Investors Take Up Abandoned Corporate Governance Regulation
Industry TrendsLegal, Risk, and ComplianceTeam Effectiveness
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April 10, 2017
Industry TrendsLegal, Risk, and ComplianceTeam Effectiveness
Given their large public equity holdings, institutional investors can shape corporate governance without government support in several ways
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Agenda

The Agenda article, “Investors Take Up Abandoned Corporate Governance Regulation,” was co-written by Russell Reynolds Associates Consultants Anthony Goodman and Jack "Rusty" O'Kelley III. They explain that the trend of global institutional investor stewardship will not be slowed. The article is excerpted below. 

As the policy priorities of the Trump administration begin to take shape, it’s clear that a substantive reduction in regulation will be high on the agenda, potentially reversing several changes in corporate governance initiated by Dodd-Frank. Many institutional investors, however, are likely to continue to pursue the governance agendas they have already initiated, despite regulation rollbacks. 

Given their large public equity holdings, institutional investors can shape corporate governance without government support in several ways. They can use public advocacy and direct engagement to propose changes to company bylaws and disclosures, vote against directors and sponsor shareholder proposals. Collectively, these attempts are often called “private ordering.” 

For example, when the SEC abandoned its proxy access proposal, the Boardroom Accountability Project, an investor-led campaign to give shareowners the right to nominate directors at U.S. companies took up the vacated proposal and helped implement it in more than a third of S&P 500 companies in less than two years. 

While some Dodd-Frank reforms are likely to disappear without much of a fight, such as the CEO pay ratio rule and conflict minerals disclosure, other changes are likely to be replaced by private ordering or voluntary enhanced disclosure, such as: 

Say on pay

Dodd-Frank introduced an advisory vote to approve executive compensation, and the option for investors to set the frequency of such votes, with most choosing to do so annually. Since say on pay is an emerging global standard, investors and companies will likely agree to keep it regardless of legal changes. 

Board leadership disclosures 

Dodd-Frank mandated that public companies disclose the rationale for combining or separating the chair and CEO roles. Although investors are often divided on the merits of separation, they tend to agree on the importance of disclosure. The Investor Stewardship Group’s corporate governance code calls for the responsibilities of the independent board leader and the executive chairperson, if present, to be agreed upon by the board, and then to be clearly established in writing and disclosed to shareholders. 

To read the full article, click here.