Jan. 25, 2019
Chairman Jay Clayton U.S. Securities and Exchange Commission 100 F Street NE Washington, DC 20549 January 25, 2019 To Chairman Clayton: My name is Nan Bauroth, and I am a retail investor. I am writing to the SEC to explain why proxy advisory firms should be regulated by the Commission. I first expressed my concern a year and a half ago in a letter to you at the SEC about the practice of fund managers abrogating the rights of individual investors such as myself on the voting of shareholder proposals. I now see that many others are voicing their concerns as well. Like many retail investors I have found low-fee passive investment products and vehicles offered by institutional asset managers, such as index funds, to be an attractive investment vehicle. However, an unintended consequence of investing in products like index and mutual funds is that retail investors like me are required to surrender control of their proxy voting rights. These privileges are instead assumed by asset managers, so individual investors must have faith in asset managers to vote responsibly to reflect our financial interests. Unfortunately, some managers are not responsibly using their newfound proxy voting power amassed from the investment accounts of ordinary investors. Many have chosen to pursue agendas that prioritize their chosen social and political goals over absolute financial returns, and they do so without the approval or knowledge of fund members like me. More evidence about this practice has now come to the light. I have recently read studies suggesting that fund managers are being assisted in this process by proxy advisory firms. The two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) control 97 percent of the proxy advising marketplace, and too many of America’s fund managers rely heavily on these two services. As David F. Larcker, Brian Tayan and James R. Copland explained at the Harvard Law School Forum on Corporate Governance and Financial Regulation in 2018: 95 percent of institutional investors vote in favor of a company’s “say on pay” proposal when ISS recommends a favorable vote while only 68 percent vote in favor when ISS is opposed (a difference of 27 percent). Similarly, equity plan proposals receive 17 percent more votes in favor; uncontested director elections receive 18 percent more votes in favor; and proxy contests 73 percent more votes in favors when ISS also supports a measure. While the evidence shows that ISS is the more influential proxy advisory firm, Glass Lewis also has influence over voting outcomes. Glass Lewis favorable votes are associated with 16 percent, 12 percent, and 64 percent increases in institutional investor support for say on pay, equity plan, and proxy contest ballot measures. Furthermore, some individual funds vote in near lock-step with ISS and Glass Lewis recommendations, correlations that suggest that the influence of these firms is substantial. To make matters for retail investors worse, proxy advisors have a track record of promoting resolutions that offer no real value for us. Research by law firm Sullivan & Cromwell has now shown that ISS supported 74 percent of social proposals in 2018, including 94 percent of proposals that would require companies to disclose political spending and 84 percent of proposals that would force them to comply with extralegal environmental standards. Although some institutional investors followed the recommendations of these proxy advisors and backed such measures, retail investors like me have been more reluctant. A study jointly produced by Broadridge and PwC showed that retail investors were half as likely as institutions to support environmental and social proposals in the 2018 proxy season. A second study commissioned by the National Association of Manufacturers, suggests why retail investors do not vote for such proposals ourselves. Their data showed that, as we fear, these proposals frequently create greater financial costs for publicly traded companies – and therefore, their shareholders – than financial benefits. What’s more, such proposals create costs for the companies that must hold ballots on the matters, yet there is no evidence definitively showing that social and environmental proposals deliver positive financial returns for shareholders. As I and other retail investors also surmise, the majority of environmental proposals put forward at publicly-held companies from 2006 to 2017 were proposed by just a handful of activist investors more interested in advancing social policy goals than the financial returns of other shareholders. I have also learned that a study by the U.S. Chamber of Commerce found that proxy advisory firms routinely support environmental and social proxy ballot items that have been rejected by a majority of retail investors such as me in prior years. According to their data, support from proxy advisors helps keeps these resolutions alive, creating “zombie proposals” that perennially drain capital and resources from firms and shareholders alike. Based on my own experience when I owned a BlackRock fund, proxy advisory firms do not disclose their methodologies for coming to their conclusions about proxy voting matters. Nor do they disclose potential conflicts of interest, even though I now see that numerous critics over the years have pointed out that ISS, in particular, has a significant number of potential conflicts between its consulting business and ratings service. These serous concerns, as well as the increasing pursuit of political objectives by fund managers prompted me to join the Main Street Investors Coalition, in order to serve as a genuine voice for the rights of individual investors such as myself. I feel vindicated that some institutional asset managers have started to take notice of the problems in the proxy advising industry that have concerned me for some time. Last year, BlackRock finally called for greater transparency from proxy advisors, suggesting that they must improve the quality and accuracy of their guidance. Although this is a good first step, more needs to be done and therefore, I respectfully ask you at the SEC to create and enforce regulatory rules for the proxy advisory industry requiring them to be bound by the same fiduciary obligations everyone else in the financial services sector must follow. While I am heartened to see the SEC take an interest in matters affecting individual investors over the past two years, your action has been limited. I hope you at the Commission will now take steps to rectify this breach of fiduciary duty by proxy advisory firms to protect the inherent financial interests of individual retail investors like me instead of special interest groups. Sincerely, Nan Bauroth Member of the Main Street Investors Coalition Advisory Council Nan Bauroth [redacted]