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SEC General Counsel Discusses Impact of Shift in Corporate Governance

SEC General Counsel Brian Cartwright, speaking at the celebration of the establishment of the Arthur and Toni Rembi Rock Center for Corporate Governance at Stanford University, noted that the ground is shifting in corporate governance as more companies adopt majority vote requirements for directors. It is no longer rare for a shareholder proposal to receive a majority of votes, he added. These changes raise new questions, including whether it is time to examine the governance of the intermediaries whose power has grown significantly in recent years. Cartwright cited a report finding that the 100 largest money managers in the U.S. now hold 58% of all stocks. It may be time to question whether these intermediaries are sufficiently faithful to the interests they represent, according to Cartwright, including ordinary Americans with pension plans and interests in mutual funds.

Cartwright raised the possibility that this increasing influence by intermediaries is shifting away from corporations just as they are beginning to improve their corporate governance. If public corporations, which are the engines of the economy, are to be governed by increasingly powerful intermediary institutions, Cartwright pondered the impact of this increasingly concentrated economic power. He suggested the time is right to focus on intermediaries' organization and conduct to ensure that U.S. investors are protected.

Cartwright said that among the areas to explore is the safeguards that are in place to ensure that the managers of these intermediary institutions act in the interests of the individuals they represent rather than following their own agendas, which may be unrelated to the interests of those whose assets they manage. Cartwright questioned the level of accountability and transparency to which the intermediaries should be subject. He also pondered whether individual investors could end up worse off given that the intermediaries may not be subject to the rigors of market competition that influence the behavior of public companies. Could it be that the battlefield has shifted, he asked, but the struggle with agency costs and conflicts of interest has simply moved to another level?