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1 1 (February 3, 2020)

handle is hein.crs/govbfxt0001 and id is 1 raw text is: ......... , Updated February 3, 2020 Introduction to Financial Services: Corporate Governance 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 comprises 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 annual meeting of the firm's shareholders. 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 and broad corporate objectives. The corporate annual meeting is a yearly gathering where a firm's previous year's performance and future prospects are discussed. At the meeting, a company's shareholders typically vote to appoint board members and adopt, or reject, various shareholder- and management-sponsored business proposals that direct a particular course of action by the firm. States and the Securities and Exchange Commission (SEC) share oversight of corporate governance concerns. In certain sectors of the economy, such as in banking, other regulators might also share oversight. 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) significantly broadened the federal regulatory scope in corporate governance. The law expanded senior management's responsibility for the quality of a company's financial reporting, expanded the audit committee's independence from management and its responsibility over company auditors, imposed constraints on the services that auditors can provide to public companies, and established an independent board to oversee auditing practices at public companies. The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), among its numerous other provisions, expanded the federal regulatory scope by authorizing nonbinding shareholder voting on executive compensation, requiring new compensation- based disclosures, and requiring that board compensation committees be solely composed of independent directors. 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 also a SEC-registered investment advisor subject to added regulations. Various academics and business interests have argued that the advisory firms require additional regulation because (1) institutional investors over-rely on ISS and Glass Lewis for voting information and recommendations; (2) public companies (issuers) are not given an opportunity to express concerns over certain of their voting recommendations; and (3) ISS is not adequately disclosing and addressing potential conflicts of interest when it provides corporate governance consulting services to issuers. Countering such criticism, the advisory 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 earlier 2004 guidance that described how an advisory firm could be deemed an independent third party able to make recommendations to an institutional investor's investment advisor despite being compensated by that advisor (who is required to vote its client's proxies in the client's best interests). Some say that it has helped lead to an overreliance on the firms. On November 5, 2019, the SEC proposed various proxy advisory firm reforms under the Securities Exchange Act of 1934 (P.L. 73-291). Among other things, it would codify controversial SEC guidelines that advisory firm voting recommendations constitute solicitations that are subject to antifraud rules. The firms would also be required to allow subject companies an opportunity to review and respond to their voting recommendations before being given to clients. SEC Chair Jay Clayton said the proposal is intended to increase the accuracy of advisory firm reporting, a view shared by business interests like the U.S. Chamber of ~dN - , gmmw' ggmm , q rq\\ 'M M X 11LULANJILiM,

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