At his recent Cooper Union speech on financial reform, President Obama claimed that "these Wall Street reforms will give shareholders new power in the financial system. They'll get a say on pay: a voice with respect to the salaries and bonuses awarded to top executives. And the SEC will have the authority to give shareholders more say in corporate elections, so that investors and pension holders have a stronger role in determining who manages the companies in which they've placed their savings."
Wrong.
As a recent corporate governance commentary by lawyers at Latham & Watkins explains:
Institutional voting of portfolio stocks,for the most part,is no longer in the hands of institutional money managers, except for votes with clear economic significance (such as mergers or election contests).As documented elsewhere in this series of posts, the beneficiaries of Obama-Dodd-Frank financial reform will not be retail investors. Nor will it be institutional investors (such as pension or mutual funds). Instead, the prime beneficiary will the firms that provide proxy voting advice. Since RiskMetrics Group dominates that select group, it will be the main beneficiary of reform. But, as we've asked before, who holds RiskMetrics accountable?
In their place,the vast majority of institutional investors has delegated voting decisions to a separate internal voting function or have outsourced voting decisions to third-party proxy advisory firms.
As a result,institutional investor votes are largely determined by one-size-fits-all voting policies based on perceived corporate governance best practices, without reference to the particulars of each company’s situation. While rare exceptions are made, the default position is determined by voting policies developed either internally by a specialized corporate governance function, or, in a large number of situations, externally by outside proxy advisory firms.
