SEC Commissioner Daniel Gallagher recently gave a great speech on the problems posed by the creeping federalization of corporate law, in which he noted that:
Although the stated purpose of Sarbanes-Oxley was to help protect investors, if you were to ask executives and boards of directors today who they believed were the biggest beneficiaries of the passage of the Act, many would answer that it was accountants, foreign markets, and lawyers that truly benefited. One example relates to compliance with Section 404 of Sarbanes Oxley, which the Commission estimated would cost on average roughly $91,000 a year to implement.5 Section 404 of Sarbanes-Oxley (in conjunction with the related PCAOB Auditing Standard 2) caused a fury when the associated costs of compliance ended up being substantially higher than anticipated by policymakers. Most of the costs related to auditors, who were perhaps overly cautious in the wake of the failure of Arthur Andersen. Or maybe they simply found Section 404 compliance to be a lucrative new revenue source. ...
Proxies today are remarkably different than they were twenty, ten or even five years ago. Disclosure requirements have made them increasingly longer, more technical and more difficult to read. I have no doubt that many – indeed, most - retail investors find it too time consuming and daunting to attempt to dissect the issues they must vote on. This phenomenon is paralleled by the rise of proxy advisory firms and the increasing willingness of investment advisers to large institutional investors to rely on such firms to do this work for them.
In addition to raising the vital question of whether advisers are fulfilling their fiduciary duties when they rely on recommendations from proxy advisory firms – a question I don’t have time to address today but one to which I hope you all give serious thought – this shift by institutional investors has resulted in increased influence by proxy advisory firms over investors and the companies in which they invest. The Dodd-Frank mandated say-on-pay requirement has only increased this influence. As Professor Stephen Bainbridge wrote in his article Quack Federal Corporate Governance Round II, the proponents of say-on-pay ignore “the probability that say-on-pay really will shift power from boards of directors not to shareholders but to advisory firms[.]”7
5 Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779, 1781 (2011). ...
7 Bainbridge supra note 5 at 1811.
Do go read the whole thing. It's concise and clear. Also, of course, I hope you'll read Dodd-Frank: Quack Federal Corporate Governance Round II.
