BlackRock's Proxy Process Roundtable comment letter to the SEC stands out from the pack for its unique, broad-based perspective based on its multiple roles as public company, investment adviser, engagement & proxy voting fiduciary, and asset management firm that informs its supportive views on proxy advisory firm (PAF), shareholder proposal, and proxy plumbing reforms, and its proposed framework to guide the SEC's proxy process review and rulemaking going forward.
Notably, BlackRock advocates greater transparency requirements for PAFs - as well as other proxy process players, including asset managers and shareholder proposal proponents [FNs omitted]:
Currently, while some participants in the proxy voting ecosystem are subject to significant reporting requirements, other participants have no requirements at all and therefore provide no transparency. For example, registered funds are required to publicly file Form N-PX on an annual basis, which discloses a fund’s proxy voting record with respect to portfolio securities held by the fund. Likewise, public companies provide significant disclosure on conflicts and related party transactions in their public filings.
Conversely, proxy advisory firms are not subject to similar disclosure rules, even though they play an important role in the corporate governance ecosystem. These firms provide research and recommendations on the thousands of shareholder votes at U.S. public companies. For context, there were over 25,000 unique ballot items for the Russell 3000 for the year ending June 30, 2018, according to Institutional Shareholder Services (ISS). The research and recommendations of proxy advisors are an important input for many institutional investors. Yet, there currently are no standards or regulations that apply to reports prepared by proxy advisory firms to summarize proxy statements, and provide analysis and recommendations. Notwithstanding general proxy voting guidelines, proxy advisors do not disclose their methodology for their analyses and vote recommendations, and offer limited insight into which companies receive consulting services. Additional disclosure around potential conflicts of interest and how they are mitigated may be warranted.
BlackRock also addresses concerns about information accuracy of PAF reports - proposing that companies be provided at least two business days to correct factual errors before reports are provided to PAFs' investor clients, and an opportunity to include a rebuttal in the final report:
A number of commentators have raised questions about dependability, factual mistakes and incorrect assumptions made in the company research reports issued by proxy advisory firms to institutional clients. This raises concerns as many clients of proxy advisory firms who are voting their own shares or those of their clients rely on the company reports accompanying the proxy advisor recommendation to determine how they will vote.
We recommend that the SEC pursue solutions that ensure accuracy, completeness and a fair and consistent process with regard to the proxy advisory firm’s preparation of its company reports. Given the volume of proxy votes and the compressed time frame of U.S. public company annual general meetings, we recommend exploring technology solutions such as a digital portal for the review of draft company reports. We imagine a scenario where a portal would provide companies at least two business days to correct factual errors prior to the recommendation being issued to clients of the proxy advisory firm. The same portal could also be used to enable companies to submit a “rebuttal” that could be included in the final report.
On shareholder proposals, the letter suggests that disclosure by shareholder proposal proponents of whether they are working with or have appointed another individual or institution to advocate or engage with a company on their behalf - which isn't currently required - could be relevant to PAFs and investors in assessing proposals.
The letter also: (i) notes the costs to companies (and ultimately, all shareholders) associated with managing and responding to shareholder proposals - many of which meet and are resubmitted based on the current initial/resubmission thresholds; (ii) recommends incorporating cost-benefit analyses into the shareholder proposal process - including requiring shareholder proposal proponents to include in their proposal a materiality discussion; and (iii) suggests the SEC use readily-available, private sector-generated shareholder proposal data analyses (or prepare its own) to help inform the dialogue on this topic, which is characterized by vastly divergent perceptions.
BlackRock further distinguishes itself from the pack by reiterating its "engagement-first" approach with its portfolio companies to facilitate understanding and change (where warranted), without resorting to initiating shareholder proposals or activist campaigns.