What rights do you have when you own shares of a company?

That’s the central question at the heart of a recent letter to the Securities and Exchange Commission (SEC) that Colorado PERA Executive Director Ron Baker cosigned as part of a coalition of investors and other organizations.

The tone and subject of the letter—which addresses “proxy adviser interpretation and guidance” and “proxy adviser rulemaking”—is technical and measured. But that buttoned-up surface belies an important debate underneath.

Proxy voting: What it is, and why it matters

When an individual owns a share of a company, he or she owns a piece of that company. Institutional investors, like Colorado PERA, also hold shares—lots of them. For example, at the end of 2018, PERA held millions of shares of Microsoft.

When ownership of a company is divided among multiple investors, important decisions are often made using shareholder ballots. Owning a share means having the right and responsibility to vote in important company decisions. Institutional investors like PERA vote a lot. In 2018, PERA staff cast votes on 63,031 individual proposals for 6,025 companies.

Voting allows investors to hold companies accountable to shareholders and decide on important issues such as executive pay and who sits on a company’s board of directors. “We don’t want to promote excessive risk taking with executive compensation,” said Luz Rodriguez, Colorado PERA’s Senior Corporate Governance Analyst. “We think pay should be aligned with performance. Those decisions ultimately affect profits, which can, in turn, affect PERA’s members.”

PERA takes voting on issues like this seriously. For example, it voted against about 18 percent of management proposals in 2018. Encouraging strong corporate governance is a concrete way to align board decisions with shareholder interests.

Exercising that right to vote is an essential component of owning a company. However, it would take significant resources to research every one of the tens of thousands of votes institutional investors like Colorado PERA make every year. So, for more than three decades, large investors have employed “proxy advisers”—third-party firms that do the research necessary to inform the votes institutional shareholders cast. PERA’s investment staff can disagree with the research and advice they receive from proxy advisers, and, in the end, PERA’s investment staff are the ones who cast the votes in accordance with the PERA Board’s Policy on Proxy Voting. Proxy advisory services simply allow institutional investors to be better-informed voters at a fraction of the cost of performing all of the research in-house. “Being cost conscious protects the assets of the plan,” Rodriguez said.

The SEC issues new guidance

Earlier this year, the SEC issued guidance and interpretation statements that could add administrative layers and regulatory burdens to this process. Many institutional investors are concerned about the effects this potential regulation could have. For example, proxy advisers could be required to share their research with the very companies that are the subject of their research before the research is shared with the institutional investors who paid for the research. “Why should companies have the chance to influence the product we’re buying?” said Rodriguez. “It affects the independence of that research.”

The Council of Institutional Investors (CII) sent a letter to the SEC in response to this guidance (Ron Baker is a member of CII’s board of directors). In the letter, the group expressed disappointment that the SEC did not ask for public comment before issuing its new Proxy Adviser Interpretation and Guidance. They also expressed concern that the SEC issued the Interpretation and Guidance without a demonstrated need to do so. The letter asked the SEC to reconsider its position and the opportunity for CII to provide comment. In addition to cosigning CII’s letter, Baker sent a letter on behalf of Colorado PERA to the SEC. The SEC will address this topic next on November 5.

In an interview with Pensions & Investments, Amy Borrus, Deputy Director of CII, summed up the issue when she said: “Many institutional investors rely on proxy advisory reports to help inform their voting decisions and they have a stake in ensuring these votes are independent and as objective as possible and timely. If rules make it more difficult for proxy advisers to get reports to investors in a timely fashion or make proxy advisers more inclined to tilt more toward companies they review, then that’s a problem.”