Earlier this summer, the House Financial Services Committee passed the Corporate Governance Reform and Transparency Act (H.R. 5311) by a vote of 41-18, sending the bill on to the full House of Representatives for a vote on a date still to be scheduled.
The bill aims to tighten regulation of proxy advisory firms. It would require proxy advisory firms to provide companies advance copies of their recommendations and most elements of their research. Previewing the analyses would allow a company to lobby the firms to change their recommendation. The bill would also require proxy advisers to resolve complaints through an ombudsman. This could create higher costs for institutional investors with no clear benefits.
Proxy-voting advisory firms, such as Institutional Shareholder Services (ISS) and Glass Lewis, provide data, analysis, and customized recommendations to help investors exercise their ownership right to vote as shareholders. Investors hold an important responsibility to keep corporate boards of directors and management accountable through their proxy vote. [Read more from PERA on the Issues about proxy voting.]
Critics of H.R. 5311, including ISS and the Council of Institutional Investors (CII) (of which PERA is a member), argue that the legislation would undermine proxy-voting firms and weaken public company corporate governance in the U.S. Proxy advisers would be pushed to serve corporate interests at the expense of shareholder interests.
In an editorial calling for the defeat of the legislation, Pensions & Investments argued that “enacting the measure would raise costs significantly, harming proxy advisory firms and the ability of new firms to enter the market.”
“If the [Council of Institutional Investors] believed the bill would enhance corporate governance and performance, its membership would turn out in support of the legislation,” the editorial continued.
Gary Retelny, president CEO of ISS, wrote in a blog post for the Harvard Law School Forum on Corporate Governance and Financial Regulation that “members of the House Financial Services Committee delivered a blow to institutional investors, and, by extension, those on Main Street who invest their retirement hopes, college savings, pension dollars, and other hard-earned money in public companies.”
“The [Securities and Exchange Commission] has long taken the position that proxy advisory firms should be regulated as fiduciary investment advisers and the U.S. Labor Department recently confirmed that proxy advisers provide fiduciary investment advice,” Retelny continued.
“However, H.R. 5311… would sever the fiduciary bond between proxy advisers and investors. The bill would effectively grant a veto to company executives who do not like a proxy adviser’s report or opinion on issues on which shareholders vote (such as the CEO’s pay). The bill would allow corporations to block the distribution of any proxy advisory report or opinion with which they disagree,” Retelny concluded.
[Read about the PERA Board of Trustees’ support for a Department of Labor rule that would strengthen fiduciary standards for investment advisers.]To follow H.R. 5311 as well as other federal and state legislation that might impact Colorado PERA or other institutional investors and public employee retirement plans, visit our Legislation page of PERA on the Issues.
Proxy votingThe process by which shareholders can vote on corporate proposals without being present at a shareholder meeting.FiduciaryA person who manages money on someone else’s behalf and who has a sworn responsibility to manage those funds in the best interest of the client.
Don’t expect the House Financial Services Committee, under Republican leadership, to do anything that supports investor or consumer protection. Their goal is to completely eviscerate all of these protections. There is no better example than the efforts to gut Dodd Frank Wall Street reforms, as well as hamstring the Consumer Financial Protection Bureau.