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There’s tension brewing between shareholders and public companies, thanks to legislation passed by the House of Representatives in late 2017.
Veteran analyst Mike Mayo of Wells Fargo Securities, who has covered the banking industry for decades, thinks the bill — the Corporate Governance Reform and Transparency Act — would put shareholders at a disadvantage, and he’s particularly worried about its implications for the banking sector.
“This is a civil war of capitalism that’s playing out behind the scenes,” Mayo told Yahoo Finance.
Rep. Sean Duffy (R-WI) proposed the bill roughly one year ago. The legislation aims to reduce red tape and bureaucracy in corporate governance, as proxy firms can stand in the way of various corporate decisions, such as CEO pay.
The legislation requires proxy firms, such as Institutional Shareholder Services (ISS), to register with the Securities and Exchange Commission and share research with companies they write about before distributing it to shareholders. The Senate has yet to vote on the legislation, but the House passed the bill with 238 members voting yes and 182 voting no.
For example, if a public company is holding a shareholder vote on its CEO compensation, ISS may conduct research and issue a recommendation for shareholders on how to vote. Under the proposed legislation, ISS must allow the company in question to look over this research.
Mayo worries that this part of the legislation will diminish power wielded by shareholders.
Lorraine Kelly, head of governance solutions at ISS, is concerned about the extra steps the proposed legislation creates for the firm’s roughly 500-person research team.
“The worst thing is that this [new rule causes] delays to the point where the research is no longer helpful to clients or that we feel pressure to include information within that report,” she told Yahoo Finance. “Right now we have a very clear framework around our policies and procedures in our research.”
Kelly acknowledged that some of the mechanics of the legislation remain unclear, such as how long a company would have to review ISS research materials (or research materials from other proxy firms) before it’s distributed to shareholders.
ISS and the Council of Institutional Investors, an advocacy group for pension funds, went so far as launching a website on Oct. 2, ProtectShareholders.org to raise awareness about the legislation. Once visitors submit their contact information, the site sends a message to their Senator urging him or her to vote down this legislation. ISS declined to release the number of people who have submitted their information on the site.