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September 27, 2010
NYSE Euronext Issues Report on Corporate Governance
    by Robert Kropp

The exchange's Commission on Corporate Governance recommends board-level commitment to long-term sustainable growth, transparency by institutional investors, and regulation of proxy advisory services.

Culminating a year-long process that began with its formation in 2009 of the Commission on Corporate Governance, NYSE Euronext released the final report of the Commission last week. The Commission was established "to examine core governance principles that could be widely supported by issuers, investors, directors and other market participants," according to NYSE.

The authority of NYSE Euronext in matters concerning corporate governance has a long and storied history, as the report points out. Even before the Great Depression, the exchange required companies to issue annual financial reports, and to submit those reports to third-party verification. Innovation in the corporate governance landscape has continued into the 21st century, when the exchange, acting on the recommendation of its Proxy Working Group, made it a listing requirement that brokers be prevented from voting unrestricted shares in proxy elections without specific instruction from clients.

The Commission was formed in the aftermath of the financial crisis of 2008 and 2009, and its report reflects the urgency of "setting forth certain core governance principles which could be widely accepted and supported." The report's first principle, that the primary objective of a corporate board of directors is to build long-term sustainable growth for shareowners, stands as an explicit corrective for the practices of many financial institutions leading up to the crisis, and has been a central tenet of the sustainable investment community for years as well.

As the report states, "Corporate polices which encourage excessive risk-taking for the sake of short-term increases in stock price performance are inconsistent with sound corporate governance."

Stating that "the right to vote the shares of a company is a basic right and duty of share ownership," the report calls on institutional investors to "establish and disclose their corporate governance guidelines and general voting policies." While many institutional investors need to use third party proxy advisory services, the report acknowledges, doing so does not relieve them "from discharging their responsibility to vote constructively, thoughtfully and in alignment with the interests of their clients."

Specifically addressing the increasing influence of proxy advisory services, the report asserts that such firms should be required to disclose the policies and methodologies used in determining its proxy voting recommendations, as well as all potential conflicts of interest. The report commends the Securities and Exchange Commission (SEC) for its
Concept Release on the US Proxy System, which asked for comments on the role of proxy advisory services in the proxy voting process.

The report also addresses the declining participation of individual investors in the proxy voting process, and calls on the SEC to consider ways to encourage effective and efficient participation in the process by individual investors.

With about 8,000 listed issues, NYSE Euronext's equities markets represent one-third of global equities trading, the most liquidity of any global exchange group.


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