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The Business Roundtable Is Not Your Friend
A cursory look at its corp gov webpages would convince even the most tolerant and understanding of activist investors that the Business Roundtable really dislikes us activists. Some activists had a warm moment in 2019 when BR issued its famous Purpose of a Corporation, which embraced all stakeholders. It urged US public companies to "deliver value" for customers, employees, suppliers, and communities, not just shareholders.
If that statement persuaded you, then its most recent one should change your mind. Last week BR released "The Need for Bold Proxy Process Reforms", a thorough takedown of many activist ideas and practices. While we expect little to change based on its arguments, it does express deeply-held desires of company leaders to curtail almost completely much of activism. It also advances a number of both old and new changes that are worth noting.
It mostly addresses the process for precatory shareholder proposals, including the roles of the SEC and proxy advisors. It complains bitterly about the cost and process for responding to shareholder proposals without any independent evidence of these costs. It mostly cites a qualitative survey of 35 BR members, who naturally think these costs are high and increasing. It provides scant evidence that investors share these concerns.
The report heaps special scorn on proxy advisors. It repeats many of the usual criticisms, including conflict of interest with their corporate advising business, undue influence on voting decisions, accuracy and rigor of analysis, and the "one-size-fits-all" approach to voting advice. Scholars and investors have rebutted these criticisms many times before (including us here and here).
Its proposed reforms bear watching. While we don't expect Congress or the SEC to jump on most of these, together they go farther than any others we've seen before.
- Eliminate E&S proposals ("preclud[e] the inclusion of shareholder proposals relating to environmental, social and political issues in a company’s proxy statement")
- Raise proposal submission thresholds (currently $25,000 of shares for a year, etc.) and exclude repeat proposals that fail to gain support
- Allow exempt solicitation only for proposal proponents
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Amend the universal proxy rule to eliminate 14(a)-4 proposal solicitation (how the UMW succeeded at HCC)
- Prevent a representative of a shareholder, like a consultant, from submitting more than one proposal at an AGM
- SEC:
- develop a no-action letter appeal process (proponents would like this, too)
- remove requirement for companies to send opposition statement to proponents.
- Proxy advisors:
- confirm SEC authority to regulate
- include proxy advice within definition of solicitation and subject to solicitation rules
- eliminate "robovoting", or the service where proxy advisors process votes for clients based on recommendations
- require recommendations include "clear economic analysis demonstrating...benefit to shareholders"
- prohibit services that represent conflicts of interest, likely services to corporations
- prohibit advice that "undermines board discretion", whatever that means
- prohibit recommendations to oppose directors after a company fails to act on a previous proposal that gains a majority of shareholder support
- require exec comp valuation to follow GAAP principles.
Criticism of corp gov proposals is conspicuously absent. We expect, though, that many of the recommendations would serve to curtail corp gov proposals as they would E&S ones.
BR also reveals a degree of hypocrisy. They urge proxy advisors to provide a detailed economic rationale for a recommendation, yet studiously avoids expressing the costs for a company to handle proposals.
Above all, BR expresses considerable outrage that seems disproportionate to the impact and influence of E&S proposals. It complains that proposals exploit SEC rules and advance narrow agendas that don't contribute to company profitability. Even if they do so, what's the harm? Big companies waste far more time and money on all manner of dumb ideas. We can't see what a company gains by making life this hard for a few shareholders.
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