Pension funds and other asset owners and managers attending the Council of Institutional Investors conference in Chicago heard speakers warn of conflicts of interest for proxy advisory firms, draw attention to the poor internal governance of many institutional investors and discuss tougher enforcement actions by the Securities and Exchange Commission.
Proxy-voting advisory firms should spin off their businesses that advise companies on corporate governance to avoid the conflicts of interest of trying to serve two different sets of clients — institutional investors and corporations — said Nell Minow and Richard Koppes, speaking Sept. 27 before some 400 attendees at the conference.
“It is idiotic” to have a business with such conflicts, said Ms. Minow, co-owner and director of GMI Ratings, a firm whose focus includes corporate governance research and analytics. “I hope they will split, and both parts will be the better for it,” Ms. Minow said, referring to Institutional Shareholder Services Inc., the only proxy-advisory firm they mentioned.
Mr. Koppes, program fellow, Rock Center for Corporate Governance at Stanford Law School, and senior adviser at CamberView Partners, said he agreed with such a split.
But both expressed opposition to regulation of proxy-advisory firms.
“I am beyond furious at the attacks on proxy advisers,” Ms. Minow said. “It is the height of hypocrisy for these nitwits who keep blathering about the beauty of the free market and want to impose themselves on the free market and (call for) government regulation on (proxy-advisory firms).”
Sophisticated investors “are happy” with the product, she said. “What is the government's business to tell them what they can or cannot do? They are already registered as investment advisers. It is unquestionably an effort by the business community to shut up their critics.”
Mr. Koppes said he also is opposed to regulating the firms.
Ms. Minow acknowledged there is a “pseudo-monopoly” of one firm, ISS. The reason is because the market prefers its product more so than that of its competitors, she said.
Ms. Minow and Mr. Koppes made up a panel devoted to a wide-ranging discussion about governance.
On the internal governance of institutional investors, Ms. Minow said: “The governance of many institutional investors, pension funds, stinks. It needs to be cleaned up.” Mr. Koppes agreed, adding, “People in glass houses shouldn't be throwing stones.”
A day earlier at the conference, Mary Jo White, SEC chairwoman, said the SEC plans to strengthen enforcement to deter wrongdoing and to enhance confidence in the markets.
“Expect to see more actions relating to sophisticated trading strategies, dark pools and other trading platforms in the coming year.” The SEC has “zero tolerance for any glitches in the system,” she said.
The SEC “must be aggressive and creative in the way we use the enforcement tools at our disposal,” using “all available means to detect and pursue violators,” Ms. White said.
“We will be taking advantage of tips from whistle-blowers, using quantitative data available to us, and conducting sweeps and other means of uncovering misconduct,” she said.
Speaking of the steps SEC is taking to strengthen its enforcement, Ms. White said the regulator must cover the “whole market.” The SEC needs to have “a presence everywhere and be perceived to be everywhere, bringing enforcement actions against violators in every market participant category and in every market strata.”
“A robust enforcement program is critical to fulfilling the SEC's mission to instill confidence in those who invest in our markets and to make our markets fair and honest,” she said.
The SEC expects to see more financial firms seek to go to trial because of the regulator's increased demand for admissions of guilt in wrongdoing, instead of an exclusive no-admission/no-deny wording in settlements.
“But that will not deter us,” Ms. White said.
“Significant and consistent trial wins also give us the credibility we need to achieve strong and meaningful settlements in every area that we will be pursuing in the coming years.” n