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Dell Inc.

appraisal rights for intrinsic value realization


Walgreen Co.

stock buyback policies

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Professional views of renewed regulatory consideration of shareholder communication processes


For previous attention to the issues reported below, see the Legal and Regulatory subsection of the reference page for the Forum's 2010 "E-Meetings" program.


Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, November 21, 2018 posting

What Happened at the SEC’s Proxy Process Roundtable?

Posted by Cydney Posner, Cooley LLP, on Wednesday, November 21, 2018

Editor’s Note: Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

At last week’s proxy process roundtable, three panels, each moderated by SEC staff, addressed three topics:

  • proxy voting mechanics and technology—how can the accuracy, transparency and efficiency of the proxy voting and solicitation system be improved?

  • shareholder proposals—exploring effective shareholder engagement, experience with the shareholder proposal process, and related rules and SEC guidance

  • proxy advisory firms—can the role of proxy advisors and their relationship to companies and institutional investors be improved?

The first panel, on proxy plumbing, was characterized by the panelist who began the discussion as “the most boring, least partisan and, honestly, the most important” of the three topics. (But it was surprisingly not boring.) The last panel, on proxy advisory firms, was characterized by Commissioner Roisman as the “most anticipated,” but the expected fireworks were notably absent—except, perhaps, for the novel take on the subject offered by former Senator Phil Gramm. Here are the Commissioners’ opening statements: Chair Clayton, Stein and Roisman.

(Based solely on my notes, so standard caveats apply.)

Proxy voting mechanics and technology

To introduce this panel, a member of the SEC’s Investor Advisory Committee, which had addressed the topic of “proxy plumbing” at length at its September meeting (see this PubCo post), observed that the current system of share ownership and intermediaries is a byzantine one that accreted over time and certainly would not be the system anyone would create if starting from scratch. There was broad agreement that the current system of proxy plumbing is inefficient, opaque and, all too often, inaccurate. So the question was: should the SEC start over from scratch with a complete overhaul or are there approaches that could repair the existing system? On that issue, there was no agreement. As framed by the first panelist, “do we have the willpower” to reinvent the system?

Accuracy in vote count. The SEC staff moderator opened this panel by observing that Securities Transfer Association found that, out of 183 meetings its members had tabulated in the past year, 130 had overvoting problems. Although most were ultimately reconciled, the question remained as to why the overvoting occurred. Many of the issues related to the inaccuracy of vote counts—overvoting, undervoting, empty voting, uncertainties regarding the accuracy of vote totals, and difficulties associated with vote counting, confirmation and reconciliation—arise out of the decision made decades ago to move to a system of share immobilization, under which most shares are held in street name and reflected in positions listed at a centralized depositary (DTC), where they are treated as a “fungible mass of shares not traceable to any individual.” While the system makes share transfers easier, the arrangement is itself complex, compounded by many layers of intermediation—the transfer agent, the custodian and perhaps several subcustodians—that can complicate and obscure proxy voting and lead to mismatches that ultimately disqualify votes. As a basic matter, investors would like the ability to see through the chain of intermediaries to confirm that their shares have been voted as directed.

Anecdotally, panelists described instances of overvoting, delays in counting of registered shares, breaks in the chain of custody leading to separation of necessary documentation and resulting disqualification of votes, and shares not counted because of conflicts on the face of the omnibus proxy. In one example given, a DTC participant had overvoted and, in trying to correct the overvote in the system, was told not to worry about it because it’s all a fungible mass and not everyone votes. (So much for accuracy.) In another example, a slight change in the name of the voting custodian—not of the beneficial owner—led to that large beneficial owner’s shares not being voted—and the problem not being caught—for ten years. Where share lending is involved, questions arise regarding who has the right to vote the shares, with the result that not all shares are voted in accordance with the instructions of the beneficial owner. What’s more, sometimes beneficial owners whose shares have been lent are still sometimes sent a VIF even when, as a technical matter, the shares are no longer on the broker’s books, leading to overvoting potential. In some cases, the level of overvoting can be in the millions. To illustrate the importance of these problems, participants discussed various issues associated with obtaining an accurate vote count in connection with a recent proxy contest involving over 2.5 billion shares, where the difference in the vote total come down to ¼ of 1%. In that contest, the final results were not available for two months. Moreover, no reconciliation was done prior to announcement of the preliminary results. That narrow difference made the voting issues more significant, but the panelists confirmed that these issues were omnipresent, even if not determinative in other cases.

Entities with a different economic interest in the outcome didn’t see it quite the same way. A representative from Broadridge, for example, saw most of these issues as fixed or readily fixable. Problem with overvoting? We have an overvoting service to fix that problem. Vote confirmation? We are all in violent agreement that we should have vote confirmation. Hey, we did a pilot program for end-to-end vote confirmation with transfer agents to address that issue and it was determined to be viable, but we can’t get participation from the vote tabulators. The SEC needs to push this process forward, he suggested. However, another panelist that participated in the pilot did not think it was used effectively. A transfer agent suggested that there’s no clear definition of what “confirmation” even means. A broker representative insisted that they do have well-functioning processes to track share ownership. One panelist suggested that the various participants in the system should think hard about whether they are more part of the problem than part of the solution.

Communication with beneficial owners. There were many complaints about issuers’ difficulty in communicating with beneficial owners. First, questions were raised about the ongoing retention of the NOBO/OBO distinction, particularly the apparent default to OBO status for clients at many brokers. One panelist partially attributed the decline in retail participation in the proxy process to the OBO default and suggested that the SEC attempt to survey why investors choose to be OBOs—are they confusing anonymity as an investor with anonymity as a proxy voter? If so are there other ways to address that issue? Some panelists questioned whether shareholders really understand the difference—or care. To facilitate engagement, issuers wanted the ability to communicate directly with all holders by email, and some noted that, even for NOBOs, email addresses were not available. (With regard to the advisability of electronic communications, it was noted that, since the adoption of notice and access, retail voting participation had declined.) In addition, there were costs associated with obtaining the NOBO names. Nevertheless, revelation of the shareholders’ names and contact information, whether to companies or to activists, can be viewed as privacy issue—a hot topic these days.

Universal proxy. A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. In the absence of universal proxy, in contested director elections, shareholders can choose from both slates of nominees only if they attend the meeting in person. Otherwise, they are required to choose an entire slate from one side or the other. The historic view has been that dissidents—hedge fund activists and otherwise—tend to favor universal proxies, while companies have more often opposed them. However, it became apparent at the meeting of the SEC’s Investor Advisory Committee (see this PubCo post), that a consensus has recently developed on the potential value of universal proxy cards in proxy contests, as some issuers have apparently recognized that universal proxy could, in some cases, help the management slate. For example, a proxy advisory firm might recommend in favor of two dissident candidates only; however, shareholders would have difficulty following that recommendation because, in the absence of universal proxy, they would be compelled to either vote for only the two recommended directors or to choose one full slate or the other—and that could end up being the dissident slate.

Nevertheless, the details will matter. For example, one issue that remained on the table was the percentage of shareholders that dissidents would need to solicit, with a hedge fund representative arguing for a low percentage, while others maintained that, to be fair, there should be parity with the solicitation requirements applicable to companies. A representative of the Society of Corporate Governance expressed concern about the possible permutations in the outcomes of the director vote—for example, what if there were no director who could be the audit committee chair? What would happen if the dissident violated the rules? What does the layout of the proxy card look like? Meetings involving proxy contests represented such a small sliver of the total number of meetings, she said, there was really no reason to distract attention from these larger proxy plumbing issues. However, another panelist observed that the SEC’s 2016 universal proxy proposal was in pretty good shape and would not end up being a major distraction. In addition, a hedge fund representative contended that universal proxy would be very helpful in addressing the issue related to determining which proxy card was the last-voted card.


In 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections, but, at the time of the proposal, opinions about universal proxies, both pro and con, were deeply held, and nothing came of the controversial proposal—at least not yet. In a 2015 speech, Mary Jo White, who chaired the SEC when the proposal was issued in 2016, said that a hotly debated question was whether universal proxies “would increase or decrease shareholder activism or otherwise impact the outcome of election contests. Some believed that it would embolden activists to run more contests. Others posited that it could stimulate increased cooperation and settlements between issuers and activists, thereby decreasing contests. No one specifically called into question the fundamental concept that our proxy system should allow shareholders to do through the use of a proxy ballot what they can do in person at a shareholders’ meeting.” As reported in this post on, in an apparent first use, one U.S. corporation elected to use a universal proxy card in connection with an election contest. The card named all the nominees of both the company and the dissident hedge-fund activist. Nevertheless, the dissident sent out its own card listing only its nominees, and the company then asked its shareholders to use its universal card to vote for all company nominees and two dissident nominees. (The company ended up settling with dissident and was then looking at its strategic options.) See this PubCo post.

Technology. Is technology the answer? Some panelists recommended that pilots be commenced using various technologies, particularly “private and permissioned blockchain” (with or without a gatekeeper), which could reduce complexity and improve traceability. According to the Nasdaq representative, blockchain has been tried successfully in Estonia and South Africa, confirming that, in his view, end-to-end vote monitoring was possible. One panelist suggested that principles needed to be determined first; while technology might be a shiny new object, it shouldn’t drive the decision. Another panelist argued that blockchain should not be viewed as a silver bullet; its success would depend on the extent of implementation—would it be used in a complete reinvention of the system or just as a veneer?

Bottom line. Which raises again the issue: start again from scratch or low-hanging fruit? A number of panelists argued that, while some system participants had taken useful steps, overall the system was “patched together” and needed a fundamental rethinking. According to the CII representative, instead of intermediaries voting the “fungible mass of shares,” voting of shares should belong directly to the beneficial owner; the use of blockchain or other distributed ledger technology would allow for traceable shares. In essence, there would be no need for all of these intermediaries, which just adds opacity to the system. In addition, he contended, participants in the system should be subject to market competition; to the extent there is a natural monopoly, it should be regulated like a utility. (To this point, Clayton noted that it was important to respect that the intermediary system was useful for trading and settlement in the context of trading.) That didn’t mean, however, that near-term steps, such as routine and reliable vote confirmation, guidance on reconciliation and universal proxy, couldn’t be undertaken now.

Shareholder Proposals

Perhaps it was just the contrast to the nearly uniform condemnation of the archaic proxy plumbing system, but most panelists for this topic seemed to view the shareholder proposal system as relatively smooth functioning and didn’t offer that much criticism. The representative of CalSTRS even went so far as to suggest that, since shareholder proposals constitute only 2% to 3% of the proposals, why try to remedy a problem that really doesn’t exist?

Submission thresholds. Most of the controversy centered around the propriety of the intial and resubmission threshold levels. Some panelists viewed the shareholder proposal as an essential tool that has, over time, resulted in important changes in corporate governance that are now well-accepted. For example, the CalSTRS representative noted that the process is especially useful if holders won’t engage. James McRitchie observed that many of the proposals submitted decades ago by the Gilbert Brothers (see this article), such as the right to ratify the selection of auditors, are now standard fare at annual meetings. Similarly, a representative of the NYC pension fund described a long history of voting for proposals that, over time, gained substantial public acceptance, thus making the case for retaining low resubmission thresholds. In addition, with the prevalence of dual-class voting, one panelist suggested, even a low percentage of the total vote could actually represent a significant percentage of the outside vote. These participants advocated retention of the current thresholds. The AFL-CIO representative contended that thresholds were intentionally low to allow small investors the opportunity to participate; big institutional investors can pick up the phone and engage directly with the company on their issues and don’t need the shareholder proposal process, he maintained.

On the other side, some panelists such as the Business Roundtable argued that shareholder proposals allow a few holders to attempt to impose on companies their personal policy priorities, but involve costs that are borne by all shareholders. Moreover, the low resubmission thresholds allow a small subset to override majority will. In addition, the representative of the Chamber of Commerce argued that the shareholder proposal process was one of the factors driving companies away from IPOs. (In response, the AFL-CIO representative noted that the average public company receives a shareholder proposal only once every 7.7 years, and so it was preposterous to suggest that shareholder proposals were a reason companies avoided going public.) These panelists advocated raising the initial and resubmission ownership thresholds, longer holding periods, disclosure of the proponents’ holdings in the company, filing fees and strengthening of the “misleading statements” and “relevancy” exclusions.

SEC guidance. Other issues raised related to specific guidance from the SEC. For example, the Chamber advocated reversal of the SEC staff’s position in Staff Legal Bulletin 14H, which narrowed the meaning of a “direct conflict” under the Rule 14a-8(i)(9) exclusion in favor of reinstitution of the position taken in the original Whole Foods no-action letter. (See this PubCo post and this PubCo post.) McRitchie advocated that the SEC “plug the hole” that had resulted from Corp Fin’s grant of relief to AES Corporation. In that letter, AES had sought relief permitting exclusion under Rule 14a-8(i)(9) of a proposal to allow a special meeting to be called by 10% of the shares on the basis that it directly conflicted with a management proposal to be submitted at the same meeting to ratify the company’s existing special meeting provisions, which included the 25% threshold. The staff agreed with the company’s position. (See this PubCo post, discussed on the Forum here.) In McRitchie’s view, the staff’s position in that letter could effectively “wipe out all proposals.”

Other issues. The NYC pension fund advocated allowing proponent access to vote tallies that are currently available only to the issuer. With regard to shareholder proposals related to social issues, one issuer representative contended that if the purpose is to allow a stakeholder without a real interest in the company to advocate for social change, that was not an appropriate use of the proposal process. Similarly, the Chamber representative argued that more than half of the proposals are social proposals and that they don’t pass; if they are just political speech, he said, they should be viewed differently. Other panelists, such as the representative from the AFL-CIO argued that investors are increasingly concerned with ESG issues precisely because they affect long-term value creation. The representative of BlackRock, which is well known for its advocacy on certain social issues such as board diversity, said that it evaluates all of these proposals through the lens of maximizing long-term economic value. And here’s a suggestion from one panelist that I suspect most of us could definitely get on board with: the basis for the staff’s determination to grant or refuse no-action relief is sometimes a conundrum, and it would be very helpful if the SEC provided more clarity as to its reasoning in its responses to no-action letters.

Proxy Advisory Firms

The topic of reigning in the proxy advisory firms, which some view as having too much unaccountable power over proxy votes, has become something of a political hot potato.(See, e.g., this PubCo post and this PubCo post.) But the panel’s discussion regarding the power of proxy advisors was surprisingly tepid.

Robo-voting? Investment advisors on the panel made the case, with regard to the recommendations of proxy advisors, there was very little so-called “robo-voting.” Asset manager State Street, for example, said that proxy advisors were used to execute State Street’s own voting guidelines, as well as for research and operational ease. Others described a similar approach. ISS and Glass Lewis maintained that they do not drive voting decisions; rather, investors follow their own policies, and ISS and GL help execute votes in accordance with instructions. GL also noted that 80% of its voting is customized. An active fund manager indicated that it needed proxy advisors for their independent research function, workflow management and data aggregation. A smaller wealth manager advised that, from a practical perspective, it needed the help of proxy advisors to fulfill its duty of care and execute mechanics; without the assistance of proxy advisors, over time, its research department would spend more time on proxy research than on investment analysis. Its practice was first to perform due diligence on the benchmark standards and determine if they were consistent with the view of the firm.

Conflicts of interest. The proxy advisors discussed how they address the standard proxy advisor conflicts of interest through disclosure and ethical walls. However, the representative of the American Enterprise Institute, former Senator Phil Gramm, offered quite a unique take on the issue. Gramm harkened back to the Enlightenment, where the idea was to allow people to follow their own ideas and interests in using the fruits of their labor, and the corporation was allowed to develop in the interests of shareholders independent of the government, guilds and social conventions, and subject only to the constraints of the Parliament. In his view, the real conflict of interest lies in those organized special interest groups that, because they are unable to convince the legislature or the agencies to adopt laws or rules promoting their views, instead use “intimidation” to impose policies on corporate America that, in Gramm’s view, are not in the interests of shareholders. In his view, the index funds, a growing category of investment fund, advocated in favor of certain high-profile social issues that have gained public favor strictly as a marketing tool to promote their funds. When investment advisors vote against social issues and are identified as part of the “flat-earth society,” they will see an adverse effect on the marketability of their products. As index funds grow, he predicted, this problem would increase, with the result that we would “undo the Enlightenment” and return to the Middle Ages, where these “leeches” bled business and stopped growth. It’s one thing, he said, for a holder to vote its own shares on social issues, but when voting the shares of others, they should vote only to increase shareholder value. The problem as he saw it was the SEC’s position that allowed index and other investment funds to fulfill their fiduciary responsibilities by following the advice of proxy advisors. (See this PubCo post.) He advocated that no investment advisor should be exempt from fulfilling its fiduciary duties and that the SEC reverse its position on Staff Legal Bulletin No. 20, “Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms.

The State Street representative agreed that it does have a fiduciary responsibility, but that State Street believed that ESG does affect sustainable long-term economic value and shareholder returns and that its strategy involved taking these issues into account. State Street takes its time in evaluating issues—how does the risk, such as an environmental risk, manifest itself? It’s not about “values,” she said, but rather about long-term “value.” (Of course, there are numerous studies supporting the case that good ESG practices can improve operational and stock price performance. See, e.g., this PubCo post and this PubCo post.) Another wealth manager argued that, given the small proportion of shareholder proposals relative to other voting issues, to curtail the manager’s ability to rely on proxy advisors’ advice for this reason would be an instance of the tail wagging the dog.

Correcting the record. Other issues discussed included the difficulty experienced by smaller companies in attempting to correct the record when errors are made in the proxy advisors’ analyses. One suggestion was to consider requiring a more iterative process involving the company prior to publication of the recommendation or perhaps even an ombudsman to resolve disputes. ISS suggested that some “errors” are actually just differences of opinion, and noted that some of its clients, for whom the reports are prepared, do not want ISS to share the report with companies before they see it.

Proxy advisor registration. Surprisingly, there did not seem to be much call for registration of proxy advisors, possibly because of the fear of rising costs associated with registration and further regulation. However, last week, a bipartisan group of six Senators introduced the Corporate Governance Fairness Act, which would require the SEC to regulate proxy advisers under the Investment Advisers Act. The bill would subject the firms to periodic SEC examinations, including review of the firms’ conflict-of-interest policies.


Harvard Law School Forum on Corporate Governance and Financial Regulation
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