacked by activist investors with short-term agendas – although she acknowledges that some create longer-term shareholder value.

‘The society is not seeking to stifle activist investing,’ she writes. ‘[It] does not believe, however, that there is a level playing field between activists and companies.’ Companies must publicly disclose material information within four days but activist investors have 10 days to file a Schedule 13D disclosing the material fact that they have acquired 5 percent of a company’s stock.

‘This 10-day window has been the subject of criticism for allowing too much time for activist investors to accumulate large positions in public companies – sometimes through undisclosed derivative positions – before being required to disclose anything publicly,’ Stuckey writes.

The legislation would update the SEC’s 13D disclosure requirements to ensure that ‘securities positions taken by activist investors are more transparent to companies and to the capital markets,’ she says, adding that these changes would:

  • Direct the SEC to shorten the deadline for disclosing an ownership interest from 10 days to four, which is the existing deadline for companies to file an 8K report
  • Require disclosure of any short or derivative positions that cross the 5 percent threshold
  • Expand the reporting requirement to include hedge funds and other activist investors that are co-ordinating activities in an effort to seek control or influence over a public company.

The act ‘represents good public policy for both public companies and their investors,’ Stuckey writes.


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