Given the current conflicts of interest, the Swiss Financial Market Supervisory Authority FINMA has declined to regulate proxy firms at this point, leaving it open for the government to propose legislation. asked corporate governance and board compensation experts Michael H. Kramarsch and Dr. Jan Dörrwächter for their assessment of the situation.
Mr. Kramarsch, Dr. Dörrwächter, FINMA opposes stricter regulation of proxy advisory services. According to the authority, it is not their responsibility, but rather the government’s. Are you surprised by this? 
Michael H. Kramarsch: The Swiss exchange (SIX) did actually launch an initiative to increase the transparency of proxy firms’ activities. It did raise the issue of the obvious conflicts of interest and wanted to regulate these in the context of a functioning market. 
... and then started a consultation on its own proposals, which it has now withdrawn? What do you think are the reasons?
Dr. Jan Dörrwächter: No matter if, and to what extent, this decision was influenced by lobbying, as the media would have us believe, we do think that this is a perfectly reasonable decision. FINMA can only influence or regulate are the practices of issuers it has listed. It does not have any direct control over the proxy firms who provide services to these companies. It is only fair that it withdrew its own proposal after comments to that effect had been made in the market.
A storm in a teacup?
Michael H. Kramarsch: Not at all. I see the opener by SIX as a smart move to bring this important issue to the forefront of the current debate about corporate governance, i.e. the activities of proxy firms and the inherent conflicts of interest.
Which conflicts of interest exactly?
Dr. Jan Dörrwächter: This is primarily the conflict of interest that arises when proxy firms also act as consultants to the companies affected by proxy voting. This relates especially to the market leader ISS, who also offers consultancy services on compensation. Glass Lewis, the second of the two most prominent proxy firms, does not offer these services. It rejects them precisely because of the inherent conflicts of interest.
Michael H. Kramarsch: If we look a bit further, we can see that proxy firms have now established themselves as some kind of shadow regime within corporate governance. Not going through the ISS check lists could affect the votes about 30% of shareholders.
This makes them amazingly powerful, and also affects other governance decisions...
Michael H. Kramarsch: Management and supervisory boards alike are alarmed by this prospect. When there are contracts to be extended or terminated in a fiscal year, unholy alliances and astonishing majorities can arise in completely nonsensical areas. This goes against all the rules of good governance.
Dr. Jan Dörrwächter: ... and demonstrates just how complex these situations are. These are not trivial processes, and there are no simple solutions. SIX has recognized this and very cleverly got the politicians involved.
Mr. Kramarsch, Dr. Dörrwächter, thank you very much for this discussion.
* Photo by Ricardo Gomez Angel on Unsplash
Author Dr. Jan Dörrwächter

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