Proxy Advisors vs. the SEC, and ESG Data vs. Narrative
Week Ending 1 November

Part of our job at IHS Markit is to anticipate what information will be the most valuable to you, even before you ask for it.  Since we know you ate an extra Baby Ruth last night, then later snuck one of those big bags of Skittles right before bed, we know your top-of-mind need is an appropriate benchmark to make yourself feel better about those decisions.  Hence – IHS Markit’s annual forecast of Halloween candy spending and pricing is what you’re looking for – total candy spending growth is expected to rise 3.6% to $2.7b for 2019, but pricing is expected to increase, by deduction, if your personal candy consumption exceeded last year at all, that means you’re above benchmark, and hence we’ll expect to see you at the 7 AM spin class at the gym tomorrow morning.  

No broader non-carbohydrate theme this week, but as you'll see below, activity in the proxy advisory world is front and center - after you've read The Autocorrect, you'll be caught up on these and other stories.

 -You have to hand it to the WSJ for a great hook here, Twilight of the Stock Pickers: Hedge Fund Kings Face a Reckoning is an eye-catching headline.  That said, this piece is long on substance too…against a backdrop of HFR’s reporting on three straight years of outflows from equity hedge funds, and nine straight years of hedge funds underperforming the S&P 500 during the long boom, it looks into some of the reasons behind these negative trends, with quotes from managers such as Highfields Capital and Senator Investment Group, as well as investment consultants allocating to them.  Competition, and “herd mentality” in terms of more funds chasing the same number of strategies, is a common response; we liked in particular the comments around low interest rates shrinking the reinvestment rate on short rebates as one detriment to running a long-short portfolio compared to early this decade.  The responses to challenges may be more stirring for the IR community; Senator Investment describes its diversification into shareholder activism to boost returns, as activism has been one of the more consistent outperforming strategies over time.  Great background piece.
IR Best Practices

- If you’ve ever listened to a Business Roundtable discussion, you know the rivalry between corporate managers and proxy advisor firms is so bitter that it might give Freddy vs. Jason a run for its money. Corporate managers claim proxy firms wield far too much influence over corporate action, while their counterparts claim they are necessary to facilitate the fiduciary duty institutional investors have to their clients.

Well, it’s possible the CEOs have won this round. The Financial Times is reporting that the SEC will vote on November 5th to propose new rules that would significantly rein in proxy firms such as ISS and Glass Lewis. Among these proposals is a stipulation that would give companies two chances to review proxy voting materials before being sent out to shareholders as well as an increase to the threshold of approval that re-submitted shareholder proposals are held to.  This has some understandably spooked. "We don't yet know what the SEC will propose, but we are concerned it may reduce shareholder rights," said Ken Bertsch of the Council of Institutional Investors.

Many commenters, including, have been cautious and suggest SEC proposal drafts are often fluid, and there's always a chance the final version looks different for any number of reasons.  However, watch this Tuesday for any new information, as we may see a major step in the regulation of proxy advisers.  (Hayden Jardine)

-Just when you'd had enough, we get a double-dose of proxy advisory this week - we won't guess whether it's a coincidence, but on Thursday, ISS filed suit in US District Court seeking to stop the rollout of the new guidance on proxy advisory firms that was delivered in August.  If you'll remember from the August 23rd Autocorrect, the SEC had stated that proxy advisor recommendations are considered "solicitations" according to SEC regulations that "prohibit any solicitation from containing any statement which, at the time or in the light of the circumstances under which it is made, is false or misleading with respect to any material fact," making proxy advisors liable for the content of their recommendation reports. 

ISS disputes this, and suggests that the SEC has overstepped its authority both to apply this definition, as well as to deliver the impact of this through "guidance" as opposed to the ongoing rulemaking process.  Your general counsel will likely understand the legalese in Cooley's wrap of the suit, which apparently might even have greater implications on how all federal agencies regulate their industries as a whole.  We'll stick with the P&I story for more laymans' terms.  The specific case affects the relationship between proxy advisors and buy-side, not corporates, but if the SEC is found to have overstepped its bounds here, next week's rulemaking might be for naught as well.  We'll keep you "caught up" on this as it develops.

-Let’s latch on to our theme from a couple weeks ago – “when you’re holding a hammer, everything looks like a nail” – but now pretend you’re a revenue-starved municipality looking for politically-viable sources of funding.  Again, we do not talk politics here at The Autocorrect, but this affects your day job – this Bloomberg Law article reviews the local business tax applied by the city of Portland, OR, to companies with a CEO-to-median employee pay ratio of greater than 100:1.  The City of Portland reports that it collected $3.5mm from a 10% surcharge on the city’s business license tax during its first year of operation, enough to attract similar interest from politicians in the City of San Francisco, Washington State, and even national candidates considering similar measures. 

For anyone else, the political opinions can start…right…here.  But, for your company, that pay ratio number you’re producing to meet the SEC mandate now has specific costs attached to it in at least one jurisdiction, and more may be coming down the road.  Given that you’re only publishing this value once per year, if these types of programs start appearing even two or three years out, preparing these values for your 2020 proxy and deciding on an appropriate policy that may help ward off not just media criticism, but costs, now starts to become an important investment in time. 

- One of our common themes around ESG disclosures is the balance between disclosing the “data” and the “narrative."  Investors are looking for comparable data to help them rank risks and opportunities, but they’re also looking for your narrative around what non-financial factors are important to your business and how you’re approaching them, which in some cases helps investors look at the data that actually matters. 

The CFA Institute’s Matt Orsagh does a great job of confirming that thesis in a blog post ESG Analysis: Is judgment more important than data?  Orsagh is speaking for the investment profession, which might tell you that any point of ambiguity in data is an opportunity for an analyst to do their job and add value.  The article quotes analysts from USS, MFS, Manulife, RBC Global Asset Management, and others giving different takes on the work the analyst does even when there is good ESG data available.  Matt, we’ll apologize in advance if we bring forward your punch line too far: “we encountered more than just a few investors who admitted that ESG data needs to be improved,” but saw that “ their judgment around ESG issues was a competitive advantage” that would be lost in a world where ESG data was standardized and improved.  This might echo the thoughts of the IR community – don’t wish too hard for ESG data standardization, you might lose a differentiator if it happens. 

Questions? Comments? Successfully found all twenty-three (23) Halloween-related puns in the IHS Markit Halloween candy spending forecast release? Reach out to your IHS Markit team, or