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Jul 11, 2018

Proxy adviser reform act begins process through Senate

Bill passed House of Representatives in December 2017

The US Senate Banking Committee began proceedings in late June to hear the Corporate Governance Reform Act – also dubbed the Proxy Advisory Reform Act – to see whether it can be passed before Congress’ mid-term elections in November.

The House of Representatives passed the bill in December 2017. It is supported by a broad range of business groups, including NIRI, the Society for Corporate Governance, Nasdaq, the NYSE and the US Chamber of Commerce.

The Senate Banking Committee heard testimony about the bill on June 28. This is the first action the Senate has taken since it was referred to the chamber. In order for the bill to pass, it needs to progress through the committee and pass a vote on the Senate floor before November’s mid-term elections, after which the legislative slate is wiped clean.

The bill proposes that proxy advisory firms should be subject to regulation by the SEC as registered investment advisers. ISS is already registered as an investment adviser but Glass Lewis is not.

The bill also asks for greater transparency into proxy advisory firms’ practices – suggesting that there could be conflict of interest between voting recommendations and advisory services – proposes a review process for companies to confirm that voting recommendations are based on accurate information, and calls for greater scrutiny of advisers’ electronic voting systems.  

ISS and Glass Lewis have previously told IR Magazine they feel their influence is being exaggerated. An ISS spokesperson told IR Magazine in May that while the company recommended voting against roughly 12 percent of say-on-pay resolutions at the top 3,000 companies in 2017, just 2 percent failed to pass.

Darla Stuckey, president and CEO of the Society for Corporate Governance, submitted a letter to the Senate Banking Committee ahead of her testimony on several pending corporate governance issues. More than half of the 20-page letter is spent discussing the Corporate Governance Reform Act.

She writes: ‘ISS and Glass Lewis recommendations are the single most influential pronouncement on the composition of a public company’s board, its executive compensation policies and an increasingly diverse range of shareholder proposals.’

Gary LaBranche, president and CEO of NIRI, submitted a similar letter to the committee, in which he praises the legislation and encourages the Senate to consider it.

He writes: ‘This legislation will ensure investors receive more accurate information before they vote their proxy ballots, provide for greater transparency around the proxy firms’ potential conflicts of interest, and ensure all issuers, regardless of their market cap, are treated fairly. NIRI also believes this bill would help foster more IPOs, as a number of private company executives have indicated that the significant influence of unregulated proxy advisers is a deterrent to going public.’

ISS’ CEO, Gary Retelny, also submitted a letter to the Senate Banking Committee, in which he expresses his concern that the bill won’t achieve the stated goals and won’t be cost-effective. ‘The proposed regulatory regime is unnecessary, burdensome and would do nothing to enhance market competition or create market conditions conducive to new proxy advisers entering the market,’ he writes.

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...