Regulating Proxy Advisors is Anticompetitive, Counterproductive, and Possibly Unconstitutional

VEA Vice Chair Nell Minow wrote about a bill passed by the US House of Representatives for Harvard Law School’s corporate governance blog.  An excerpt:

When I left ISS in 1990, both our employees and our clients were in the low two digits. The fact that it became such a powerful international presence in the two decades that followed demonstrates just how badly its customers wanted those products. The fact that other substantial competitors have entered the market shows that there are very low barriers to entry. The firms often disagree with each other. They are transparent and highly competitive about their different approaches, and each does not hesitate in sales calls to explain in detail why their product is superior. Most clients choose the firm that best suits their own policies the rest prefer to do business with more than one and compare the recommendations to assist them in arriving at their own decision. This is exactly what markets do best and there is no reason to interfere.

Corporate executives claim that these firms are too influential, a strange objection to make when they support management recommendations in the overwhelming majority of cases. In the small fraction where they recommend against management recommendations, it is important not to confuse correlation with causation. Clients follow because they agree that in those instances the executives are proposing matters that are not in the shareholders’ interest.There is no evidence that sophisticated institutional investors are abdicating their obligation as professionals and fiduciaries to consider these issues as carefully as they do their buy-sell-hold decisions, also based in part on the opinions of independent analysts. Just as two investors can look at the same data and make different conclusions about whether to buy, sell, or hold, they can look at a proxy advisory recommendation and make a different decision about whether to vote yes, no, or abstain.Corporate executives and Republican Congressional representatives seem stung to discover that investors may not believe management is acting in their best interests and believe that the answer is not to change their behavior or improve their communication but to smother outside analysis of their proposals. If executives object to the recommendations made by the proxy advisory firms, the answer is for them to respond directly and substantively in their communications with their shareholders, not to cut off outside assessment.

The core founding principle of our democracy is freedom of expression. The recent Citizens United decision by the Supreme Court emphasized the importance of unfettered speech, justifying corporate participation in the political process explicitly through its accountability to investors because shareholder objections raised through the procedures of corporate democracy can be more effective today because modern technology makes disclosures rapid and informative (citation omitted). The core founding principle of our economy is to allow the market to determine the value of goods and services. Infringement of either free expression or the free market should only be done in the most extreme circumstances and no such justification is present here.

Most significantly, consideration of this bill included no assessment of any kind of its potential for unconstitutional infringement of First Amendment freedom of speech and of the press. The proxy advisory firms publish reports that include facts, data, analysis, and opinion along the lines of a newspaper or magazine. No one is required to buy their reports or follow their recommendations. The bill’s requirement that these reports include rebuttals from the corporations they are analyzing would be allowing the government to direct the content of their publications, like requiring the New York Times to publish op-eds by the individuals in their news stories.

Source: Regulating Proxy Advisors is Anticompetitive, Counterproductive, and Possibly Unconstitutional

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