Moxy Vote Petitions SEC for a "Neutral Internet Voting Platform"

Larry Eiben, the co-founder of Moxy Vote, has petitioned the SEC to adopt rules to recognize a new category of investment adviser -- a “neutral Internet voting platform” -- that an investor could use to receive information about his or her investments, to vote shares at corporate meetings, and to designate as the recipient of proxy materials to be transmitted by companies whose stock is registered with the SEC. Moxy Vote closed its business on July 31, 2012, citing the need for regulatory reforms in order to make its business viable.

According to the petition:

 “The refusal of brokers to disseminate information to shareholders at an online platform of their choosing is the first significant problem that needs to be addressed. The second major hurdle is the fact that proxy distribution/collection agents are presently charging significant fees to internet voting platforms to collect votes - a fee that we believe should be paid by public companies and one that proves substantially more burdensome to individual voters than institutional voters.”

Delivery of Information by Brokers

The petition describes in detail (a) the difficulties that Moxy Vote experienced in obtaining the cooperation of brokers and (b) how Moxy Vote does not fit neatly into the regulatory regime for registered investment advisers.  It also describes how a neutral website would fit within the framework contemplated for “proxy advisers” under the SEC’s proxy plumbing concept release.

Ultimately the petition states that the neutral voting platform idea should be incorporated into a proposed rule on “proxy plumbing.”  At the end of the petition letter there are proposed changes to the SEC’s proxy rules, which define a neutral Internet voting platform (“platform”), specify that a broker can satisfy its obligation to forward information to a beneficial owner of stock by transmitting such information to a platform designated by the beneficial owner, and create an exception from certain proxy solicitation rules for licensed platforms that furnish of proxy voting advice.

 Fees Reimbursement

 Mr. Eiben believes that the fee issue can be addressed without rulemaking:

"The NYSE should state that the existing fee reimbursement for collecting ballots electronically is intended to fully cover all collection costs, including any file exchanges with internet voting platforms, and that issuers must pay all of these collection costs.  Moreover, as part of its ongoing assessment of fees, the NSYE should reevaluate the appropriate reimbursement level, paid by issuers to Broadridge, for ballots collected electronically. The present amount of $0.06 per ballot does not likely provide sufficient revenue to account for the electronic voting infrastructure that has evolved over time. It is again worth noting that issuers should not fear the increase in costs here. That is, they will likely realize substantial savings relative to other forms of proxy ballot delivery and collection, as well as, more efficient means of solicitation as needed. Also, FINRA should provide guidance to brokers that they may not hire intermediaries (e.g., Broadridge) that charge a fee to anyone other than issuers for proxy collection."

The full text of the petition can be found at http://www.sec.gov/rules/petitions/2012/petn4-651.pdf, and Moxy Vote’s comment letter on the SEC’s proxy plumbing concept release can be found at http://www.sec.gov/comments/s7-14-10/s71410-181.pdf.

Blackrock and Global Proxy Plumbing

The CEO of Blackrock, one of the largest managers of equities, was reported by Bloomberg recently to have sent a letter to 600 of its biggest holdings stating that Blackrock “seeks to engage in a dialogue” with these public companies to address issues that will be raised at upcoming stockholder meetings. “We think it is particularly important to have such discussions - with us and other investors - well in advance of the voting deadlines for your shareholder meeting and prior to any engagement you may undertake with proxy-advisory firms.” 

Let’s make believe that 80% of the 600 companies wanted to take Blackrock up on the offer, and let’s assume 75% of those have their annual meetings from April through June, and each have a half hour telephone call with Blackrock.  That’s a total of 180 hours of phone calls.  Now let’s assume that a member of Blackrock’s global Corporate Governance and Responsible Investment (CGRI) team spends an additional half hour before the call (as preparation) and an additional half hour after the call (as follow-up).  Now we are up to 540 hours.  Let’s assume half of the 20-member CGRI team spends three hours of each day on this task.  So within 18 days, a little under three weeks, they should be able to handle the task. :-)

I don’t know what prompted the CEO’s letter.  It appears consistent with Blackrock’s philosophy of engagement historically.  They say they already engage with over 1,000 companies every year (10%-15% of its investments).

It's interesting to note that according to Blackrock, for the 37 U.S. incorporated companies that did not get majority shareholder support on the "say-on-pay" vote during the past proxy season, Blackrock voted “for” pay for half and voted “against” pay on half, and it engaged with close to three quarters of these companies. Michele Edkins, the global head of the CGRI team, is quoted in the The Financial Times as saying "remuneration is a pretty small piece of the puzzle." Factors to blame for value destruction are board issues such as "succession planning, poor board decision-making, not having the right people capable of the job." For example, it appears Blackrock voted “for” pay at the Nabors Industries annual meeting last year (1 of the 37) but withheld votes against a director.

In case you are interested and in the San Francisco area on Monday evening, January 30, 2012, you can hear from three members of the CGRI team.  There is a Q&A too.  

The Financial Times earlier this year interviewed Ms. Edkins:

Ms. Edkins points to the difficulties of voting across borders, describing the process as “a nightmare.”  “It’s incredible.  In a day and age when your telephone can tell you exactly where you are in the world, you can’t vote end to end and get confirmation that has happened through a custodial voting chain.”  Global investors need to step up their efforts to simplify the voting instruction process and make it electronic, she concludes.

Proxy plumbing is a global issue.

Elimination of Broker Voting: Ineffective Regulation by SEC?

A recent research paper concludes that the elimination in 2010 of uninstructed broker voting in uncontested director elections (an amendment to NYSE Rule 452) is an example of ineffective regulation by the SEC.

In “The Elimination of Broker Voting: Much Ado About Nothing?”, the authors, Ali Akyola, Konrad Raffb and Patrick Verwijmerenb state:

Overall, we do  not find a convincing effect of the rule change on shareholder value, not even for those firms that  seemed to be mostly targeted by the new rule. Moreover, the probability that a particular director would be voted off the board has not increased since the rule change. . .   .

However, given the absence of wealth effects for even those firms in which we expect the strongest impact of the new rule, it appears that shareholders do not view the elimination of broker votes as an important first step,  and are not convinced that other, more value relevant, steps will be taken. .  .

Another potential explanation is that the SEC, the NYSE, shareholder activists, and proxy advisory firms acted in the best interest of investors and simply misjudged the effectiveness of the regulation ex-ante.  . .

We find that excluding broker votes, which in our sample represent 12% of the votes cast in 2009, would decrease the average approval rate by only one percent. .  . .

A more plausible explanation for our findings is that broker votes are not of substantial importance and that outside pressure has been an important factor in the SEC’s decision to change regulation. A desire of proxy advisory firms and shareholder activists to demonstrate vigilance could explain why they strongly supported the change in regulation, even if this change was unlikely to be effective.

This “more plausible explanation” is described in more detail as follows:

Our results raise questions about the role that different actors play in the initiation and adoption of regulation. Many market participants, notably shareholder activists and proxy advisory firms, strongly supported the rule change from its beginning and exerted pressure on the SEC to adopt it. The rule’s apparent futility suggests that it may be of interest to study in more detail the incentives and potential biases in decision making within these organizations regarding regulation. Rather than being unbiased agents for shareholders, these institutions may have incentives to pursue or advocate policies to enhance their own public visibility or perceived disciplinary role. Belinfanti (2009) argues that proxy advisory firms do not have appropriate incentives to act in the best interest of investors because they benefit from high barriers to entry in the proxy advisory market and bear no risk from providing bad recommendations. McCall (2011) stresses the possibility that proxy advisory firms respond to incentives such as the generation of consulting revenue and to demonstrate vigilance to subscribers and politicians. A desire of proxy advisory firms and shareholder activists to demonstrate vigilance could explain why they strongly support changes in regulation, even if these are likely to be ineffective.

Our results also raise the question to what extent the SEC’s actions are distorted by outside pressure, which relates to the political-economy approach to financial regulation that attempts to provide a positive analysis of the evolution of regulations (see Kroszner, 2000). Our findings suggest that it is interesting to open the black box of the SEC and examine more closely its motivations in the design of governance regulation. This topic has not received much attention in the corporate governance literature. A notable exception is Choi et al. (2011), who provide evidence that the SEC may have misallocated enforcement resources to less efficient investigative activities due to news coverage and media frenzy on option backdating. Their results raise the question how the media, in turn, allocates its attention and resources and which distortion may arise in this context. In a time when the SEC and its supporters recurrently complain about the lack of resources devoted by Congress to the SEC’s mission of investor protection, evidence on the effectiveness of SEC regulation is of the highest importance.

Although I have not analyzed this paper thoroughly, I am initially skeptical of the methodology employed by the study and the inferences that can be drawn from it.  But I do not dismiss the questions it raises generally.  The SEC seems to have a lot of economists now (http://www.sec.gov/divisions/riskfin/economistbios.shtml), and it is looking for more (http://www.sec.gov/divisions/riskfin/rfemployment.shtml).  Hopefully some of them are familiar with behavioral economics and that this discipline is also brought to bear in the regulatory process.  See http://ssrn.com/abstract=500203.

The paper is cited as: Akyol, Ali C., Raff, Konrad and Verwijmeren, Patrick, The Elimination of Broker Voting: Much Ado About Nothing? (December 15, 2011). Available at SSRN: http://ssrn.com/abstract=1973558

Proxy System in Canada is Broken Too

“It seems counter-productive to continue to improve the disclosure and governance aspects of the capital markets only to have these improvements potentially lost through an inadequate proxy voting process,” according to Tom Enright, the President of the Canadian Investor Relations Institute.  Earlier this month CIRI published comments on the discussion paper entitled “The Quality of the Shareholder Vote in Canada” that was released last year by the law firm of Davies Ward Phillips & Vineberg LLP (the “Davies Paper”).

 I’ll mention a few of CIRI’s comments: 

• CIRI would propose that consideration be given to regulatory initiatives under a fair disclosure regime to require that any report/recommendation be provided to the appropriate issuer in a timely fashion, prior to the report being issued to the proxy advisor firm’s institutional clients. We understand this practice is being followed by Governance Metrics International when it creates research reports on the risk profile of corporate issuers for its investor community clients.
• CIRI would like to see advisory firm voting recommendations be provided to all issuers (not just large capitalization companies who sign up for them) in advance of the recommendations being issued to investor clients and in a manner to provide sufficient time to provide a real and meaningful opportunity for issuers to correct factual research errors or engage in a dialogue with advisory firms if contentious issues arise. While the ability of selected, large capitalization companies to sign up to receive a copy of the recommendation is an improvement, we know of at least one TSX 60 company that signed up for the report but never received it.
• Proxy advisory firms should be required to disclose (a) if and when a recommendation has been provided to the issuer, (b) the name and contact information of the research analyst responsible for the recommendation, (c) the most recent date a discussion was held with the issuer and (d) whether there was any consultation with either the issuer’s management or board prior to the recommendation.
• Proxy advisory firms should be required to establish a mandated appeals process for those issuers who have concerns about a research report that cannot be resolved through direct dialogue with the advisory firm.
• Institutional investors should be required, as we believe they are in the UK under the Stewardship Code, to disclose whether or not and to what degree they rely on the recommendations of proxy advisory firms with regard to shareholder voting issues. In addition, institutional investors should be required to disclose or certify as to the internal controls they use to ensure the integrity and reliability of the services provided to them by a proxy advisory firm.
• If not already the case, it should be mandated that votes on securities of individual issuers should have significant input from the individuals, such as the portfolio manager, or investment teams directly responsible for the decision to purchase and own the securities.

 The 200+ page Davies Report can be found at http://www.dwpv.com/shareholdervoting

This all comes as the Ontario Securities Commission continues to review the proxy system in Canada. It solicited comments earlier this year.

Recommendations for Providing End-to-End Vote Confirmation

The Weinberg Center for Corporate Governance at the University of Delaware organized a rountable on proxy governance at the end of 2010.  It has now published a report with recommendations for providing end-to-end vote confirmations.  The report seeks to address what the roundtable believes to be the issues of the most pressing concern, and those which can be solved in the short to medium term, without the need for federal regulation. Thus the recommendations are not premised on SEC reform of NOBO/OBO.  The recommendations propose a series of steps that result in a street-side proxy voting process that can be both confirmed to all shareholders from end-to-end and lend itself to overall independent audit and verification.

• Early-Stage Entitlement Confirmation:  All parties that anticipate submitting votes for a shareholders’ meeting should confirm their voting entitlements with the meeting tabulator within a defined period following the record date. The Roundtable suggests six business days.
• Encouragement of Early Voting:  All shareholders, whether large or small, institutional or retail, are encouraged to cast votes early in the solicitation period and, in any event, no later than three business days before the shareholders meeting.  This recommendation addresses a major cause of potential voter disenfranchisement – late-stage voting, making thorough analysis and reconciliation by tabulators and nominees difficult.
• Enhancements to Exception Processing:  Tabulators should promptly communicate to vote-reporting entities the reasons vote reports are being rejected.  The Roundtable believes such communication should be on the day after a tabulator identifies the discrepancy. 
• Vote Confirmation:  The proxy process should enable investors to obtain, via the Internet or other electronic means, a vote confirmation on a demand or as needed basis.  The existing Voting Instruction Form (VIF) control numbers serve as the unique identifier needed to facilitate vote confirmation.  The Report also provides for confirmation of the overall proxy system through audits and other reviews. 

Read the full report of the roundtable.