The Corporate Governance Field - A Pathway to a Better Future

Under current conditions in the Proxy Advisory field, we have major corporations controlling major swaths of the industry. One firm distributes materials on behalf of the issuers, advises issuers on the best way to structure proxy materials to obtain support, advises investors on how to vote, provides the platform for casting votes, acts as a tabulator to inform issuers on the results of the votes, and processes reports funds make on how they voted. Another major firm does all of the above but acts as a distributor mainly in international markets. What could possibly be wrong with this system?

The core issue is that there are fundamental conflicts of interest in the various roles. From the investors’ perspective, they want management to serve their interests in the most effective manner. From the Board of Directors’/ management’s perspective, they want to be paid handsomely and minimize the hassle. From a processor’s perspective, they want to be well-paid, with little interference.

Unfortunately, there have been breakdowns, but given the rather closed nature of the business, it is rare that those breakdowns come to light. A 2023 piece in the Wall Street Journal stated, “a new study by the American Council for Capital Formation shows Glass Lewis and ISS make material errors in their recommendations to investors.”

In contrast, in an eerily similar business, there are massive checks and balances. In the investment field, there are strict limits on the various roles. For example, a clearing house (such as the Depository Trust Company) does NOT act as an investment manager, stockbroker, nor stock exchange. Likewise, typically the investment manager does not engage in the other roles. While most people are honest, the structural separation is there to minimize the conflicts of interest.

While change is hard, there is little reason why the critical area of corporate governance cannot install simple safeguards. Perhaps there has to be a transition period, but the current arrangement provides little comfort and requires reorganization.