Proxy advisory firms should be subject to greater oversight, transparency and accountability, argues a new paper from U.S. think-tank the Milken Institute.
The paper, authored by former chief economist at the U.S. Securities and Exchange Commission (SEC) Chester Spatt, argued that the lack of competition and regulatory oversight in the proxy advisory business leave these firms susceptible to conflicts of interest.
“The role of the proxy advisory firms is arguably among the most crucial for corporate governance, but they are subject to very little regulation,” it noted.
It also said that, while proxy advisory firms should make recommendations that aim to maximize shareholder value, their recommendations sometimes reflect other considerations.
“The power of proxy advisory firms may make it difficult for the public companies that are subject to their recommendations, as well as the asset managers that rely on them, to challenge their advice and perspective,” it said.
Among other things, the paper calls for improved disclosure of potential conflicts, requiring greater transparency into voting recommendations and enabling companies to respond to voting advice before shareholder votes take place.
These reforms could come either through regulatory action, legislative action, or voluntary industry efforts, it suggested.
In past years, Canadian regulators have examined a number of issues involving proxy advisory firms and shareholder voting. Their recent reform efforts, however, have focused primarily on improving the mechanisms for proxy voting.