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Tuesday, August 4, 2020

ANALYSIS/OPINION:

Despite the media’s incessant focus on the presidential candidates themselves, presidential elections are more than popularity contests. Whoever occupies the White House brings with them a team of literally thousands of federal appointees, from U.S. Supreme Court and lower court nominees, to cabinet heads, agency heads and agency staff. You’re voting for a team, not an individual, when you vote for president.

And because Congress has failed as an institution to assert its constitutional mandate to shape policy by passing meaningful legislation, the real policy making has fallen to the executive branch, the courts and to the federal agencies.


That’s why many people who were uncomfortable with various aspects of Donald Trump’s personality still voted for him for president. They realized that it wasn’t just Mr. Trump they were voting for, but his policies and the people he would appoint to implement them. 

While Supreme Court justices get the most attention, federal agencies such as the Environmental Protection Agency (EPA), the Federal Communications Commission (FCC), the Federal Trade Commission (FTC) and many other agencies have done yeoman’s work under President Trump to remove harmful and unnecessary regulations.

Among many other accomplishments, the EPA has rolled back nonsensical regulations such as the Obama administration’s Clean Power Plan, the FCC has rolled back President Obama’s net neutrality and Title II Internet reclassification, and the Treasury Department has undone some of the Dodd-Frank legislation’s most harmful regulations on the financial services industry.

But sometimes new regulations are needed to address problems that arise, and even here the Trump administration is succeeding. Last week, the Securities and Exchange Commission (SEC) adopted a new, long-overdue rule reining in abuses within the obscure but important world of proxy advisory services. The new rule is the result of a years-long process at the SEC.

Mr. Trump’s appointee to head the SEC, Jay Clayton, advanced the new rule that will help protect ordinary, “Main Street” investors from having their investment returns reduced and their control over their investments diluted by a tiny number of proxy advisory services that have no legal fiduciary obligation, and thus are not required to act in the best interests of their clients, including ordinary investors, yet which have gained enormous influence.

Mr. Clayton presided over a careful and rigorous process in considering the rule, including an extensive fact-finding roundtable, numerous meetings with stakeholders and interested parties, and almost 1,000 comments and letters from corporations, academics, think tanks, asset managers and retail investors.

The result of this process was an understanding that a small number of proxy advisory services have gained inordinate power over corporate governance by making recommendations to institutional and small investors and enabling institutional investors to “robo-vote” on their recommendations without carrying out any due diligence.

The problem is, these recommendations are often directly contrary to the best interests of the shareholders, including millions of small investors who own shares through pension funds, private retirement savings and through mutual funds.

That is because proxy advisers often find themselves in league with ideologues who want to force corporations to pursue political criteria for corporate governance. These are non-financial criteria that are at best unproven but often contrary to maximizing returns for shareholders, which has traditionally been the primary responsibility of corporate governance.

For example, the services might insist that corporations pursue subjective policy goals — including divesting from fossil fuels, social justice aims, gender and diversity mandates, and other non-financial standards of corporate governance instead of shareholder value.

Robo-voting means these proxy recommendations are supported by default even by passive investors. At the very least, dealing with these proposals under the threat of robo-voting ties up executives and distracts them from the day-to-day responsibilities of maximizing shareholder value. Worse, investors can actually support measures that will be damaging if they don’t carry out their due diligence before voting.

Current law and regulations permit this distortion in the corporate governance process, and that’s why it’s yet another regulatory success that the SEC implement a new rule that regulates proxy advisory services.

The goal of the regulatory system should be that consumers and investors are protected from demonstrated harm while maintaining dynamic, vibrant free markets. Most often that requires the elimination of harmful regulations, but occasionally the application of new, rational regulations designed to carefully target demonstrated problems. The SEC’s new proxy voting rule is a great example of the latter, and of why electing the right people matters.

• Tom Giovanetti is president of the Institute for Policy Innovation, a free market think tank based in Irving, Texas. 


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