SEC Holds Roundtable Discussion on Proxy Voting (with Lofchie Comment)

The SEC held a roundtable discussion on ways to improve the proxy voting process ("proxy process"). Panelists discussed topics such as universal proxy ballots and strengthening retail shareholder participation. Commissioners Gallagher and Aguilar also issued public statements.

In his opening remarks, Commissioner Gallagher stated that he is interested in evaluating the ways in which the SEC can improve retail shareholders' participation in the proxy process. According to Commissioner Gallagher, retail shareholders are "famously rationally ignorant" of the proxy process, which at times can be "costly and intimidating." Additionally, he explained that the current corporate governance framework has been driving companies toward "excessive short-termism." He encouraged the SEC to focus on methods for leveling the playing field, including by considering universal ballots.

In his statement, Commissioner Aguilar explained that retail shareholder participation in the proxy process is "disappointingly low," and that it might be helpful for the SEC to revisit the "access equals delivery" rule. According to Commissioner Aguilar, if retail shareholders were better informed, then their participation would be greater. Commissioner Aguilar also expressed support for a universal proxy ballot, noting that the proxy process should "function, as close as possible, to replicate the rights of a shareholder who attends the annual meeting in person." The current proxy rules, according Commissioner Aguilar, "diminish" shareholders' rights by limiting voting choices. He explained that shareholders who attend annual meetings in person have the opportunity to "split their tickets" among all eligible candidates, whereas shareholders who vote by proxy may not "pick and choose" among all candidates.

Lofchie Comment: All of the SEC Commissioners seem to agree on the importance of encouraging retail participation in proxy voting. Yet there is little reason that retail participation should be a focus of any particular importance. There are no convincing arguments for the idea that retail investors would make better governance decisions than institutional investors. The great protection that markets provide to retail investors is that it lets them piggyback off the price determinations that are made in the financial markets by more knowledgeable institutional investors. Similarly, retail investors benefit from the actions that institutional investors take to protect shareholders generally. Given the limited influence that any retail investor can have in a proxy contest, and given the amount of study that would be necessary for the investor to master the issues, proxy voting is really not a good use of investor's time. How does it compare to an investor spending time with their family, going to a museum or exercising? The SEC's job is to protect retail investors. Protecting them is quite different from presuming they have special knowledge that can be a benefit in the determinations made via the proxy process. In fact, it is because they do not have special knowledge that they are in need of protection.

See: Commissioner Gallagher's Remarks; Commissioner Aguilar's Remarks.Related news: SEC Announces Agenda and Panelists for Proxy Voting Roundtable (with Lofchie Comment) (February 12, 2015); SEC to Hold Roundtable on Proxy Voting (with Lofchie Comment) (January 27, 2015).