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US regulator aims to revitalise shareholder democracy

US regulators want to revitalise shareholder democracy by ensuring the views of Main Street investors on issues such as climate change and executive pay are accurately reflected by investment managers.

Allison Herren Lee, acting chair of the Securities and Exchange Commission, said it was time to ensure that small investors were able to hold companies and their top executives to account by improving the transparency and disclosure standards governing shareholder votes.

In a speech entitled “Every Vote Counts” at an Investment Company Institute conference last week, Lee said there was “a lot of work to do” to ensure the US system of shareholder democracy functioned in the interests of ordinary investors.

Almost half of US households own a mutual fund, up from 6 per cent in 1980, concentrating huge power into the hands of asset managers responsible for voting investors’ shares at company meetings.

Ordinary investors, however, have little say in the development of voting policies of asset managers or proxy advisers.

“Our regulations have not kept up with this new landscape of institutional investor-driven corporate governance,” said Lee.

Massive inflows into passive tracker funds and surging demand for sustainable investment strategies have complicated the issue of shareholder democracy because it was unclear whether fund managers were reflecting investors’ views on environmental, social and governance issues when voting, she said.

BlackRock said in December it would support more shareholder resolutions on climate and social issues following years of criticism of its voting record.

The world’s largest asset manager supported just 6 per cent of environmental proposals filed by shareholders globally in the 12 months to June 2020, down from 8 per cent in the previous year, according to the data provider Proxy Insight.

SEC staff have been asked to assess options for simplifying and clarifying Form N-PX, the regulatory report detailing proxy votes which has been widely criticised as unwieldy since it was introduced almost two decades ago.

Investment managers could also be required to disclose their votes on executive pay on the new form.

The language used in shareholder proposals has also presented problems for retail investors trying to formulate an accurate picture of how a fund voted on ESG issues, according to the SEC.

“Retail investors need more meaningful insight into how their money is voted. That insight is more important than ever with the growth of interest in ESG shareholder proposals,” said Lee.

The very large number of participants that are usually involved in shareholder votes has led to criticisms of their accuracy and timeliness. Both of these problems could be addressed by the use of blockchain ledger technology, suggested Lee.

The SEC established a new climate and ESG task force earlier this month. The analysis of disclosure and compliance issues relating to ESG strategies of investment funds is one of its responsibilities.

Two commissioners, Hester Peirce and Elad Roisman, have jointly questioned the “extra fanfare” around ESG from the SEC, arguing that the regulator should have gathered more evidence before establishing the task force.

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