SEC Commissioner David Gallagher delivered a speech before the European Corporate Governance & Company Law Conference, in which he focused on the increasing role that governments play in corporate governance as well as the increasingly prominent influence of proxy advisory firms on how companies are governed and on how shareholders vote.
In his speech, Commissioner Gallagher stated that reactive legislation (as with Dodd-Frank) and the resulting regulatory mandates are often based upon false narratives and in the end “lead to the expansion of a universal law: the law of unintended consequences.” This threat, he believes, is especially acute in the realm of corporate governance, where “the costs of good intentions are actually borne directly by “Main Street” investors.”
Gallagher further asserted that one of the most troubling unintended consequences of stricter corporate governance rules is the rise of proxy advisory firms and the increasing willingness of investment advisers and large institutional investors to rely on such firms to meet their fiduciary duties. He observed that given the increased questions raised about proxy advisory firms, it is important to ensure that advisers to institutional investors are not over-relying on analyses by proxy advisory firms, stating: “policy makers, regulators, fiduciaries, and market participants need to ask tough questions about the current proxy advisory regime.”
Commissioner Gallagher concluded by suggesting the following list of questions for the current proxy advisory regime:
- Does following recommendations by proxy advisory firms increase shareholder value?
- What research do proxy advisory firms conduct to ensure that their recommendations increase shareholder value, and how is that research documented?
- How much transparency should proxy advisory firms provide to subscribers with respect to how such research is conducted?
- Should proxy advisory firms be subject to proxy solicitation rules?
- Do governments provide preferred treatment to proxy advisory firms and advisors that rely on them, and is that appropriate?
- How can proxy advisory firms be held accountable for their recommendations?
- How should proxy advisory firms, and subscribers which use their recommendations, address potential conflicts of interest?
Lofchie Comment: Commissioner Gallagher’s speech raises important issues: (i) as a matter of policy for regulators to consider, (ii) as a matter of practicality for those involved in significant governance disputes to strategize, and (iii) as a matter of fiduciary obligation for investment advisers to weigh the appropriate extent of reliance on the recommendations provided by proxy advisory firms. The impetus for Commissioner Gallagher’s speech appears to have been an academic article on the influence of corporate advisory firms published by the Mercatus Center: “How to Fix Our Broken Proxy Advisory System.”
Click here to view speech in full (links externally to SEC website).