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Legislative Proposals to Examine Corporate Governance (HR 4015 and Proxy Advisors)

On June 28, 2018, The US Committee on Banking, Housing, and Urban Affairs held a full committee hearing related to corporate governance.

It covered a wide range of topics, most of which have not yet been discussed in the House. Bills discussed would:

  • expand the definition of accredited investor;
  • shorten the Schedule 13D filing window and increase disclosure of short positions;
  • require FINRA to create a relief fund to cover unpaid arbitration awards to investors;
  • draw attention to cybersecurity experience at the board level;
  • address concerns that a gap exists between the time a firm learns of material
  • nonpublic information and its disclosure; and
  • highlight the unique challenges to rural area small businesses.

Of interest, they also discussed the role of proxy advisory firms and a bill which the House has already considered and passed (HR 4015 - the Corporate Governance Reporm and Transparency Act).

This legistration was specifically designed to target longstanding issues identified with the two dominant players in this space (ISS and Glass Lewis) and raised concerns on the conflicts of interest and processes in which both the firms operate.

For example, ISS operate a consulting division to provide advice to companies as to how they can achieve better ISS corporate governance ratings. And while Glass-Lewis does not operate a consulting division, its owned by two activist institutional investors – the Ontario Teachers’ Pension Plan and the Alberta Investment
Management Corporation.

Additionally, the legistation aims to ensure that recommendations are developed based on clear, objective, and empirically-based analysis. More specifically, they raised that both firms do not have a clear producre for providing companies sufficient time to respond to recommentations - in a few examples provided, ISS only gave companies a few hours.

HR 4015 seeks to promote greater transparency around the information that proxy advisors report and the recommendations they make. It requests proxy advisory firms to register with the SEC and disclosemore information to the public to ensure they are making decisions that align with the shareholders they represent.

Under the legislation, proxy advisory firms would

  • need to develop clear procedures and methodologies for the development of voting recommendations
  • both disclose and manage any conflicts of interest they have
  • demonstrate that they have the capability and expertise to provide empirically-based and objective vote recommendations. e.g. ISS has only about 1,000 total employees covering 40,000 shareholder meetings in more than 100 countries. Glass Lewis has roughly 360 employees issuing approximately 20,000 research reports annually.

You can find the full hearing and member statements here.

Legislative Proposals to Examine Corporate Governance (HR 4015 and Proxy Advisors)
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