I recently published a piece with FT Alphaville arguing that, after a brief experiment with democratization, corporate and securities law were taking on a distinct authoritarian turn.  (See also Christine Hurt, Texas, Delaware, and the New Controller Primacy).

Further to that, I doubt anyone was surprised when the Business Roundtable came out with its wish list for SEC/congressional rulemaking, which essentially is designed to minimize shareholder voice by attacking both shareholder proposals and proxy advisors.

They want to ban ESG proposals, for example and, hilariously, they cite a survey – with a pie chart! – showing that 91% of their own members agree that shareholder proposals are more focused on special interests than increasing company value.  Next, you’ll tell me that 91% of Business Roundtable members agree that income taxes are too high, employees are too entitled, and Gstaad lets just anyone in these days.

They also want to codify a policy I earlier blogged about, namely, to bar the use of Rule 14a-6 to distribute solicitation material by anyone holding less than $5 million.

But most aggressively, they want to ban the use of the universal proxy for shareholder proposals.  This use of universal proxy is a new development – the United Mine Workers, and later Starboard Value, both took advantage of universal proxy rules to run “proposal only” proxy contests.  (Mike Levin explained the situation here and here; we also had a Shareholder Primacy podcast about it here).

By running a proposal-only proxy contest, these shareholders could avoid the usual restrictions on 14a-8 (word limits, subject matter limits, etc), while allowing shareholders to vote for director candidates and other matters on the dissidents’ ballots.  The critical thing about these contests, I thought, was the shareholders running them had to invest real money to do it – the estimate was $15,000 in the United Mine Workers case.  So what these contests demonstrated was, shareholders had a nontrivial interest in running them, and it was only the artificiality of the proxy rules – which limited the ballots that shareholders could return – that prevented these contests in the past.  I personally suspect that if 14a-8 is eliminated and/or declared unconstitutional, these kinds of proposal-only proxy contests might be the new frontier. 

Which is probably why the Business Roundtable wants to nip that in the bud by making clear that administrative burdens, rather than any substantive issue, should bar shareholders from paying their own money to circulate their own alternative proxy materials, if they aren’t actually running an alternative director candidate.  I can’t imagine why the federal government should be in the business of imposing administrative burdens for the sole purpose of protecting corporate boards from hearing the views of their own shareholders, but that is why I am not a public company CEO.

But that’s not all!

Naturally, the Business Roundtable fired its usual salvo of attacks at proxy advisors, including the practice of “robovoting,” in which they, as per usual, misleadingly conflate the administrative service that permits an institutional shareholder to automatically cast ballots according to the shareholders’ preferences with the act of “blindly” following an advisor recommendation as to how those ballots should be cast.   Frankly, I agree with them – not a single institutional investor should be permitted to access voting technology.  In fact, they should all vote exclusively by sending a representative to attend shareholder meetings in person.  In the next proxy season, I look forward to seeing how many companies have a quorum to do business.

Of course, the most telling thing about the demand for proxy advisor reform is that absolutely none of it comes from the proxy advisor clients – the shareholders – and all of it comes from companies subject to shareholder discipline.

But, unquestionably, proxy advisors have been feeling the heat – this week especially, since the House, in the spirit of objective inquiry, held testimony on the subject, “Exposing the Proxy Advisory Cartel: How ISS & Glass Lewis Influence Markets.”

ISS has responded by ostentatiously including an “ESG-skeptic” template among its voting options, on the assumption that the objection here is to substantively-liberal proxy advisor recommendations, while Glass Lewis is apparently considering getting out of the advice business entirely. Instead of generating recommendations for clients, it might instead simply administer “custom” voting policies – where institutions identify their preferences, and Glass Lewis effectuates them company by company. 

Now, it’s previously been suggested that proxy advisors’ true value is not the bottom line “advice” they offer, but their substantive analysis of company proxies. Therefore, I suppose it makes sense for Glass Lewis to get out of the advice business, and sell the analysis alone. 

That said, there’s a particular regulatory quirk here.  It’s the advice part that the SEC claims constitutes a proxy solicitation; and it’s the categorization of advice as a “solicitation” that ostensibly gives the SEC authority to regulate proxy advisors.  (an interpretation of the concept of “solicitation” that is now being considered by the D.C. Circuit).

Now, one might reasonably think that if one is not offering advice – but is simply offering analysis, and a technology to effectuate client voting preferences – then one is not engaging in solicitation, and therefore is outside of the purview of (perhaps vengeful) SEC regulation.

But one would be wrong!  Because the SEC has previously concluded that even though “custom” advice simply effectuates investor preferences, it still counts as a “solicitation” and is therefore still within the purview of SEC regulation.

So, Glass Lewis – and ISS – might believe they can relieve the heat by minimizing or altering their advice-giving functions, but my cynical take is that the objections fundamentally are not about the substance of what they recommend, but about making it easy for shareholders to express preferences at all (i.e., “robovoting”)– and there’s no way either Glass Lewis or ISS can take themselves out of that business while remaining in business.

And another thing. On this week’s Shareholder Primacy podcast, Mike Levin and I talk about the ESG securities fraud lawsuit against Target (Ben Edwards blogged about the motion to dismiss here, but the story only gets crazier after that), and about what it means to “solicit” proxies under federal law.  Here at Apple, here at Spotify, and here at YouTube.

Also also. Shareholder Primacy is taking questions! If there’s something you’d like us to talk more about, drop us an email at shareholderprimacy@freefloat.llc. Once we have a critical mass of requests, we’ll go through them on the pod.