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1 1 (May 21, 2019)

handle is hein.crs/govzuq0001 and id is 1 raw text is: T Congressional Research Service I fo r g the I les~at've debate since 1914 May 21, 2019 Introduction to Financial Services: Corporate Governance Introduction Broadly speaking, corporate governance is the system through which a public company's objectives and the means for obtaining them are established and monitored by the company's board of directors and management. Structurally, the system constitutes a web of relationships among a firm's management, board of directors, employees, shareholders, and other stakeholders. Two key focal points of corporate governance are the corporate board and the corporate annual meeting. The corporate board consists of a group of individuals elected to be the company's fiduciaries acting on behalf of its shareholders. Along with company executives-such as the chief executive officer-who run the company on a daily basis, the board helps set the tone for the corporation. Overarching board mandates include assisting in setting broad corporate objectives. The corporate annual meeting is a yearly gathering where a company's previous year's performance and future prospects are discussed; its shareholders vote to appoint board members and adopt various shareholder- and management-sponsored business proposals, advocating a particular course of action. Congress is perennially interested in corporate governance. This In Focus introduces and examines several key corporate governance issues-proxy advisory firms, shareholder proposal submission thresholds, and environmental, social, and governance (ESG) disclosures. The Regulation o Corporate Governance States and the Securities and Exchange Commission (SEC) share oversight of corporate governance concerns. State- based business incorporation laws give the states substantial authority over corporate governance matters. Within the parameters of state incorporation laws and under federal securities laws, the SEC oversees the types of information that are available to shareholders voting on proposals at the annual meeting and how such information is disseminated. Notably, most shareholders do not attend corporate annual meetings. Under state incorporation laws-mainly those in Delaware, where most public companies are incorporated- shareholders have the right to appoint a proxy. A proxy is a written authorization that delegates the shareholder's voting power to another person or, more typically, an institution. The Sarbanes-Oxley Act (P.L. 107-204) and the Dodd- Frank Act (P.L. 111-203) significantly broadened the federal regulatory scope in corporate governance that included expanding senior management's responsibility for the quality of a company's financial reporting; expanding the audit committee's independence from management and its responsibility over company auditors; imposing constraints on the services that auditors can provide to public companies; establishing an independent board to oversee auditing practices at public companies; authorizing nonbinding shareholder voting on executive compensation; requiring new compensation-based disclosures; and providing for clawbacks of executive compensation under certain circumstances. Proxy Advisory Firms Proxy advisory firms provide institutional investors with research and recommendations on management and shareholder proposals that are voted on at annual corporate meetings. Two firms-Institutional Shareholder Services (ISS) and Glass Lewis-dominate the proxy advisory business. Unlike Glass Lewis, ISS is a SEC-registered investment advisor subject to added regulations. In early 2019, SEC Chair Jay Clayton stated that the SEC is likely to consider whether (1) institutional investors over rely on ISS and Glass Lewis for voting information and recommendations; (2) public companies (issuers) are given an opportunity to express concerns over certain of their voting recommendations; (3) ISS is properly disclosing and addressing potential conflicts of interest when it provides corporate governance consulting services to issuers; and (4) these firms require additional regulation. Various academics and business interests have criticized the advisory firms on similar grounds. Countering such criticism, the firms have argued that they have little influence over client voting and they have established firewalls that separate their proxy advisory work from the other services they offer. They also stress that the ongoing demand for their services reflects their value to clients. In late 2018, SEC staff withdrew 2004 guidance that described how an advisory firm could be deemed an independent third party that can make recommendations to an institutional investor's investment advisor despite being compensated by that advisor (whose required to vote its client's proxies in the client's best interests). Various observers say that the guidance has helped lead to overreliance on advisory firms. A 2016 Government Accountability Office (GAO) report (GAO-17-47) surveyed market participants and stakeholders on proxy advisory firms. GAO found that, although advisory firms influenced shareholder voting and corporate governance practices, that influence varied based on an institutional investor's size or the nature of the voting policies that were employed. https:!crsreports~cong --sg S

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