Loren Matthew/AP Images for Bloomberg Global Business Forum
Business Roundtable Chairman Jamie Dimon and Walt Disney Company CEO Bob Iger speak at a forum in New York, September 25, 2019.
Back in August, the influential Business Roundtable, a collection of top CEOs, announced that it would no longer view corporations as solely existing to maximize shareholder value, and would take the interests of other stakeholders into account. At the time I was skeptical whether this signaled a true change in direction, or a pretext for CEOs to centralize management control and silence the carping from pesky activist shareholders.
New regulations proposed by the Securities and Exchange Commission on Tuesday seems designed to push forward the latter, with the regulatory apparatus helping CEOs build a metal fortress around their companies. Instead of breaking from the tyranny of corporate decision making fueled by short-term stock movements, this proposal just reflects CEOs telling everyone who might have a stake in their companies to shut up.
The regulations mainly involve proxy advisory firms—and please don’t click to another website after reading that, as I promise you it’s important.
The short version is that publicly traded companies hold annual meetings and have investors vote on a bunch of things like pay packages and board members and executive structures. Occasionally activists will get a proxy vote (the formal name for these things) on the docket, sometimes a symbolic question like committing to climate goals, and sometimes the equivalent of a revolt, like trying to throw the board of directors out.
With so many companies and so many decisions, and more importantly with shares so concentrated in the hands of institutional investors, who then have literally hundreds of proxy votes to deal with, a cottage industry of “proxy advisers” has arisen. These firms (for the most part there are two: Institutional Shareholder Services or ISS, and Glass-Lewis) analyze proxy votes and give recommendations to investors for a fee. The proxy advisers do the work investors would rather pay someone else to do.
Unsurprisingly, here’s who hates proxy advisers: the Business Roundtable. They would rather have investors follow management’s recommendations on all proxy votes, and not have some outside entity threaten their power. In June, two months before its showy announcement on shareholder value, the Roundtable sent a letter to the SEC asking to restrict the types of proxy motions that investors can submit, and to institute oversight on the proxy advisory process.
This sort of cleverly fits with the Business Roundtable’s new presumed posture of not following the whims of shareholders, but it’s a manifestly different thing: The CEOs just want to call the shots. And the SEC listened, rubber-stamping virtually every recommendation in that Business Roundtable letter.
One provision proposed Tuesday limits the re-submission of proxy motions that were defeated in previous years. The re-submissions would have to have received 5 percent of the vote previously, up from 3 percent. Another part of the rule raises the ownership threshold for who can submit a proxy motion.
But the more consequential regulation puts restrictions on proxy advisers. If the rule is finalized, companies would be able to review proxy adviser recommendations twice before they get sent to investors. Companies could then respond with their own feedback, and those objections would have to go into the final report to shareholders. The SEC could also take action against the methodology of how the proxy advisers came up with their recommendations.
The rule essentially institutionalizes lobbying of the proxy advisers. It saps their independence as neutral analysts of corporate governance. And it combines, with the limitations on submitting motions, to solidify management’s power. It’s a form of election tampering, no different than businesses meddling with union elections or parties scheming to suppress votes in political elections. “Congress created the SEC to protect shareholders, not coddle thin-skinned C-suiters who dislike being questioned,” wrote Lisa Gilbert, vice president of legislative affairs for Public Citizen, in a statement.
Proxy advisers had already sued the SEC over a guidance the agency did earlier in the year that forced more disclosure on how they constructed their recommendations. The rule, which is more deliberative, would have less exposure to legal overturning. It’s subject to public comment, but the agency’s Republican majority has clearly shown where their sympathies lie.
The SEC passed the proposed rules on a party-line vote of 3-2. Rob Jackson, one of the two dissenting Democrats, said during the meeting before the vote that the proposal “simply shields CEOs from accountability to investors … Whatever problems plague corporate America today, too much accountability is simply not one of them.”
Jackson’s office analyzed the evidence and found that shareholder proposals for the most part increase the long-term value of companies.
If anything cements the fact that the Business Roundtable’s pretensions of responsible corporate governance were a convenient fiction masking a power grab, this regulation will do it. CEOs fashioned some pretty words about considering stakeholder interests, and then mounted up their lobbying teams to persuade the SEC to keep any threat on their decision making at bay.
Shareholder value theory is damaging, in that it motivates CEOs to take actions— cutting labor costs, raising dividends—that engineer short-term stock spikes. But CEOs aren’t really against that aspect. They love it, in fact, because they typically hold large amounts of stock and goosing the price feathers their own nest. The end goal for CEOs isn’t a transition to stakeholder capitalism—only stakeholders could lead the way on that—but a managerial capitalism, where their decisions go unchallenged. This rule on proxy advisers reflects just one more way to get that done.
