The world of corporate governance and shareholder voting appears to have plumbed new depths this week with charges of fraud being levied against a unit of RCS Capital Corp in relation to shareholder voting. http://www.sec.state.ma.us/sct/current/sctrealtycapital/Realty-Capital-Complaint-11-12-15.pdf

According to the complaint, RCS employees used "fake accents" to pass themselves off as real shareholders in order to meet high pressure management targets for soliciting the maximum number of proxy votes possible.

The complaint runs to a pretty depressing 33 pages - I would recommend everyone takes a look - and in particular page 17 para 82 where 'RCS Employee One' refers to the culture of proxy soliciation at RCS as follows:

"I'm not really sure what it is, but, I mean it was almost sort of indentured servitude...." (not my emphasis btw, it's there in the complaint).

(NB The document is a scanned document image, not a searchable PDF)

This is the second formal regulatory proceeding against proxy voting abuses. Both of which raise troubling questions about attitudes towards shareholder voting and the culture in which such services are provided.

Earlier this year we saw employees at a proxy advisor and a proxy solicitation firm willing to trade "inside information" for tickets to the (US) football.

The proxy advisory firm in question was fined U$300k (and the employee in question, Brain Bennett, pleaded guilty to conspiracy. Bennett is due for sentencing in January 2016 and, according to the U.S. Attorney’s Office, he could face five years in prison, three years of supervised release and a fine of $250,000 or twice the gross gain or loss from the offense.

But what of the managers - or indeed the clients - that put these employees under such pressure that they were either willing to commit crimes or see no alternative ways to manage the process ethically.

The proxy business is often treated as the Cinderella of financial services, heavily dependent on seasonal interns - often working long hours and in some cases for less than minimum wage let alone a living wage. The attraction is that, for some, a spell in proxy could be the start of a more lucrative and desirable career in financial services. This is a toxic combination, not just my view, but also the view of personnel experts such as the UK's Chartered Institute of Personnel & Development (CIPD) in their guidance Tackling Staff Fraud and Dishonesty: Managing and Mitigating the Risks

Beyond the immediate management or regulatory issues, this prosecution should give us all pause for thought. Those of us in the ESG space have no room for complacency about the failings of Big Finance or Big Biz if the fundamental building block of shareholder responsibility and better governance, a shareholder vote, is managed as badly as LIBOR or CDSs.

Either we believe that votes are an asset whose management is a fiduciary responsibility to be discharged with utmost care and attention or just another opportunity for an unsuspecting client rip-off.

What do you think?

Coverage Elsewhere

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