Shareholder Communications Coalition
“Fair corporate suffrage is an important
right that should attach to every equity
security bought on a public exchange.”
- U.S. House of Representatives, Report No. 73-1383
Securities Exchange Act of 1934
Corporate “Get-Out-The-Vote”
Campaigns: Better Shareholder
Communications and Proxy Voting
Shareholder Communications Coalition
Congressional Staff Briefing
House Committee on Financial Services
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May 1, 2013
10:00 – 11:00 AM
2128 Rayburn House Office Building
Membership of the Shareholder
Communication Coalition
 Business Roundtable
 National Investor Relations Institute
 Society of Corporate Secretaries & Governance Professionals
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Speakers
 Don Green, Vice President, Corporate Governance, Business
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Roundtable
Amy Goodman, Partner, Gibson, Dunn & Crutcher LLP
Jeff Morgan, President and Chief Executive Officer, National
Investor Relations Institute (NIRI)
Niels Holch, Executive Director, Shareholder
Communications Coalition
Darla Stuckey, Senior Vice President, Policy & Advocacy,
Society of Corporate Secretaries & Governance Professionals
Background
 Public companies are required to hold annual shareholder
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meetings to elect directors, consider proposals offered by
shareholders and management, and for other purposes.
State laws require companies to have a quorum for their meetings.
Most shareholders do not attend these annual meetings to vote in
person, requiring public companies to solicit votes through an
absentee ballot/proxy process.
Securities and Exchange Commission (SEC) rules govern how
public companies distribute proxy materials and “get-out-the-vote”
among millions of institutional and individual investors.
Proxy distribution and processing is complicated and involves
companies, brokers, processors, advisors, and investors.
The Current Proxy System
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Status of Shareholder Communications
and Proxy Voting Rules
 Since 2004, Business Roundtable and the Shareholder
Communications Coalition have urged the SEC to undertake a
comprehensive evaluation of the proxy process, and modernize
the shareholder communications and voting system.
 In 2010, the SEC issued a Concept Release on the U.S. Proxy
System. This Concept Release outlined a number of potential
reforms in shareholder communications, proxy distribution and
voting, and proxy advisory services.
 As the SEC winds down its rulemaking responsibilities under
Dodd-Frank and the JOBS Act, the agency should turn its
attention to reforming the proxy system.
 With more than 600 billion shares voted each year at
approximately 13,000 shareholder meetings, shareholders need a
proxy system that promotes efficient communications and
accurate voting.
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History of the U.S. Proxy System
 More than 75% of all public companies’ shares are held in “street
name,” i.e., through brokers and banks. Investors holding in street
name are known as beneficial owners. The other 25% of company
shares are registered directly with a company.
 After a paperwork crisis occurred in the 1970’s, the street name
system of stock ownership expanded, to enable securities
transactions to be processed and cleared more efficiently.
 Under SEC and stock exchange rules, brokers and banks are
responsible for distributing annual meeting materials and
otherwise communicating with shareholders who use the street
name system. Public companies have limited ability to
communicate with these shareholders, or otherwise encourage
them to participate in an annual meeting.
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History of the U.S. Proxy System
 The structure of the current proxy processing system has
been in place since 1985.
 This structure has been left largely unchanged, despite
significant advances in technology and the growth of the
Internet.
 Corporate governance has also changed over this period,
increasing the need for public companies to know who their
shareholders are and be able to engage with them more
efficiently and effectively.
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Public Company Concerns
 Public companies need to know who their shareholders are and be
able to communicate with them directly.
 Current SEC rules inhibit public companies from interacting with
their shareholders throughout the year and during the annual
meeting process. The process of identifying and communicating
with shareholders, especially individual investors, is inefficient and
expensive.
 Direct two-way communications between shareholders and public
companies should be a fundamental element of our capital
markets.
 Additionally, public companies want to improve the SEC reporting
regime applicable to institutional investors.
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Public Company Concerns
 The proxy voting process also needs to be changed.
 Shareholders registered directly with a public company receive
proxy cards with their annual meeting information materials.
 Shareholders in the street name system receive a separate voting
form that communicates voting instructions only and does not
authorize shareholders to vote at annual meetings. Only brokers
are authorized to vote.
 Instead of having such a complicated system, with different cards
and forms, the system should be changed so that shareholders can
vote directly with the company.
 The proxy system should be able to track all votes through to the
actual vote count and be capable of having a third-party audit the
final tabulation, just like in a Federal election.
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Coalition Recommendations: Public
Company Communications
 Public companies want to have direct communications with
their shareholders. They should be able to distribute annual
meeting materials and otherwise communicate with them
whenever necessary.
 Shareholders should have the ability to vote their shares
directly with a public company and not have to go through
their broker. Many banks use this more direct approach to
voting.
 Individual shareholders who want to remain anonymous can
hold shares in the name of their broker or bank, using the
same nominee status as institutional investors.
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Coalition Recommendations: Proxy
Voting
 Changes in corporate governance are also demanding a proxy
voting system that is accurate, verifiable, and can be audited.
 The proxy voting system would be structured to permit all
votes to be tracked through to final tabulation and in a
manner that can be audited by a third-party if necessary.
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Proxy Advisory Services: Need for More
Oversight and Transparency
 One issue raised in the SEC’s 2010 Concept Release was the role
and activities of private firms providing proxy advisory services to
institutional investors.
 These firms have considerable influence in the proxy voting
process, by generating voting recommendations and making voting
decisions for their clients, which are typically pension plans,
mutual funds, hedge funds, and endowments.
 Despite their large role in proxy matters, these firms use a “onesize-fits-all” approach to their work, instead of evaluating the
specific facts and circumstances of each public company.
Substantial concerns also have been raised about:
 A lack of transparency concerning their standards, procedures, and
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methodologies;
 Their use of incorrect factual information to formulate specific
recommendations; and
 The conflicts of interest caused by several of their business practices.
Why Do We Have Proxy Advisory
Firms?
 Current regulatory rules impose fiduciary responsibilities on
investment companies, investment advisers, and most retirement
and pension plans in voting their proxies.
 Pursuant to SEC rules, investment companies and investment
advisers are required to adopt policies and procedures to ensure
that proxies are voted in the best interests of their shareholders
and clients.
 Similarly, the Department of Labor requires ERISA retirement and
pension plans to vote proxies for stocks in their plans, as a part of
their fiduciary obligations to plan beneficiaries. A 2008
interpretive document does permit retirement plans to engage in
a cost-benefit analysis before deciding whether to participate in a
specific vote.
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Why Do We Have Proxy Advisory
Firms?
 Many institutional investors and their third-party
investment managers – especially mid-size and smaller
investment managers – choose to reduce costs by not
having in-house staff to analyze and vote on proxy items.
 These institutional investors and managers typically
outsource their voting decisions to proxy advisory firms.
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Regulatory Oversight of the Proxy
Advisory Industry
 Proxy advisory firms should be subject to more robust
oversight by the SEC.
 New SEC regulations should enhance transparency of the
internal processes of these firms, improve accuracy of factual
information, and address conflicts of interest.
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Increased Transparency by Proxy
Advisory Firms
 There is a need for greater transparency about the internal
procedures, guidelines, standards, methodologies, and
assumptions used in the development of voting
recommendations by proxy advisory firms.
 Proxy advisory firms should be required to disclose their
public company reports a reasonable time after each annual
meeting is completed.
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Accuracy of Factual Information Used
by Proxy Advisory Firms
 Proxy advisory firms should be required to provide all public
companies with draft reports in advance of distribution to
their clients, to permit companies to review and correct the
factual information contained in these reports for accuracy.
 Consideration also should be given to whether these firms
should be required to include in their reports any
information they receive from a company, or, at a minimum,
provide disclosures in reports if a company disagrees with a
particular factual assertion.
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Conflicts of Interest in the Proxy
Advisory Industry
 Corporate Consulting: the largest proxy advisory firm –
Institutional Shareholder Services (ISS) – provides corporate
governance and executive compensation consulting services,
in addition to providing voting recommendations on
proposals submitted in shareholder elections.
 Investor Proponents: institutional investors that are clients of
a proxy advisory firm may be a proponent of a matter to be
voted on at a shareholder meeting, raising concerns that
proxy advisory firms will make favorable recommendations
to other institutional clients on such matters to maintain the
business of the proponent.
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Proposed Improvements to the
Institutional Investor Due Diligence
Process
 The SEC and Department of Labor should review the existing
regulatory framework applicable to the use of proxy advisory
firms by institutional investors, including the issue of whether
these investors should be required to vote on each and every
matter at a shareholder meeting.
 This review should evaluate whether such investors are exercising
sufficient oversight responsibility with respect to their use of
proxy advisory firms to satisfy their fiduciary duties.
 For example, are they using methodologies that are evaluating the
facts and circumstances of each public company and are they
avoiding “one-size-fits-all” or “check the box” methodologies?
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What’s Next?
 The Coalition seeks support from Members on the House
Committee on Financial Services to encourage the SEC to
make reform of the U.S. proxy system a higher priority and
address the issues in its 2010 Concept Release.
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Contact Information
Niels Holch, Executive Director
Jeff Morgan
Shareholder Communications Coalition
President and CEO, National Investor Relations Institute
400 N. Capitol St, NW
225 Reinekers Lane
Suite 585
Suite 560
Washington, D.C. 20001
Alexandria, VA 22314
(202) 624-1461
(703) 562-7676
nholch@holcherickson.com www.shareholdercoalition.com
jmorgan@niri.org
Kenneth Bertsch
Don Green
Vice President, Business Roundtable
President and CEO, Society of Corporate Secretaries &
Governance Professionals
300 New Jersey Ave NW
Darla Stuckey
Suite 800
Washington, DC 20001
Senior Vice President, Policy and Advocacy, Society of
Corporate Secretaries & Governance Professionals
(202) 496-3275
240 West 35th Street
dgreen@brt.org
Suite 400
New York, NY 10001
(212) 681-2000
kbertsch@governanceprofessionals.org
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dstuckey@governanceprofessionals.org