[Senate Hearing 115-455]
[From the U.S. Government Publishing Office]


                                                   S. Hrg. 115-455
                                                           

  PROXY PROCESS AND RULES: EXAMINING CURRENT PRACTICES AND POTENTIAL 
                                CHANGES

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                                   ON

    EXAMINING SEVERAL ASPECTS OF THE CORPORATE PROXY VOTING SYSTEM, 
 INCLUDING THE ROLE OF PROXY ADVISORY FIRMS, THE SHAREHOLDER PROPOSAL 
              PROCESS AND RETAIL SHAREHOLDER PARTICIPATION

                               ----------                              

                            DECEMBER 6, 2018

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  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


Available via the World Wide Web: http://www.govinfo.gov
                    
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
34-527 PDF                  WASHINGTON : 2019                     
          
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
JERRY MORAN, Kansas                  DOUG JONES, Alabama

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                  Jonathan Gould, Deputy Chief Counsel

                  Jen Deci, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                 Elisha Tuku, Democratic Chief Counsel

                       Dawn Ratliff, Chief Clerk

                      Cameron Ricker, Deputy Clerk

                     James Guiliano, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       THURSDAY, DECEMBER 6, 2018

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    26

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
        Prepared statement.......................................    26

                               WITNESSES

Daniel M. Gallagher, Chief Legal Officer, Mylan N.V. and Former 
  Commissioner, Securities and Exchange Commission...............     4
    Prepared statement...........................................    28
    Responses to written questions of:
        Senator Warner...........................................    63
Michael Garland, Assistant Comptroller for Corporate Governance 
  and Responsible Investment, Office of the New York City 
  Comptroller Scott Stringer,....................................     5
    Prepared statement...........................................    45
    Responses to written questions of:
        Senator Warner...........................................    64
Thomas Quaadman, Executive Vice President, Center for Capital 
  Markets Competitiveness, U.S. Chamber of Commerce..............     7
    Prepared statement...........................................    52
    Responses to written questions of:
        Senator Warner...........................................    72

              Additional Material Supplied for the Record

Letters to the Committee submitted by Chairman Crapo and Senator 
  Brown..........................................................    75

                                 (iii)

 
  PROXY PROCESS AND RULES: EXAMINING CURRENT PRACTICES AND POTENTIAL 
                                CHANGES

                              ----------                              


                       THURSDAY, DECEMBER 6, 2018

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. The Committee will come to order.
    Today's hearing will focus on several aspects of our proxy 
voting system, including the role of proxy advisory firms, the 
shareholder proposal process and retail shareholder 
participation.
    As SEC Chairman Clayton noted earlier this year, 
shareholder engagement is a hallmark of our public capital 
markets, and the proxy process is a fundamental component of 
that engagement. I commend the SEC for its ongoing attention to 
this issue, including its recent staff roundtable on the proxy 
process and rules, and I encourage them to move forward with 
their reform efforts.
    Many of these rules have not been examined for decades. In 
that time, there have been a number of changes to the proxy 
environment, including the growing influence of proxy advisory 
firms and fund managers on voting outcomes and, more generally, 
corporate behavior.
    There has also been a rise in the number and substantive 
scope of proposals pursuing an environmental, social, or 
political agenda. Many of these proposals have little or 
nothing to do with a company's financial performance or 
shareholder value, but companies and investment advisors alike, 
nevertheless, devote time and resources to evaluate these 
proposals, often relying upon proxy advisory firms or other 
consultants to assist them and reduce their costs.
    It is time to reexamine the standards for inclusion of 
these proposals as well as the need for fiduciaries to vote all 
proxies, on all issues in light of the proliferation of 
environmental, social, or political proposals, and the rise of 
diversified passive funds.
    Chairman Clayton has also expressed concerns that the 
voices of long-term retail investors may be underrepresented or 
selectively represented in corporate governance.
    According to an SEC staff estimate, retail investors own 
roughly two-thirds of Russell 1000 companies, often through 
mutual funds or pensions. But it is not always clear whether 
the proxy rules promote the long-term financial interests of 
those retail investors, many of whose interests are expressed 
through intermediaries.
    Last week, John Bogle, the creator of the index fund, 
warned that if historical trends continue, a handful of giant 
institutional investors will one day hold voting control of 
virtually every large U.S. corporation.
    With this level of concentration and intermediation, it is 
even more important that the proxy voting process and voting 
decisions of fiduciaries reflect the clear economic interests 
of the retail investors on whose behalf these institutional 
investors engage.
    I look forward to hearing the views of our witnesses on 
these and other proxy-related issues, and I thank them for 
their willingness to appear here today.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman.
    Thanks to our three witnesses.
    All too often, we see corporate boards and executives focus 
on short-term profits instead of long-term investments in their 
companies and their workers.
    We saw very painful and clear evidence of that this week. 
General Motors announced it would lay off 14,000 workers and 
close five plants. Ohio, the number two GM State in the country 
for decades, no longer, if GM continues with this, will 
assemble any of their vehicles in Ohio.
    The Chevy Cruze plant in Lordstown is slated to lose jobs. 
In the last 2 years, GM has laid off nearly 3,000 workers at 
the Lordstown plant. This most recent decision suggests they 
will lay off another 1,500, the whole workforce. The decision 
is devastating for the Mahoning Valley, a three-county area 
with about 500,000 people.
    Meanwhile, GM has spent more than $10 billion on stock 
buybacks--$10 billion on stock buybacks since 2015, double what 
it expects to save from the cuts and the plant closings. 
Lordstown workers and their families and the supply chain 
company workers and the owners of many of those companies are 
angry.
    The President claimed last year's Republican tax bill would 
mean more money in workers' paychecks, but instead, we have 
seen these stock buybacks explode this year to a record $894 
billion. Executives claim these record buybacks are supposed to 
reward shareholders. They do not seem interested, however, in 
hearing from shareholders when they raise concerns.
    The bad corporate decisionmaking does not stop with GM and 
with buybacks and layoffs. Marriott announced on Friday, it had 
a data beach between 2014 and 2016, affecting 500 million 
customers. It only discovered that in September of 2018.
    Cyber breaches are so common now that it is routine for 
Wall Street analysts to estimate the stock price hit, companies 
will take in the week after they have announced a breach. Then 
it is
business as usual. It does not even matter that companies 
cannot secure their customers' personal information.
    These are just the most recent examples of corporate 
mismanagement and abuse of workers and customers.
    Excessive executive compensation packages, abuses and 
scandals that can wreck customers' financial lives like we have 
seen at Wells Fargo, price gouging for vital prescription drugs 
like we have seen at the company Mr. Gallagher works for, it is 
clear these corporations are not making good decisions for 
their companies, for their customers, for their workers. It is 
why we should foster more shareholder engagement, not less.
    But that is not how corporate lobbyists and special 
interests see it. The Wall Street business model does not see 
workers like those in Lordstown as vital to their company. They 
see them as cost to be minimized.
    But, incredibly, we are here today to discuss how to make 
it even more difficult for shareholders to hold management 
accountable. Several bills introduced this Congress undermine 
shareholder oversight of the companies they own. These measures 
would deny all but the largest shareholders the right to submit 
proposal for a vote, requiring investors to own billions of 
dollars of stock to be eligible to submit a shareholder 
proposal.
    Current rules permit small shareholders to submit 
proposals, but apparently, folks in this town want to stack the 
deck even more. Every day, there is another attempt to stack it 
even further against Main Street, against small-time investors.
    This hearing will consider proposals that make it harder 
for institutional investors to have timely access to research 
and analysis from proxy advisory firms that the investors have 
hired. These proposals would give corporate interests access to 
this information before the public retirement systems, 
investment fund managers, and foundations who manage money for 
hardworking Americans. And what is fair about that?
    You will hear about errors and inaccuracies in those 
reports, but what it really amounts to is an effort to make an 
independent analysis less so. That is just the wrong answer.
    Shareholders of all sizes deserve to have every tool 
available to hold executives accountable, forcing them to think 
beyond their short-term self-interest and manage for the long 
term. Companies and shareholders and workers and other 
stakeholders all benefit when the system promotes fairness and 
communications and trust.
    Mr. Chairman, before I finish, I wanted to note that 
Senator Reed must leave for another committee. I want to take a 
moment to thank him for his work on a bipartisan bill on proxy 
advisors and ask him to describe his bill briefly, and, Mr. 
Chairman, I appreciate your willingness to do that.
    Jack.
    Chairman Crapo. Thank you.
    Senator Reed. Thank you, Mr. Chairman, and thank you, 
Ranking Member Brown, not only for holding this hearing, but 
for giving me an opportunity to speak, as I must go to another 
Armed Services committee meeting.
    Investors have been clear that continued access to proxy 
advisory firms is critical. Given this, it is important that 
proxy advisory firms are appropriately regulated and held 
accountable.
    That is why I am very pleased that Senators Perdue, Jones, 
Tillis, Heitkamp, and Kennedy have joined me in introducing S. 
3614, the Corporate Governance Fairness Act, which preserves 
the vital role played by proxy advisory firms, but also holds 
these firms accountable to investors.
    In addition to the broad bipartisan support here for the 
legislation, a wide range of stakeholders, including the 
Consumer Federation of America, SEC Investor Advisory Committee 
member John Coates of Harvard Law School, the New York Stock 
Exchange, and the Society for Corporate Governance also support 
the Corporate Governance Fairness Act.
    I thank all the stakeholders for this, particularly my 
colleagues, Senators, Perdue, Heitkamp, Tillis, Jones, and 
Kennedy. Thank you all.
    And, again, I thank the Chairman for his graciousness. 
Thank you very much.
    Chairman Crapo. Thank you, Senator Reed and Senator Brown.
    And also, again, thank you to our witnesses for agreeing to 
be here and to share with us your expertise.
    Our witnesses today--and we will have them speak in the 
order I introduce them--are the Honorable Daniel M. Gallagher, 
Chief Legal Officer of Mylan N.V. and former Commissioner, U.S. 
Securities and Exchange Commission; Mr. Michael Garland, 
Assistant Comptroller, Corporate Governance and Responsible 
Investment in the Office of the Comptroller of New York City; 
and Mr. Thomas Quaadman, Executive Vice President of the U.S. 
Chamber Center for Capital Markets Competitiveness.
    And to each of our witnesses, as you know, your testimony 
has been entered into the record, and we encourage you to pay 
attention to the clock, so that you do not go over 5 minutes in 
your oral presentations, so that we will have opportunities for 
the Senators. And I again remind our Senators, they have a 5-
minute clock too.
    With that, Mr. Gallagher, you may proceed.

 STATEMENT OF DANIEL M. GALLAGHER, CHIEF LEGAL OFFICER, MYLAN 
     N.V. AND FORMER COMMISSIONER, SECURITIES AND EXCHANGE 
                           COMMISSION

    Mr. Gallagher. Thank you, Chairman Crapo.
    Chairman Crapo, Ranking Member Brown, and Members of the 
Committee, it is an honor to be here today to discuss the 
critically important issue of corporate proxy voting.
    During my tenure as an SEC commissioner, few issues 
generated as much discussion and controversy as the various 
facets of the proxy voting system, and I was recognized for 
actively engaging on those issues. That is why I was invited 
here today to share my views on the three issues identified in 
the invitation letter and how the SEC can, or should, respond 
to these issues.
    This is very important, as more than 3 years after I left 
the Commission, these issues have become even more pronounced 
from so-called ``proxy plumbing issues'' to the concerns about 
the role of proxy advisory firms. The intensity of the debates 
is evidence of the importance of these issues to U.S. 
investors, corporations, policymakers, and ultimately the U.S. 
economy.
    Many of these issues are exactly the types of technical 
matters that independent agencies like the SEC were created to 
address, subject to congressional oversight, and I am happy to 
tell you that the current Commission is exceptionally well 
situated to fix many of the problems related to proxy voting.
    Chairman Clayton has proven to be a strong principled 
leader of the agency, and his fellow commissioners have deep 
expertise in the proxy voting area. The relevant senior staff, 
including Division of Investment Management Director, Dalia 
Blass, and Division of Corporation Finance Director, Bill 
Hinman, are incredibly capable leaders and experts on proxy 
voting issues.
    Despite the SEC's expertise in this area, however, the 
Commission is operating within a very antiquated statutory 
framework when it comes to proxy voting.
    Accordingly, and certainly with respect to certain high-
impact issues such as the ever increasing importance of proxy 
advisory firms, the time is right for meaningful congressional 
attention. And so I am very happy that this Committee is 
focusing its limited time on these issues.
    Indeed, I will note at the outset that Members of this 
Committee are working on bipartisan legislative efforts to 
address the proxy advisory firm concerns, and the House is 
similarly focused on these issues and has passed bipartisan 
bills that provide solutions to many critical proxy voting 
problems.
    I hope that effective legislation can, if needed, be 
enacted in the near future.
    Thank you again for inviting me here today, and I look 
forward to answering any questions you may have.
    Chairman Crapo. Thank you very much, Mr. Gallagher.
    Mr. Garland.

    STATEMENT OF MICHAEL GARLAND, ASSISTANT COMPTROLLER FOR 
CORPORATE GOVERNANCE AND RESPONSIBLE INVESTMENT, OFFICE OF THE 
            NEW YORK CITY COMPTROLLER SCOTT STRINGER

    Mr. Garland. Thank you, Member Brown and Members of the 
Committee.
    I am the Assistant Comptroller for Corporate Governance and 
Responsible Investment in the Office of New York City 
Comptroller Scott Stringer. Comptroller Stringer serves as a 
trustee to four of the five New York City public pension funds 
and as the investment advisor and custodian to all five, which 
collectively have more than $200 billion in assets under 
management. These five independent pension funds provide 
retirement security to more than 700,000 of the city's active 
and retired teachers, police, firefighter, and other employees. 
It is an honor to be invited to provide this Committee with our 
perspective on important matters of shareowner responsibility.
    Because of our long investment horizon and largely indexed 
investment strategy, we cannot readily sell shares in a company 
at which we have concerns. In those instances, the most cost-
effective way we can protect and create long-term shareowner 
value is to be an active owner by exercising our rights, our 
legal rights, as shareowners. Therefore, we actively vote our 
proxies at each portfolio company and actively engage our 
portfolio companies mainly through shareowner proposals and 
dialogue ensuing from those efforts.
    Our capacity to fulfill these fiduciary responsibilities to 
our beneficiaries relies heavily on the timely receipt of 
expert independent proxy research and our longstanding ability 
to submit shareowner proposals.
    The unfounded suggestion from critics is that when it comes 
to voting proxies, which are considered plan assets under 
relevant fiduciary law, sophisticated institutional investors 
whose job it is to manage billions of dollars of investment 
capital are like lemmings, blindly following the 
recommendations of proxy advisors in a proxy vote decision-
making.
    This does a great disservice, and I want to disabuse 
Committee Members of the notion that the argument of undue 
proxy advisor influence has merit. Although I assess the 
largest proxy advisory firm, recommended voting against say-on-
pay proposals at 12.3 percent of the Russell 3000 in 2018, only 
2.4 percent of those companies received less than majority 
support on their say-owner proposals.
    For the year ending June 30, 2018, our office cast 71,000 
individual ballots at 7,000 shareowner meetings in 84 markets 
around the world. In the U.S. market, every ballot item is 
individually reviewed and voted on by our experienced staff. 
All votes are cast according to our own guidelines, 
irrespective of the proxy advisors' recommendations. Our 
ability to apply our own guideline rests, in large part, on a 
timely receipt of the expert research we receive from our proxy 
advisors, which presently included both Glass Lewis and ISS.
    Because different companies present key information in 
different ways and places, we rely on our advisors to pull 
information to a consistent format that enables quick reference 
to comparable data.
    As an example of our independence, while the New York City 
funds voted against say-on-pay at 25.4 percent of our U.S. 
portfolio companies for the year ending June 30, 2018, ISS only 
recommended against say-on-pay at 16.7 percent of those 
companies.
    In our view, additional regulation of proxy advisors would 
likely increase our cost and delay our receipt of research, 
with no clear benefit to our process.
    Our funds have filed more than 1,000 shareowner proposals, 
almost certainly more than any other institutional investor in 
the world, and our proposals have led to significant market 
changes that benefit long-term shareholders.
    For example, largely in response to the Boardroom 
Accountability Project launched by Comptroller Stringer and the 
New York City funds in 2014, roughly 540 companies, including 
70 percent of the S&P 500, now have proxy access bylaws, up 
from about six companies when the project was launched. Proxy 
access allows shareowners to nominate one or more directors to 
a company's board using the company's proxy and ballot.
    A July 2015 study by economic researchers at the SEC 
analyzed the public launch of the Boardroom Accountability 
Project and found that 0.5 percent average increase in 
shareowner value at the first 75 firms that received proxy 
access shareowner proposals from the New York City funds.
    In response to a shareowner proposal in 2013, we 
successfully negotiated an enhancement to Wells Fargo's 
clawback policy. Those changes enabled the Wells Fargo board to 
announce in September 2016 that it would recoup $60 million 
from two senior executives in order to hold them financially 
accountable for the fake account scandal that has caused 
significant financial and reputational harm to the bank.
    But large institutional investors do not have a monopoly on 
good ideas. In our view, shareowners of any size should have 
the opportunity to use the shareowner proposal process.
    Additionally, our track record shown in our proposals to 
prohibit workplace discrimination based on sexual orientation 
and gender identity has shown that there are good reasons for 
not increasing the resubmission thresholds. It can take many 
years to build investor support for a shareowner proposal.
    In summary, we believe critics of shareowner proposal 
rights and proxy advisors are seeking to remedy problems that 
do not exist.
    Thank you again for the opportunity to testify today. I 
look forward to your questions.
    Chairman Crapo. Thank you, Mr. Garland.
    Mr. Quaadman.

STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER 
 FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairman Crapo, Ranking Member 
Brown, Members of the Committee. We appreciate this Committee's 
continued focus on removing obstacles that prevent businesses 
from growing from small to large.
    The 20-year decline of public companies has brought 
economic consequence. The 2012 Kaufmann Institute study found 
that between 1996 and 2010, 2.2 million jobs were created by 
businesses that went public. Additionally, in the 1980s and 
1990s, mainstream investors directly benefited from IPOs. 
Today, companies go public at a much later stage, shutting 
those mainstream investors out from that wealth creation. 
Additionally, if companies do not go public, they are not 
creating jobs.
    This hearing presents a spotlight on three important 
issues: the lack of oversight of the proxy advisory duopoly, 
distraction of boards and inefficient use of company assets, 
and disenfranchisement of retail investors.
    We know many of the issues around proxy advisory firms, yet 
in response to a recent Banking Committee letter and the recent 
SEC Roundtable, ISS claims to be a fiduciary, yet disclaims any 
fiduciary obligations. Proxy advice should correlate to the 
fiduciary duty of their clients.
    ISS and Glass Lewis have conflicts. Both a consulting 
business and activist investor ownership are well known, yet 
they both share a common conflict of interest in that neither 
discloses to the public if a shareholder proponent is a client 
of an advisory firm.
    Indeed, a recent ACCS study found that 139 supplementary 
filings between 2016 and early 2018 disputed proxy advisory 
inaccuracies as well as mistakes. That is a 2 percent error 
rate that we know of on proxy advice. A 2-percent error rate in 
any fiduciary duty is unacceptable. Clients, in other words, 
are not getting the total mix of accurate, useful information 
needed to decide how to vote.
    Opponents of proxy advisory oversight raised cost concerns, 
but what about flawed decisionmaking processes that reduce 
returns for retirees, families, or individuals who are looking 
to secure their livelihood?
    We appreciate the introduction of the Bipartisan Corporate 
Governance Fairness Act. We support a transparent process in 
the development and dispensation of proxy advice.
    We think this legislation could be changed in a couple of 
ways. One, proxy advisory firms should certify recommendations 
are based on material accurate information. Two, they should 
disclose conflicts. Three, they should disclose to the public 
if a shareholder is a proponent. We look forward to working 
with the sponsors of that bill.
    There are additional problems as well. Zombie proposals--
those shareholder proposals that are repetitively introduced, 
yet have lower declining support--harm the shareholder process. 
Those proposal constitute one-third of shareholder proposals, 
yet 90 percent of them are continually rejected. Proxy advisory 
firms supported those proposals. ISS supports 79 percent of 
them, allowing them to be propped up. This creates a waste of 
assets, company assets, and distraction for both boards and 
investors.
    At some point in time, the will of the majority must mean 
something. The resubmission thresholds were first introduced in 
1954 and have not been updated. The investor base is the mirror 
image of what it was in 1954. We think that the 1997 Arthur 
Levitt proposal to raise these thresholds to 6, 15, and 30 
percent should be a basis for reform.
    We also have four individual investors known as ``gadfly 
investors'' that submit 30 to 40 percent of the shareholder 
proposals in the S&P 250. Ninety-one percent of those proposals 
fail, and it is unclear if those investors actually own the 
shares or if at times are actually acting as a front for third-
party entities.
    We believe that if a shareholder issues a proposal, there 
should be disclosure and verification of ownership as well as 
an articulation of the interest that they are supporting.
    Finally, retail shareholders are being disenfranchised. 
Direct retail share ownership today constitutes 32 percent of 
shares, yet only 28 percent of that block is actually voted, in 
contrast to 91 percent of institutional investors. We do not 
have a level playing field.
    We think that innovative new technologies, such as client-
directed voting, virtual meetings, and blockchain can be a 
remedy for this.
    We can no longer wait on these issues. Our international 
competitors are making their public capital markets more 
efficient. It is time for the SEC and Congress to act to 
promote competition and preserve U.S. competitiveness in a 
global economy.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Mr. Quaadman.
    I will start with you, Mr. Garland, in the questions. As I 
understood your testimony, you do not just take the proxy 
advisor's advice, per se. You actually take their research, 
look at their recommendations, and then go in and do a due 
diligence analysis of their recommendations. Is that correct?
    Mr. Garland. That is correct, Mr. Chairman.
    I would not say that we do a due diligence analysis of 
their recommendations. Our obligation is to implement the 
guidelines that were approved by our boards of trustees, and 
our guidelines are different than the guidelines from the proxy 
advisors.
    Let me give you an example. Some issue can be fairly 
binary. There may be a proposal for an independent board 
chairman. ISS or Glass Lewis may recommend against that 
proposal because they believe that the company has another 
mechanism in place. For example, lead independent director, 
that is adequate. Under our guidelines, we will always support 
a vote for an independent board chairman.
    Chairman Crapo. So on these guidelines you are talking 
about, are they specific to each corporation?
    Mr. Garland. No. They are a set of governance principles 
that inform our view of value and what we think is our best 
long-term interest. As long-term owners, we articulate a 
philosophy about boards of directors, executive compensation, 
and also many of the matters that may be subject to vote 
through shareowner proposals.
    Chairman Crapo. So are those guidelines consistent across 
all corporations that you own?
    Mr. Garland. We maintain two sets of guidelines. We have a 
set for U.S. companies, which are available on our website, and 
we have a set for non-U.S. companies because the items subject 
to vote vary by market, and all of our domestic guidelines and 
all of our global proxy votes are disclosed on our website, so 
that our participants and beneficiaries and our portfolio 
companies can review them.
    Chairman Crapo. OK. One last quick question for you, and 
that is, do these guidelines all focus on increasing 
shareholder value and the value of the corporation, or are 
these guidelines also focusing on environmental, social, or 
political objectives?
    Mr. Garland. Well, the proxy vote relevant under State law 
for us, we consider that to be a fiduciary asset. So the 
guidelines are constructed in a manner, and they are 
recommended to the board in a manner solely to maximize long-
term shareowner value.
    Many of the issues which often are referred to as social or 
political, we believe they are directly on long-term shareowner 
value.
    So when we cast a proxy vote, we are voting because we 
believe that is in our long-term best financial interest.
    Chairman Crapo. All right. Thank you.
    I would love to go into that much further with all three of 
you, but I want to shift to Mr. Quaadman and Mr. Gallagher. A 
question for both of you, and then I will probably be out of 
time. Please pay attention to my clock because I do not want to 
violate it for my colleagues here.
    But the SEC staff recently withdrew staff guidance dating 
from 2004 on the use of proxy advisory firms and held an 
important roundtable to get to our next steps. I am interested 
in learning more about the tradeoff between long-term investing 
and a social agenda and a fiduciary's calculation and how 
retail investors should be involved.
    I know that is a question that requires a long answer, but 
I would like you to each take about 45 seconds to respond to me 
on that.
    Mr. Gallagher. Well, thank you, Senator, for the question.
    I think it is a critically important issue that you have 
teed up for this hearing about retail participation because I 
think we have lost, and the trend toward institutional 
ownership of shares and sort of disintermediated retail 
participation in the United States, we have lost the retail 
voice, which sometimes thinks very differently than the 
collective institutional asset manager.
    The SEC was right to tee this up. I think Jay Clayton, the 
Chairman of the SEC, has been a real voice for what he calls 
the ``Main Street investor,'' and I think the Roundtable 
started the dialogue in a very meaningful way.
    Chairman Crapo. Well, thank you.
    I would request further thoughts of yours on this as we 
proceed in analyzing this.
    Mr. Quaadman.
    Mr. Quaadman. Mr. Chairman, both the Roundtable and 
withdrawal of those two letters were important steps forward. 
We are very concerned because both--first off, environmental, 
social, and political shareholder proposals make up over 50 
percent of those that are submitted, yet almost none of them 
pass.
    ISS and Glass Lewis have recently started both ESG ratings 
that is going to put even more fuel behind that. Those 
proposals are not directly linked to economic return. So we 
think that increased SEC oversight over proxy advice is very 
important, particularly as ESG is beginning to gain more of a 
foothold.
    Chairman Crapo. Thank you, Mr. Quaadman.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Mr. Garland, briefly describe how shareholder proposals 
help to hold management accountable, briefly.
    Mr. Garland. Yes. Thank you, Senator Brown.
    For us, it is a critical tool for holding management 
accountable. I think a good example would be--and in your 
opening remarks and in my remarks, we referenced Wells Fargo. 
In 2013, we filed a shareowner proposal at Wells Fargo asking 
them to strengthen their clawback policy.
    We filed it at Wells Fargo and a number of other banks. We 
were concerned that in the banking industry, no senior 
executives were held financially accountable in the wake of the 
financial crisis. We think accountability is key for setting a 
proper tone at the top for responsible business practices and 
ethical conduct. If you are not held accountable, you 
essentially can have the incentive to look the other way if you 
are benefiting from the misconduct of those below you.
    So when the fake account scandal happened at Wells Fargo, 
we sent a letter to the Compensation Committee and said, ``You 
now have this new policy,'' and the policy that they adopted 
that we negotiated with them, it has three key components. And 
these are all requested in the proposal.
    First, there is a misconduct trigger that the board has the 
authority to clawback compensation in the vent of misconduct.
    Second, what we call the ``up-the-ladder provision,'' that 
you can be held financially accountable for misconduct for a 
supervisory failure. So, in the case of Wells Fargo, for 
example, the fact that John Stumpf may not himself have engaged 
in misconduct, but the board had the authority to clawback 
compensation because he was held ultimately accountable, that 
is a way of ensuring accountability and eliminating the 
perverse incentive to look the other way.
    And the final prong is public disclosure so that investors 
have the ability to monitor enforcement of that policy.
    And one last point on accountability, the fact that most 
companies in the U.S. market now have annual elections for 
directors, which is a fundamental accountability mechanism, and 
have majority voting in direct elections is largely the result 
of successful shareowner proposals.
    Senator Brown. And you can certainly make the case. This is 
a yes or no here. You can make the case, certainly, that those 
proposals adopted by Wells Fargo made a big difference in the 
clawback, correct?
    Mr. Garland. Yes. And it is really the way the process is 
supposed to work. It never went to a vote. It is an invitation 
to engage. You submit the proposal. They called us up, and then 
we had a very productive negotiation.
    Senator Brown. In your testimony, Mr. Garland, you 
mentioned the risks if regulation creates obstacles for 
investors to use proxy advisors. How would additional 
regulatory burdens on proxy advisors limit investors' ability 
to hold company management accountable?
    Mr. Garland. I think that some of the proposals from 
critics seek to insert the issuers in between investors and the 
advisors who we hire. These are our advisors, and I think that 
could compromise their independence. We rely on the independent 
expert research they provide to us.
    There is also a big concern about timing. The volume of 
proxy voting during proxy season is tremendous. We only have a 
very little time to apply our guidelines from the time that the 
company files its proxy until it has its annual meeting. Our 
process generally does not start until we receive the research 
from the proxy advisors, and we are not looking at the 
recommendations. But just seeing issues like dilution or 
diversity on board, looking at the hedging and pledging 
policies of the company, there are all kinds of metrics in 
those reports that we need to interpret our own guideline.
    Senator Brown. Thank you.
    Let me ask one last question and preferably a simple yes or 
no, and I will start with you, Mr. Quaadman. If a shareholder 
is concerned that a company is price gouging, say, for a 
critical medicine and it could affect long-term value in the 
company's reputation, should we take tools away from that 
shareholder to hold management accountable?
    Mr. Quaadman, let us start with you. Yes or no, if you 
would.
    Mr. Quaadman. Shareholders should keep companies 
accountable, and that is a dialogue that companies should have 
with their shareholders, but when that process is perverted for 
political or social gains, that is where it becomes a problem.
    Mr. Gallagher. Mr. Garland.
    Mr. Garland. I think that drug pricing can create 
reputational risk for companies, which is why we have called on 
companies like Merck filing the EpiPen price increase to 
elevate oversight of drug pricing to the board.
    Senator Brown. I was not sure what you meant on political 
or social, but maybe we can get back to that if we have time.
    Mr. Gallagher, your comments on that?
    Mr. Gallagher. Senator, Thank you for the question.
    I am never one to say we should take a voice away from 
investors. I think the proposals that are being discussed 
today, in particular, 14a-8, amendments all have to do with 
what is a meaningful ownership position such that the voice 
should be heard.
    And I do not personally believe that any of the discussions 
we have had about potential amendments are of the type that 
would diminish the voice of shareholders, such that we have 
heard.
    Senator Brown. So you would say that we should not take 
away tools from the shareholders to hold them accountable?
    Mr. Gallagher. I would say that, but I would also say that 
the proposals I have seen would not do that. So I do not think 
that is what is at stake with some of the modest amendments 
that have been discussed with 14a-8.
    Chairman Crapo. Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman.
    Thank you, gentlemen, for coming.
    I am here to learn. You know more than I do. I am going to 
ask you a few questions. I only have 5 minutes. I would just 
like you to answer them straight up and talk to me like I am a 
tenth grader, OK?
    It has been alleged that proxy advisory firms have 
conflicts. Do they? If so, how?
    Mr. Gallagher, we will start with you.
    Mr. Gallagher. Senator, when I walked into the Commission 
as commissioner in 2011, I did not know what a proxy advisory 
firm was. But I will tell you, it was the number one issue 
presented to me by the business community, by others in the 
corporate governance world. I am sure you can share some of the 
same stories in your offices.
    The stories I have heard, there are facts and----
    Senator Kennedy. Do they have conflict?
    Mr. Gallagher. They do. They absolutely do.
    Senator Kennedy. Then tell me about them.
    Mr. Gallagher. There are two types of conflicts. One is a 
pretty obvious one that I actually do not view as that 
problematic. That is when you have a proxy advisory firm 
providing consulting services to the issuers that they are 
providing recommendations on. That is disclosed and knowable, 
and in fact, everyone, I believe, assumes that there is that 
conflict in place.
    Senator Kennedy. So the proxy advisory firm is giving 
advice to the institutional investor----
    Mr. Gallagher. Right.
    Senator Kennedy.----but it is doing work for the company 
about whom it is giving advice?
    Mr. Gallagher. Absolutely correct, Senator.
    Senator Kennedy. OK.
    Mr. Gallagher. And then there is a second, which I think is 
a more insidious potential conflict, which is that the proxy 
advisory firm is providing advice to institutional investors, 
some of whom pay more in fees than others to the proxy advisory 
firm, given the volume of votes, given the volume of assets 
under management.
    Senator Kennedy. What is wrong with that?
    Mr. Gallagher. Well, there might be an outsized influence 
by one institutional investor over another in that context, 
where they might pressure a proxy advisory firm.
    Senator Kennedy. OK.
    Mr. Garland.
    Mr. Garland. The practice of selling services to companies 
they provide ratings on does constitute a conflict of interest.
    Senator Kennedy. How so?
    Mr. Garland. Mr. Gallagher's point with respect to one of 
the advisors, ISS, there is a conflict that we as clients I 
think have a responsibility to oversee.
    Mr. Quaadman referenced another conflict with respect to 
the other advisor, which is owned by a large Canadian pension 
fund. In my view, that ownership does not present a conflict. 
That really is an alignment of interests.
    Senator Kennedy. OK.
    Mr. Quaadman.
    Mr. Quaadman. Yeah. Let me just add a couple more. One is 
actually an example with Glass Lewis. We have sent letters to 
both SEC and DOL with McGraw-Hill and also Canadian Pacific, 
where on day one, a dissident director slate is proposed. Day 
two, Ontario Teachers' Pension fund announces its support. Day 
three, Glass Lewis announces it support for that dissident 
director slate. That is at least the appearance of a conflict, 
and we think that that should be looked at.
    Number two, as I mentioned in my opening statement, both 
firms do not disclose if a shareholder proponent of a proposal 
or a dissident director slate is also a client to the advisory 
firm.
    Senator Kennedy. OK.
    Mr. Quaadman. Now, that is important because you can think 
of the economic return.
    Senator Kennedy. Let me stop you a second----
    Mr. Quaadman. Yep.
    Senator Kennedy.----because I have only got 2 minutes.
    Mr. Quaadman. Sure.
    Senator Kennedy. Each of you are King for a Day. You can do 
whatever you want. Politics be damned, OK? What, if anything, 
would you do with respect to regulation of proxy advisory 
firms?
    Mr. Quaadman.
    Mr. Quaadman. Disclosure of conflicts, open and transparent 
process for advice, there is a level playing field, and 
everybody knows exactly what the advice is. And that there is 
no hidden third parties trying to push an agenda.
    Senator Kennedy. Mr. Garland.
    Mr. Garland. I think transparency with respect to conflicts 
with the issuers, which is currently disclosed to clients.
    Senator Kennedy. OK.
    Mr. Gallagher. Senator, thanks for the question.
    I could not agree more with Mr. Quaadman. It is about 
transparency and accountability too. In any situation in which 
you have a fiduciary duty running from a principal to an agent 
and you cut that off by inserting a third party who arguably 
does or does not have a fiduciary duty, you have a problem. We 
see that in certain areas.
    Senator Kennedy. But you do not think they have a fiduciary 
duty now? It is uncertain?
    Mr. Gallagher. Well, based on the letter that ISS sent you 
that I read, I am a little confused. They clearly have a 
registered investment advisor in their holding group. There had 
been some debate about where the recommendations came out of.
    Senator Kennedy. Would the three of you support creating an 
explicit fiduciary responsibility?
    Mr. Gallagher. Yes, Senator.
    Mr. Quaadman. Yes.
    Senator Kennedy. OK. Mr. Garland.
    Mr. Garland. Yes.
    Senator Kennedy. OK.
    Is there anything in Mr. Reed's bill that should not be 
there or that is there--that should be there or should not be 
there?
    Mr. Gallagher. Senator, I think the bill is great for a 
bunch of purposes. The biggest one is the recognition of the 
need for action. I think it is pretty bare bones. It is very 
simple.
    Senator Kennedy. OK.
    Mr. Gallagher. I think there are a few things that we could 
tweak.
    Senator Kennedy. OK. Briefly, gentlemen. I am sorry to cut 
you off. I just do not want to run over. Quickly, either of 
you?
    Mr. Quaadman. It is an important first step, and I 
mentioned in my opening statement, I think there are three or 
four things that could be added that I do not think are that 
problematic that can help disclosure and a level playing field.
    Senator Kennedy. Mr. Garland.
    Mr. Garland. We do not oppose the bill.
    I think our concern is that it is enforced in a manner to 
protect the investor clients rather the issuers who are being 
rated.
    Senator Kennedy. All right. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you, Mr. Chair.
    And let me follow-up on the line of questioning by my 
colleague, Senator Kennedy.
    And thank you, all three, for being here as well. This is 
very instrumental for learning as we move forward.
    Do you think disclosing a conflict is enough to address the 
conflict? I am going to ask all three of you.
    Mr. Gallagher. Thanks for the question, Senator.
    That is the premise of pretty much the entirety of the U.S. 
securities laws. The disclosure, and in a clear way without 
fraud or misrepresentation, should be enough for an investor to 
make proper investing decisions, including in this context, the 
voting decision.
    So, yes, I think disclosure goes a long, long way.
    Senator Cortez Masto. Mr. Garland.
    Mr. Garland. As a matter of practice, we generally support 
disclosure as a tool to address conflicts of interest.
    The conflict under discussion here is a little less 
relevant to us because it speaks to compromising a 
recommendation on which we do not rely.
    Mr. Quaadman. I agree with Mr. Gallagher's comments.
    I would also say, too, that in the current system that we 
have, advisory firms do not have to disclose all their 
conflicts, nor do their clients have to ask about those 
conflicts.
    The other thing that disclosure does is it also forces the 
clients of the advisory firm to manage those conflicts and 
ensure that they are meeting the fiduciary duties that they 
have to their investors.
    Senator Cortez Masto. Do we need to be concerned that proxy 
advisory firms recommend votes in favor of management 
recommendations more often than an alternative view? Are we 
concerned at that at all?
    Mr. Gallagher. Senator, I think to the extent that that 
would imply that they are not doing the hard work, that that 
number is skewed in some way, then yes. I mean, one of the main 
criticisms of the firms is that the quality of the work is not 
up to snuff. So to the extent it is 90 percent or more and 
folks view that that not to be appropriate, I think that is a 
question in and of itself, separate from issuer concerns that 
they are getting matters wrong and misinterpreting in a way 
that is negative for the management proposal.
    Senator Cortez Masto. OK.
    Anyone else?
    Mr. Quaadman. One other thing I would just add with that, 
if you take a look at ISS, they have 180 employees to evaluate, 
analyze, and make recommendations on 250,000 issues. Think 
about that workload. They are not properly resourced to do 
their job, and that should be something that is also troubling 
because at the end of the day, if investors are not getting 
decision-useful information, they are not meeting their 
fiduciary obligations.
    Senator Cortez Masto. Do you think that the proxy advisors 
need to be regulated by the SEC?
    Mr. Gallagher. Senator, I am not a real regulatory type; by 
nature, more free market. But I think we have reached the point 
in this industry where, yes, there needs to be a role for the 
SEC because, as I mentioned in response to Senator Kennedy's 
question, whenever you have a fiduciary duty flowing and you 
have that from the institutional investor to the beneficiary, 
but you put in the middle of that a third party that may or may 
not have a duty, I think things get twisted in a way. And I 
think that you need someone, an entity like the SEC, to come in 
and regulate that flow, much like Congress did with credit 
rating agencies in 2000.
    Senator Cortez Masto. Thank you.
    Gentlemen, yes or no. I am running out of time as well.
    Mr. Garland. No, I think it depends what that regulation 
looks like.
    Senator Cortez Masto. OK.
    Mr. Garland. If it flows our access to information, 
compromises their independence, and poses significant cost 
incentives, we would oppose it.
    Mr. Quaadman. We provided ISS with a proposal in 2010 for 
an open and transparent system and for disclosure, and the 
response that we got, because they were being sold at the time, 
was ``We are not interested. It is going to cost too much 
money.''
    We are 4 years past SLB 20 being introduced by the SEC. We 
thought that was an important step forward, but clearly, there 
are still flaws in the system that need to be addressed. So 
there needs to be a heightened level of oversight.
    Senator Cortez Masto. OK. And then, Mr. Garland, I am 
curious. You talked about the guidelines that New York State 
has set in the Comptroller's Office with Senator Crapo, and I 
know there is an association of State comptrollers. Those 
guidelines that you have identified, is that a best practice 
across the country for the State comptrollers, or is that 
something you, just New York State, has identified?
    Mr. Garland. We have maintained our own proxy voting 
guidelines since 1987 when we took back voting control from 
external investment managers. We believe that having guidelines 
is best practice, and we would like to believe that our view on 
particular issues reflects best practice.
    Senator Cortez Masto. OK. Are you aware of the association, 
national comptrollers, and do they address this issue as well 
as a national level?
    Mr. Garland. I am aware of a national--many of my 
principal's peers with respect to his responsibilities fall 
with State treasurers as opposed to comptrollers, and we work 
with many of the public funds in the country. Many of our peers 
maintain guidelines and vote proxies in a very similar manner, 
as we do.
    Senator Cortez Masto. Right.
    I notice my time is up. Thank you very much. I appreciate 
the conversation today.
    Chairman Crapo. Thank you.
    Senator Toomey.
    Senator Toomey. Thanks very much, Mr. Chairman, and thanks 
to all of our witnesses for joining us.
    You know, I just want to start off with a quick observation 
about really a fantastic development over recent decades for 
small and retail investors, which is really the collapse in the 
fee structure.
    I mean, the cost for a middle-income individual or family 
to invest in our capital markets is a tiny fraction of what it 
once was, and this is a fantastic development for retail 
investors. It gives access to huge categories of asset classes. 
It gives access to those classes that just was not there 
before, and I sure want to make sure that we are not doing 
anything to impede not only that development, and then I will 
put in a plug for a constituent, Vanguard, that has clearly 
been at the forefront of this. It is stunning how the kinds of 
services that they provide that are virtually free. It is just 
amazing, and it is great for investors.
    But not everybody is as big as Vanguard, and one of the 
things that concerns me is the cost of some of these 
shareholder vote requirements for a money manager that may not 
have the resources of a Vanguard, for instance.
    I think there may be some disagreement among the panelists 
over whether or not and the extent to which there in fact are a 
lot of shareholder proposals that are not fundamentally about 
the operation of the company.
    And so let me pose a question to each of you briefly. Is it 
your view that there are frequently shareholder proposals that 
are really about a social or environmental or political or 
cultural issue and not fundamentally about the return to 
shareholders of the company?
    Starting with Mr. Gallagher, does that actually happen?
    Mr. Gallagher. Well, thank you for the question, Senator 
Toomey, and I can give you an example of another one of your 
constituents, which is PNC Bank.
    I remember when I was on the Commission one day commuting 
down from my home in Baltimore, reading the Wall Street 
Journal, and seeing reported in the Journal that PNC had gotten 
a shareholder proposal on the environmental impact of its 
lending activity. I also was reading that the SEC had decided 
against PNC in that regard, which was news to me. So you can 
imagine how happy I was when I walked into that office that 
morning----
    Senator Toomey. Yeah.
    Mr. Gallagher.----which gave me a very good insight into 
the internal staff process, and we can talk about that later, 
if you like.
    Senator Toomey. So do I infer your answer is yes----
    Mr. Gallagher. Absolutely.
    Senator Toomey.----that this happens?
    Mr. Gallagher. Yes.
    Senator Toomey. This does happen?
    Mr. Gallagher. It does.
    Senator Toomey. Mr. Garland.
    Mr. Garland. No. We are often criticized for filing 
proposals that I think some would characterize as political or 
social in nature.
    One example that we are very proud of dates back to 1992 
when we filed a proposal to prohibit workplace discrimination 
at a company--Cracker Barrel--that fired some employees because 
they were gay, and so we have since then, we and other 
investors, filed hundreds of proposals to prohibit workplace 
discrimination based on sexual orientation and gender identity.
    Senator Toomey. Is not that illegal? Is not there a law 
against that?
    Mr. Garland. In some States. It is not uniformly illegal, 
and there is research from Credit Suisse that says they value 
diversity and also the notion that you want to cast a wide net 
to get the most talent. We think there is a direct correlation 
to value.
    Senator Toomey. OK. Mr. Quaadman, do you think these, the 
answer to my question?
    Mr. Quaadman. Yes, Senator Toomey.
    Manhattan Institute and even ISS data shows that over 50 
percent of shareholder proposals now are of a nature that are 
environment, social, or political.
    Senator Toomey. And not fundamental to the well-being of 
the company or returns to shareholder?
    Mr. Quaadman. Correct.
    Senator Toomey. Fifty-percent. Over 50?
    Mr. Quaadman. Over 50 percent, and almost none of them ever 
pass.
    In fact, there was a study by the University of Tennessee 
in 2015 that looked at public pension plans that had a very 
overt political, social, or environmental bent with what they 
do, shareholder proposals. They had the lowest rate of return, 
creating tens of billions of dollars of unfunded liabilities 
for State taxes.
    Senator Toomey. I am running out of time, but very quickly, 
if you do not blindly follow the proxy advisors, would it not 
be potentially extremely expensive to systematically evaluate 
all of the proposals for all of the companies if your business 
model requires that you be invested in many, many companies?
    Mr. Quaadman. One of the issues that was addressed in SLB 
20--and I think it needs to be maybe highlighted a little 
further--was that it specifically stated that institutional 
investors do not have to vote on every single issue. So that 
they should only do so if they feel it is material.
    Senator Toomey. Mr. Gallagher, I think you wanted to add 
something.
    Mr. Gallagher. Yeah. I just wanted to jump on that because 
I was at the Commission at the time of SLB 20. That was 
unfortunately revolutionary at the time. The interpretation of 
the '03 rule that gave rise to the purported obligation to vote 
every share, every vote, we dispelled that myth, and we thought 
that would set folks free and give you a zero-cost ability to 
say we are not going to vote on this one, we are going to pre-
direct our voting in accordance with management, in accordance 
with the New York Comptroller. You could pick whoever you want. 
We have not seen the uptake, though, on that, which is a shame.
    Senator Toomey. All right. Thank you.
    I see I have run out of time. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Jones.
    Senator Jones. Thank you, Mr. Chairman, and thank you for 
this important hearing.
    Thank you for the witnesses to come here today.
    Obviously, this is a major issue, with the thousands of 
proxy issues that take place every year, especially during the 
high season. It has gotten complicated, technical, and I think 
ripe for reform. And I am pleased to be part of the bipartisan 
group of Senators who are working to bring some--a little bit 
of reform to this, and I look forward to trying to continue 
that process.
    In addition to just reform, though, one of the things I 
have got a concern about is just the lack of competition in 
this area. I firmly believe that having more competition in the 
marketplace on anything provides better options for investors. 
It also pushes best practices in this industry, push them right 
to the forefront.
    What can be done? As I understand it, it is like two firms 
that dominate like 95 percent or more of this industry. What 
can we do or look at to maybe encourage more competition in 
this whole area going forward?
    I will open that up to the panel.
    Mr. Gallagher. Well, thanks for the question, Senator. I 
will take a stab at it.
    This is the exact same issue I already referenced that 
Congress dealt with in 2006 with the Credit Rating Agency 
Reform Act, which was how do we regulate these critically 
important advisors that weigh in in a substantive way on the 
merits of a product or an issuer, which is kind of similar to 
proxy advisory firms. How do we do that without either 
regulating them out of business or creating barriers to entries 
such that you do not have competition? And I know Congress 
struggled with that at the time.
    And what they came out with in the Credit Rating Agency 
Reform Act was a sort of low-threshold, low-touch registration 
requirement at the SEC that encouraged application, and then in 
return, you got an imprimatur that was used in a very special 
way throughout the securities markets.
    It has not exactly panned out, 12 years later. I think you 
still have market domination by three big players in the rating 
space, but you do have 16 or 17 other registrants that came 
behind them that did not exist as NRSROs, so-called ``NRSROs,'' 
before that legislation came through. I think I even noticed 
one of them in the audience here today. So there is a tension.
    Your Act, I think would be different in that just the 
requirement of investor advisor registration. It is a known 
paradigm that the SEC oversees. Whether it increases 
competition amongst firms, brings them in, adds too many costs, 
I do not know because I have not gone through that sort of 
cost-benefit thinking, but I did want to bring back the 
parallel analysis that Congress did with the credit rating 
agencies.
    Senator Jones. Great. Thank you.
    Mr. Quaadman. Senator Jones, 11 years ago or so, there was 
a firm, PGI, that tried to enter the market. A few years ago, 
there was another firm, Proxy Mosaic, that tried to enter the 
market, and they had a difficult time because of the market 
power of the two dominant firms.
    Look, the Chamber is not a proponent of regulation, 
normally.
    Senator Jones. Right.
    Mr. Quaadman. But even if you take a look at what we are 
proposing here, if you take the direction that your bill is 
going in, we think that there should be some additional 
disclosures around that. I think that allows for the 
appropriate oversight of those firms, and I agree with what Mr. 
Gallagher was saying. This is analogous to the credit rating 
agencies.
    Look, this is a situation that we have, and until there is 
another entrant that is going to be successful, we have to have 
this level of oversight for a level playing field.
    Senator Jones. Great.
    Mr. Garland. Senator Jones, I share your underlying concern 
about the lack of competition. Investors would be better served 
if there were more advisors, rather than less. I think the fact 
that the bill has a carve-out for smaller is appropriate.
    Senator Jones. Right.
    Mr. Garland. And the challenge is the barriers to entry. 
For clients like us, our portfolio is so massive that it is 
very hard for a new entrant to be able to provide us with the 
tools we need to vote across in 84 markets around the world.
    Senator Jones. All right. Thank you.
    Real quick, as my time is running out, this whole proxy 
process is incredibly complicated. I did not think I could find 
anything more complicated than trying to navigate between the 
Dirksen, Russell, and Hart Senate Office Buildings, but this 
process certainly is.
    Are there takeaways from the Roundtable about maybe helping 
the whole process? Are there things that can be done to 
streamline that? And we have only got a little bit of time 
left.
    Mr. Gallagher. Senator, I will take a 5-second opportunity 
just to plug technology. I think technology can resolve a lot 
of the issues that were highlighted in the SEC Roundtable, 
whether it be the plumbing issues for sure, whether it be 
voting issues.
    I do not want to speak for Michael here, but I think the 
institutional investors would love more transparency and 
accountability that you can get through technology.
    Senator Jones. Great.
    Mr. Quaadman. Same. I think particularly when you take a 
look at retail shareholders who have been disenfranchised, if 
you start to take a look at things like blockchain and client-
directed voting, that will allow them to be more of a 
participant, and I think that is also going to help make the 
system more efficient.
    Senator Jones. Great. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman.
    Thank you all for being here.
    I want to start with Mr. Quaadman. I was struck--I was 
going to start with Mr. Garland, but I was struck with 
something you said about the process being perverted for social 
and political goals. And I just kind of want to flesh this out 
because I think here is what I worry about. I assume you are a 
conservative. I am a known liberal, and so we may disagree on 
any number of issues, including climate change or LGBTQ or 
whatever.
    But the question that I have for you, is a climate change 
proxy proposal by definition, in your view, a sort of social, 
political goal? Because it seems to me that when you are 
talking about publicly traded companies that may have stranded 
assets or publicly traded companies that may have power plants 
or real estate assets in coastal areas that get flooded, it is 
perfectly reasonable for shareholders to say, ``Hey, hold on a 
second. We need to account for this better. We need to have a 
more robust climate strategy.'' And so the question is, in a 
case like that, is that a social-political end, or are you 
referring to something else?
    Mr. Quaadman. So if you take a look at climate change, if 
you take a look at what EEI has done, they have actually 
created standards for disclosure for utilities for how they can 
provide that information out to their investors and to other 
stakeholders who are interested in that information.
    When you take a look at ESG disclosures and ESG movement, 
that is used for a variety of different stakeholders. It is 
used for investors. It is used for employees, consumers, and 
even vendor management.
    So what there is right now is there is a struggle as to how 
we are going to deal with that. When you take a look at 
environmental, social, and political shareholder proposals, 
they make up over 50 percent of the shareholder proposal.
    Senator Schatz. Hold on, but let us slow down.
    Mr. Quaadman. Yeah.
    Senator Schatz. What is an environmental, social, or 
political proposal? Because it seems to me that basically you 
are defining it as anything that you do not like that does not 
service short-termism, that is not advancing your clients' and 
your institution's interest, which is fine, but I am having a 
hard time understanding what it is that you mean by that except 
the stuff that I do not want companies to have to deal with.
    And one more point here, it seems to me that under the law, 
shareholders have a perfect right to make that determination 
themselves about what is in the interest of the company as part 
owners of the company. So can you clarify what you mean by 
social-political? Because the Cracker Barrel example is a 
really good example. In '92, that may have been viewed as a 
sort of political question, but now it is clearly a 
reputational and shareholder question, and so who gets to make 
that determination? In my view, not the regulators. In my view, 
not the legislative branch. In my view, the shareholders 
themselves.
    Mr. Quaadman. So directors have a fiduciary responsibility 
to long-term management and strategies of----
    Senator Schatz. I know that.
    Mr. Quaadman.----preservations of assets, correct? So if 
you take a look at, let us say, political and lobbying spending 
disclosures in, let us say, the defense aerospace industry, 
right? There are studies that have found that that type of 
lobbying and those expenditures are critical to the 
profitability of that company, yet those proposals fail by over 
80 percent.
    So the question is, over the course of time, what we are 
saying here is, particularly with the resubmission thresholds, 
if these proposals keep on coming up, yet 80 percent of the 
shareholders have said it is not material and the SEC has said 
that is not material, at some point in time, it should just be 
given a time-out if you reform the resubmission thresholds.
    So I think it is a matter of also looking. Are those 
proposals pushing a political agenda, or are they actually tied 
to----
    Senator Schatz. And who decides that?
    Mr. Quaadman. Are they tied to the profitability of a 
company? But I think the other question is, are we also----
    Senator Schatz. Hold on. Hold on. Hold on.
    Mr. Quaadman. Yeah. Go ahead.
    Senator Schatz. You are restating the claim over and over 
again, and I would like you to define what it is that is a 
political agenda other than stuff you do not want companies to 
have to talk about because, in my view, just because a company 
continually refuses to deal with the stranded assets problem, 
just because a company refuses to deal with the fact that they 
may have resources in the coastal areas that they are denying 
are in peril or not insured properly or subject to severe 
weather, just because you think they should continue to ignore 
that does not mean that they ought to.
    I am going to finish with Mr. Garland because I would like 
you to respond to the exchange that we had, with my remaining 
seconds, please.
    Mr. Garland. Thank you, Senator Schatz.
    I appreciate that you raised climate change as an issue, 
which is something that our boards have been spending a lot of 
time on.
    In 2015, Mark Carney, the Governor of the Bank of England 
and the Chair of the Financial Stability Board, said climate 
change presents a systemic risk to the global financial system, 
and so he and the G20 tasked the Financial Stability Board with 
coming up with a framework to help markets price and understand 
risks within individual companies.
    And what Carney said is climate change is the--if you are 
familiar with the tragedy of the commons, as externalities with 
respect to environmental issues, climate change is a tragedy of 
the horizons. The most devastating consequences are not going 
to affect today's decision-makers. It is going to be the next 
generation.
    Given our time horizon, our time horizon is measured in 
generations. So we have to take those risks very seriously, and 
climate change does present risks and opportunities, the risks 
both of transition to a low-carbon economy and the physical 
impacts from severe weather and rising ocean levels.
    So our boards last year, we hired a consultant to help us 
integrate climate change into our investment strategy and asset 
allocation and provide a set of recommendations, which we are 
now moving on.
    In September of this year, Comptroller Stringer and Mayor 
de Blasio and other trustees announced a commitment to double 
our investment from $2 billion to $4 billion in clean energy 
solutions.
    Senator Schatz. Thank you.
    Chairman Crapo. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman, and thank all 
of you for what you are doing here today. As Senator Jones 
said, it is a complicated area. It is an area that I think may 
be able to use some reform, but I am struck the way the sort of 
tables are turned here.
    Mr. Gallagher, you mentioned you were from Baltimore. I am 
glad to have you as a Maryland constituent. As you know, in 
Baltimore, we also have a firm, T. Rowe Price, and I have a 
letter here from T. Rowe Price strongly opposing this 
legislation.
    I just want to read to you part of what they say here. They 
are responding both as an institutional client of a proxy 
advisory firm as well as a corporate issuer covered by proxy 
advisors. So they are seeing this from both perspectives, and 
in this letter, they write:

        We make our own voting decisions using the independent research 
        provided to us by our proxy advisor as one factor, among many, 
        used to inform our firm's voting positions. The House bill, 
        which I understand you support, Congressman Duffy's bill, would 
        diminish the independence of that research and therefore its 
        value to us as a client.

    I have a simple question. Why are you supporting the bill 
that diminishes the value of that information, and why did we 
want regulation that says to T. Rowe Price, we need this 
regulation because we know what is better for you, T. Rowe 
Price? We need for you to have all this regulation so that you 
can make the right decisions for your investors.
    I just find that this whole thing has been turned on its 
head.
    Mr. Gallagher. Well, Senator, thank you for the question. I 
am happy to be your constituent.
    I am not here to support the Duffy bill or any bill, quite 
frankly.
    Senator Van Hollen. OK.
    Mr. Gallagher. That is for you guys to decide. I am an old 
SEC staffer who is used to taking congressional direction and 
running with it, so whatever Congress chooses to do is best.
    In this context, I would disagree with T. Rowe. I do not 
believe the Duffy bill would do what they say. I do not think 
the Duffy bill would do a lot of what its opponents would say.
    As I understand the Duffy bill and I have studied it over 
the years--I have not looked at it in a while, but it is, as we 
talked earlier about the Credit Rating Agency Reform Act of 
'06, predicated based upon that body of statute, which was 
meant to be incremental, which was meant to bring in oversight.
    Senator, I do not come to Congress and ask for regulation 
and legislation a lot. I am more of a free-market guy, but I 
will tell you this is one spot, like I said earlier, that I 
heard more about these issues, the proxy advisory issue in 
particular, than anything else as an SEC commissioner, from 
sheepish executives and others who would not want to come and 
do this today, who would not want to raise their profile, who 
whisper. And you hear the anecdotes, and it drove me to think 
that we need to do something in this space. And if we are going 
to do it, why not do it in a way where we leverage something 
that Congress found to be pro-competitive? Because I am really 
worried about the concern of new entrants and everything else.
    Senator Van Hollen. Right.
    I would just suggest that adding this additional layer of 
requirement and requirements on people who are providing advice 
actually will raise the cost of new entrants.
    Mr. Gallagher. Yeah.
    Senator Van Hollen. It will make it more difficult----
    Mr. Gallagher. Right, right.
    Senator Van Hollen.----for people to compete.
    I appreciate--I believe that you were in favor of the Duffy 
bill, but here is the thing. So you are saying here is a major 
firm, T. Rowe Price----
    Mr. Gallagher. Right.
    Senator Van Hollen.----that essentially is saying this 
legislation is telling us that Congress wants to put in these 
protections. We do not want the protections. They will actually 
undermine the value of the information we are receiving.
    Mr. Gallagher. Right.
    Senator Van Hollen. And I do find it a strange world where 
we are equating that to credit rating agencies. I mean, there 
may be some of the reforms registering. That is fine. Credit 
rating agencies have a model where they collect information 
from consumers without the support of--without the consent of 
consumers.
    These are big firms, in many cases, and small firms who are 
choosing, who believe it in their economic interest----
    Mr. Gallagher. Right.
    Senator Van Hollen.----to hire a proxy advisor, to give 
them advice. They can choose to reject the advice or accept the 
advice, but here we are coming along saying, ``You know what? 
You, T. Rowe Price, do not really know what is good for you, 
and we are going to insist that we go through this other 
process''----
    Mr. Gallagher. I hear you.
    Senator Van Hollen.----``and to the Chamber.'' What is your 
response to this?
    Mr. Quaadman. Look, as I stated earlier, we do not come at 
this position lightly that we think that there should be 
regulation and oversight, but the fact of the matter is, as I 
said in my opening statement, as far as we can see, flawed 
information, from what we saw with the supplementary filings, 
means at the end of the day, they are not getting decision-
useful information that can impact the return of the clients of 
T. Rowe Price.
    Senator Van Hollen. Yeah.
    Mr. Quaadman. So if that return is being impacted, that is 
going to affect retirees, families, homeowners, and that is 
something that I think we need to take a cost-benefit analysis 
to look at.
    Senator Van Hollen. Look, I am with you, but the suggestion 
there is that T. Rowe Price does not know how to weigh the 
information they are getting from these proxy advisors.
    I would also point out in the same letter, they say that 
from their perspective as a corporate issuer, because they are 
also subject to these proxy advisors, that we appreciate having 
effective ways to address factual errors and proxy advisor 
research reports, but in this regard as well, the proposed 
legislation is unnecessary, given current practices and 
available legal remedies. In other words, that a lot of this 
has to be put on a portal, right, available to review, and here 
we are, this bill. I am not saying this bill--the Duffy bill 
essentially says to T. Rowe Price, you know, ``We know better 
than you.'' I just find it a strange----
    Mr. Quaadman. I would just say quickly, Senator--I know 
your time is up, but I think T. Rowe and some of the other 
firms, as Senator Toomey said with Vanguard, they use proxy 
advisory reports as one data point of many to make their 
decisions.
    The problem is you have a large group of smaller 
institutional investors that completely outsource their 
functions or their thinking to the advisory firms, and that is 
where the problem lies.
    Senator Van Hollen. I understand that. I just think, again, 
that risk should be borne by those firms that make that 
decision. If they do not like that proxy advisor, get rid of 
them. Do something else. Tell them you want them to do a better 
job. But, in this case, we are coming in and again saying that 
they do not know what they are doing. I just find it overly 
burdensome.
    Chairman Crapo. Thank you.
    And I would like to thank all of our witnesses again for 
coming today, not only your testimony here today, but the 
testimony you have supplied and the advice and support and 
guidance that you will supply as we continue.
    For Senators who wish to submit further questions for the 
record, those questions are due on Thursday, December 13th, and 
I encourage the witnesses, as I suspect you will get some 
additional questions, to please respond to those as promptly as 
you can.
    Again, thank you very much for being here, and with that, 
the hearing is adjourned.
    [Whereupon, at 11:09 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Today's hearing will focus on several aspects of our proxy voting 
system, including the role of proxy advisory firms, the shareholder 
proposal process and retail shareholder participation.
    As SEC Chairman Clayton noted earlier this year, ``Shareholder 
engagement is a hallmark of our public capital markets and the proxy 
process is a fundamental component of that engagement.''
    I commend the SEC for its ongoing attention to this issue, 
including its recent staff roundtable on the proxy process and rules, 
and I encourage them to move forward with their reform efforts.
    Many of these rules have not been examined for decades.
    In that time, there have been a number of changes to the proxy 
environment, including the growing influence of proxy advisory firms 
and fund managers on voting outcomes and, more generally, corporate 
behavior.
    There has also been a rise in the number and substantive scope of 
proposals pursuing an environmental, social or political agenda.
    Many of these proposals have little or nothing to do with a 
company's financial performance or shareholder value.
    But companies and investment advisers alike nevertheless devote 
time and resources to evaluate these proposals, often relying upon 
proxy advisory firms or other consultants to assist them and reduce 
their costs.
    It is time to re-examine the standards for inclusion of these 
proposals as well as the need for fiduciaries to vote all proxies on 
all issues in light of the proliferation of environmental, social or 
political proposals, and the rise of diversified passive funds.
    Chairman Clayton has also expressed concerns that the `voices of 
long-term retail investors may be underrepresented or selectively 
represented in corporate governance.'
    According to an SEC staff estimate, retail investors own roughly 
two-thirds of Russell 1,000 companies, often through mutual funds or 
pensions.
    But it is not always clear whether the proxy rules promote the 
long-term financial interests of those retail investors, many of whose 
interests are expressed through intermediaries.
    Last week, John Bogle, the creator of the index fund, warned that 
``if historical trends continue, a handful of giant institutional 
investors will one day hold voting control of virtually every large 
U.S. corporation.''
    With this level of concentration and intermediation, it is even 
more important that the proxy voting process and voting decisions of 
fiduciaries reflect the clear economic interests of the retail 
investors on whose behalf these institutional investors engage.
    I look forward to hearing the views of our witnesses on these and 
other proxy-related issues, and I thank them for their willingness to 
appear here today.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you, Chairman Crapo, and welcome to our witnesses.
    All too often, we see corporate boards and executives focus on 
short-term profits, instead of long-term investments in their companies 
and their workers.
    We saw pretty clear evidence last week.
    GM announced it would lay off 14,000 workers and close five plants, 
including the Chevy Cruze plant in Lordstown, Ohio. In the last 2 
years, GM has laid off nearly 3,000 workers at the Lordstown plant and, 
after this most recent decision, that number may grow to 4,500 workers 
who have gotten a pink slip. This decision is devastating for the 
Mahoning Valley.
    Meanwhile, GM has spent more than 10 billion dollars on stock 
buybacks since 2015--more than double what it expects to save from the 
job cuts and plant closings. Of course, Lordstown workers and their 
families are angry.
    The President claimed last year's Republican tax bill would mean 
more money in workers' paychecks. But, instead we've seen stock 
buybacks explode this year to a record 894 billion dollars. Executives 
claim these record buybacks are supposed to reward shareholders, but 
they don't seem interested in hearing from shareholders when they raise 
concerns.
    And the bad corporate decisionmaking doesn't stop with GM and with 
buybacks and layoffs. Marriott announced on Friday that it had a data 
breach between 2014 and 2016, affecting 500 million customers, which it 
only discovered in September.
    Cyber breaches are so common now that it's routine for Wall Street 
analysts to estimate the stock price hit companies will take in the 
week after they announce a breach. Then it's business as usual, and it 
doesn't even matter that companies can't secure their customers' 
personal information.
    These are just the most recent examples of corporate mismanagement 
and abuse of workers and customers.
    Excessive executive compensation packages; abuses and scandals that 
can wreck customers' financial lives like we've seen at Wells Fargo; 
price gouging for vital prescription drugs like we've seen at the 
company Mr. Gallagher works for--it's clear these corporations aren't 
making good decisions for their companies, their customers, or their 
workers. It's why we should foster more shareholder engagement, not 
less.
    But, that's not how corporate lobbyists and special interests see 
it. The Wall Street business model doesn't see workers like those in 
Lordstown as vital to their companies--it sees them as a cost to be 
minimized.
    But incredibly, we're here today to discuss how to make it even 
more difficult for shareholders to hold management accountable. Several 
bills introduced this Congress undermine shareholders' oversight of the 
companies they own.
    Those measures would deny all but the largest shareholders the 
right to submit proposals for a vote, requiring investors to own 
billions of dollars of company stock to be eligible to submit a 
shareholder proposal. Current rules permit small shareholders to submit 
proposals, but apparently, folks in this town want to stack the deck 
even further against Main Street, small-time investors.
    This hearing will also consider proposals that make it harder for 
institutional investors to have timely access to research and analysis 
from proxy advisory firms that the investors have hired. These 
proposals would give corporate interests access to this information 
before the public retirement systems, investment fund managers, and 
foundations who manage money for hardworking Americans.
    You'll hear about errors and inaccuracies in those reports, but 
what it really amounts to is an effort to make independent analysis 
less so. That's also the wrong answer.
    Shareholders of all sizes deserve to have every tool available to 
hold executives accountable--forcing them to think beyond their short-
term self-interest, and manage for the long term. Companies, 
shareholders, workers, and other stakeholders all benefit when the 
system promotes fairness, communication, and trust.
    Thank you, Mr. Chairman.
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
                 PREPARED STATEMENT OF MICHAEL GARLAND
    Assistant Comptroller for Corporate Governance and Responsible 
   Investment, Office of the New York City Comptroller Scott Stringer
                            December 6, 2018
    Good Morning, Chairman Crapo, Ranking Member Brown, and Members of 
the Committee. My name is Michael Garland and I am the Assistant 
Comptroller for Corporate Governance and Responsible Investment in the 
Office of New York City Comptroller Scott Stringer. Comptroller 
Stringer serves as a trustee to four of the five New York City Pension 
Funds and as the investment advisor and custodian to all five funds, 
which collectively have more than $200 billion in assets under 
management and a long history of active share ownership on issues of 
corporate governance and sustainability. It is an honor to be invited 
to provide this Committee with our perspective on important matters of 
shareowner responsibility.
    The NYC Pension Funds (or ``NYC Funds'') together constitute a 
system made up of five independent public pension funds that provide 
retirement security to more than 700,000 of the City's active and 
retired teachers, police, firefighters, school employees, and general 
employees. Each of these constituencies has member representatives on 
the board of its respective fund.
    With an average retirement benefit of $38,000 per year, it is 
likely that many of our members only participate in the capital markets 
through their role as pension fund beneficiaries. Our members are true 
Main Street investors, as opposed to a group using that name that 
represents the interests of company managers.
    The NYC Pension Funds make up the fourth largest public pension 
system in the United States. We are long-term share owners of 
approximately 10,000 public companies around the world, including more 
than 3,000 U.S. companies.
    Because of our long-term investment horizon, and the fact that we 
allocate more than 80 percent of the funds' investments in U.S. public 
equity through passive index strategies, we cannot readily sell shares 
in a company when we have concerns about the company's performance, 
board composition and quality, management, executive compensation, 
workplace practices or management of risks, including those related to 
climate change.
    In these instances, the only way we can protect and create long-
term shareowner value is to be an active owner of our portfolio 
companies by exercising our legal rights as shareowners. We (1) 
actively vote our proxies at each portfolio company, and (2) actively 
engage our portfolio companies, mainly through shareowner proposals and 
dialogue ensuing from those efforts, in order to promote sound 
corporate governance and responsible and sustainable business 
practices. In fact, over the last 30 years, the NYC Pension Funds have 
been the most prolific filer of shareowner proposals in the Nation.
    As long-term owners, we expect companies to create long-term, 
sustainable value. We push them to address a range of environmental, 
social and governance risks that are fundamental to ensuring long-term 
profitability. This is part of our fiduciary duty as long-term 
shareowners.
    We believe sound corporate governance and sustainable business 
practices--the latter including responsible labor, human rights and 
environmental practices--are fundamental to creating and protecting 
long-term shareowner value and sustainable economies.
    The link between environmental, social and governance factors 
(ESG), on the one hand, and risk management and long-term value 
creation on the other, is supported by a growing body of empirical 
research, including an important study from Harvard Business School in 
2011.
    The study tracked the performance of 180 U.S. companies for 18 
years and found that that ``High Sustainability'' companies 
outperformed ``Low Sustainability'' companies in terms of both stock 
market performance and profitability. According to the study, High 
Sustainability companies are those that embrace corporate policies 
related to the environment, their employees, community, products, and 
customers.
    Our capacity to fulfill our proxy voting and engagement 
responsibilities to our beneficiaries depends heavily on (1) the timely 
receipt of expert, independent proxy research, and (2) our longstanding 
ability to submit shareowner proposals and to cast votes on proposals 
submitted by other shareowners, regardless of their size or 
sophistication (or whether institutional or retail).
    The NYC Funds have been filing shareowner proposals and voting our 
own domestic proxies for more than 30 years.
    Mr. Chairman, it is an honor therefore to be invited to provide 
this Committee with our perspective on (1) the role of proxy advisory 
firms, their involvement in the voting process and their current 
regulatory treatment; (2) the shareowner
proposal process; and (3) the level of retail shareowner participation, 
its causes and whether the relatively low level of retail participation 
compared to institutional investors is cause for concern.
    The remainder of my testimony will address each of these topics in 
order.
Proxy Advisors
    With respect to proxy advisory firms, we oppose any additional U.S. 
Securities and Exchange Commission (SEC) actions that would compromise 
the independence of research, reduce the amount of time we have to 
review research aimed at voting at that company's annual meeting, or 
that would otherwise impose additional costs on our participants and 
beneficiaries in terms of either added burdens on our staff resources 
or additional compliance costs imposed on our advisors, which we, as 
paying clients, would ultimately bear.
    While proxy advisory firms have been the subject of vocal 
criticism, I find it remarkable the impetus for onerous regulation of 
those firms is coming from those who are the subject of the analysis--
particularly board members, corporate executives and their lobbying 
organizations--rather than from the institutional investors who pay for 
the research services. To the extent that there are concerns on the 
quality of proxy advisory firm research, that is our problem as 
investor clients. Many of those who are the subject of the proxy 
analysis do not like to be criticized and receive negative vote 
recommendations, so they are reportedly lobbying aggressively and 
inappropriately to insert themselves between the proxy advisers and the 
clients of those advisors.
    The chief allegation of these lobbyists is that proxy advisor 
clients ``automatically follow'' proxy advisor recommendations and 
therefore the proxy advisors have too much influence. This argument was 
reflected in the testimony before this Committee last June by Thomas 
Quaadman of the U.S. Chamber of Commerce. The Chamber and similar 
lobbyists apparently seek to sow seeds of doubt about the capabilities 
of institutional investors to exercise their own judgment. The 
unfounded suggestion is that when it comes to voting proxies, which are 
considered plan assets under relevant fiduciary law, sophisticated 
institutional investors--whose job is to manage billions of dollars of 
investment capital--are like lemmings, blindly following the 
recommendations of proxy advisors in our proxy vote decisionmaking. 
This does a great disservice and I want to disabuse Committee Members 
of the notion that the argument of undue influence has merit.
    Although Institutional Shareholder Services (ISS), the largest 
proxy advisory firm, recommended voting against say-on-pay proposals at 
12.3 percent of Russell 3000 companies in 2018 (through November 1), 
only 2.4 percent of Russell 3000 companies received less than majority 
shareowner support on their say-on-pay proposals. According to Proxy 
Insight, which analyzes the voting records and policies of over 1,800 
global investors and is the world's leading source of information on 
global shareowner voting, ``the number of investors delegating their 
entire policy and voting to a proxy voting advisor is actually very 
low--from a sample of 1,413 investors, 75 percent have their own 
dedicated proxy voting policy representing a significant 92 percent of 
the assets under management.'' According to ISS, 85 percent of its top 
100 clients use a custom voting policy.
    The NYC Funds are among the proxy advisor clients that use custom 
policies. In our case, we have one policy that applies specifically to 
the U.S. market, which we first adopted in 1987. We have a second set 
of policies, adopted later, that apply to non-U.S. markets. While we 
have been voting our own U.S. proxies for more than 30 years, just this 
year the Comptroller's Office took back voting control of our entire 
global portfolio from our outside investment managers. Both policies, 
which are updated regularly, establish voting principles and positions 
on a broad range of issues, consistent with our views on how best to 
maximize long-term shareowner value.
    I would like to provide the Committee with a window into our proxy 
voting process and the essential role that proxy advisors play in 
enabling institutional investors like us to comply with our fiduciary 
duty to vote proxies.
    Like other institutional investors with custom policies, we use the 
research we receive from both of our proxy advisors as a critical 
inputs into how we apply our own guidelines. The specific proxy voting 
recommendations from the proxy advisors are entirely irrelevant to our 
process. In fact, as I will discuss in a moment, there is little 
correlation between their recommendations and our votes on executive 
pay, perhaps the most sensitive and contentious issue from the issuers' 
perspective (and likely the most important element leading CEOs and 
their representatives to seek onerous regulation of proxy advisors).
    For the year ending June 30, 2018, our office cast 71,000 
individual ballots at 7,000 shareowner meetings in 84 markets around 
the world, each market with its own governance norms and matters 
subject to shareowner voting. Consistent with our commitment to 
transparency, all of our proxy voting decisions are available on our 
website for our participants and beneficiaries, and our portfolio 
companies, to review.
    During the peak of U.S. proxy season, which runs from April to the 
end of June, the number of meetings and votes is very large, putting a 
premium on having a high-quality, efficient process, to which the proxy 
advisory firms are indispensable. In the U.S. market, every ballot 
item, including each management and shareowner proposal, is 
individually reviewed and voted by our voting staff. We have five full-
time staff dedicated to proxy voting during peak season, and our least-
tenured investment analyst has 12 years' experience applying the NYC 
Funds' domestic proxy voting guidelines. All votes are cast according 
to our own guidelines irrespective of the proxy advisors' voting 
recommendations. Given the volume of annual meetings, and the 
complexity of company proxy disclosures, particularly with respect to 
executive compensation, our ability to apply our own guidelines rests 
in large part on the timely receipt of the independent, expert research 
we receive from our two proxy advisors (presently ISS and Glass Lewis).
    Much of the information we obtain from the advisors' research 
reports is available in company proxy statements. But different 
companies present much of the important information in different ways 
and in various places. Just as our investment advisors rely on 
intermediaries like Bloomberg and FactSet to organize data from company 
disclosures, we rely on proxy advisory firms to pull information into a 
consistent format that permits quick reference to comparable data. Our 
ability to locate and calculate the necessary data points without this 
research would impose an unreasonable burden on the investment analysts 
who vote our proxies.
    In addition to organizing and presenting in a uniform way 
information that is already somewhere in the proxy statement, the proxy 
advisors provide independent value-added analysis, such as peer group 
comparisons for executive compensation and total shareowner returns, 
the robustness of hedging and pledging policies, board gender diversity 
by percent--all of which are required to apply our guidelines. I would 
note that many company complaints of ``inaccuracies'' are that the 
proxy advisors use their own frameworks, rather than those of the 
company involved, to analyze issues (e.g., ISS and Glass Lewis have 
their own definitions of director independence, leading to multiple 
company complaints of ``inaccuracy'' because the analysis does not 
parrot the company-favored definitions).
    As an example of our independence, while the NYC Funds voted 
against say-on-pay at 25.4 percent of our U.S. portfolio companies for 
the year ending June 30, 2018, ISS only recommended against say-on-pay 
at 16.7 percent of these same companies.
    We recognize our responsibility to vote proxies with diligence and 
integrity, and in the best long-term interests of our participants and 
beneficiaries. We do not want company management interposed between us 
and our research service providers, and this is even more true if it 
involves additional cost and delay, giving us less time for our due 
diligence on each proxy vote.
Shareowner Proposals
    In our experience, as both a proponent and proxy voter, the 
shareowner proposal process is an essential and cost-effective tool for 
investors to protect and enhance value by aggregating and expressing 
their views to management, boards and other shareowners on major 
governance issues, corporate policies and important and emerging risks 
and opportunities. The NYC Funds have used shareowner proposals to 
prompt portfolio companies to constructively engage on specific 
concerns in ways that benefit the investing public.
    Critics of shareowner proposal rights are seeking to remedy 
problems that do not exist. For example, critics of shareowner 
proposals claim that such proposals are deterring companies from going 
public, and thereby distorting our capital markets. This claim is 
highly implausible.
    Proposals generally are nonbinding, and the average Russell 3000 
company can expect to receive a proposal once every 7.7 years. Most 
proposals go to larger, established companies.
    The notion seems to be that a company would forgo the benefits of 
efficient public equity markets to avoid the possibility that, sometime 
in the next decade or so, a shareowner might submit a nonbinding 
proposal to (for example) ask for improved disclosures around climate 
risk. This claim too is simply not plausible.
    U.S. public equity markets are efficient, broad and deep. It is 
true that private equity markets also are larger and more efficient 
than in the past, and that some new economy companies have less need 
for capital than companies that emerged in earlier years, and can gain 
high valuations without needing to go to public markets. But that has 
nothing to do with shareowner proposals.
    Outside investors (in both publicly held and private companies) 
want some means to protect their interests, and to hold management 
accountable. For public companies, that means providing outside 
shareowners with certain rights, including the right to file shareowner 
proposals, along with other regulatory and disclosure requirements that 
are the cost of admission to public markets, where companies have a 
dispersed shareowner base.
    The NYC Funds have a proud record of engaging our portfolio 
companies on a broad range of environmental, social, and corporate 
governance issues, and thereby working to enhance long-term shareowner 
value, often through shareowner proposals. Our funds have filed more 
than 1,000 shareowner proposals, almost certainly more than any other 
institutional investor in the world, with a record dating back 30 
years. And our shareowner proposal initiatives have led to significant 
market changes.
    Among important changes that the NYC Pension Funds' shareowner 
proposals have helped achieve over the last 30 years (and often working 
in parallel with other institutional investors):

    Substantial independent majorities on boards of directors

    Enhanced standards of independence for members of company 
        audit and compensation and nominating committees

    Strengthened policies to enhance board diversity

    Enhanced company disclosures on board composition and 
        skills

    Annual election of all directors

    Proxy access rights

    Majority vote standards in election of directors

    Shareowner advisory votes on executive compensation

    Effective clawback policies

    Company disclosure of corporate lobbying and political 
        spending

    Emphasis on performance-based awards in executive 
        compensation

    Company policies prohibiting discrimination based on sexual 
        orientation or gender identity

    A particularly good example of market change from shareowner 
proposals relates to ``proxy access''--that is, a mechanism to permit 
shareowners to include their nominees on the company proxy card for a 
minority of board seats under certain circumstances. In 2014, 
Comptroller Stringer and the NYC Funds launched the Boardroom 
Accountability Project, a campaign to implement proxy access on a 
company-by-company basis in the U.S. market using shareowner proposals.
    Proxy access had long been a top priority for the NYC Pension Funds 
and other institutional investors. We applauded in 2003 when the SEC 
first proposed a proxy access rule in response to board failures at 
Enron and WorldCom. The SEC in 2009 again proposed a proxy access rule 
as a key response to the governance failures that contributed to the 
financial crisis of 2008. As authorized by the Dodd-Frank Act of 2010, 
the SEC enacted a proxy access rule in August 2010. The rule provided 
shareowners that collectively held 3 percent of a company's shares for 
at least 3 years the ability to nominate director candidates 
representing up to 25 percent of the board using the company's proxy 
materials. In September 2010, however, the Business Roundtable (BRT) 
and U.S. Chamber of Commerce successfully challenged the proxy access 
rule in Federal court. While the BRT and the Chamber opposed a 
universal rule, they implicitly endorsed the kind of private ordering 
they now oppose, and we called their bluff with our shareowner proposal 
effort.
    Today, largely as a result of the Boardroom Accountability Project, 
approximately 540 U.S. companies, including 70 percent of S&P 500 
companies, have enacted proxy access bylaws with terms similar to those 
in the vacated SEC rule, up from only six companies in 2014 when we 
launched the project.
    In July 2015, economic researchers at the SEC released a study that 
analyzed the public launch of the Boardroom Accountability Project and 
found a 0.5 percent increase in shareowner value at the first 75 firms 
that received proxy access shareowner proposals from the NYC Funds. 
(See http://www.sec.gov/dera/staff-papers/working-papers/
24jul15_bhandari_public-vs-private.html.) The SEC staff's findings were 
consistent with a 2014 CFA Institute study that found that proxy access 
on a market-wide basis has the potential to raise U.S. market 
capitalization by as much as 1 percent, or $140 billion.
    As another example, the NYC Funds won significant change on company 
clawback policies, making use of shareowner proposals. Motivated by the 
small number of top executives held accountable for the excessive risk 
taking and compliance failures that led to the global financial crisis, 
the NYC Funds have fought for strong policies to enable boards at many 
major banks to claw back compensation from senior executives 
responsible for egregious misconduct that causes financial or 
reputational harm to their companies. In 2013, in response to a 
shareowner proposal, we successfully negotiated this enhancement to 
Wells Fargo's clawback policy. It was that policy that then enabled the 
Wells Fargo board of directors to announce in September 2016 that it 
would recoup $60 million from two senior executives in order to hold 
them financially accountable for the fake account scandal that involved 
the loss of jobs by 5,300 lower-level employees and cost Wells Fargo 
$185 million in fines and penalties.
Rule 14a-8 and the No-Action Process
    SEC Rule 14a-8--which governs the shareowner proposal process--is 
largely effective, and is based on sound analysis of costs and 
benefits. Adjudication through court proceedings are substantially more 
expensive for all parties than the no-action process. We know this from 
experience, as we usually are satisfied with the SEC no-action process 
on our shareowner proposals (and have usually accepted rulings against 
our proposals), but on occasion have been moved to go to court when we 
believed an SEC staff decision was not warranted.
    The 13 permitted exclusions reflect the SEC's determination as to 
what issues are or are not important enough to shareowners as a whole 
to warrant giving shareowners a vote. Thus, if a shareowner who meets 
the holding requirements wishes to present a topic that surmounts the 
13 enumerated bases for exclusion, there is a benefit to all 
shareowners in terms of being able to have a say on what is, by 
definition, a policy matter affecting their interest as shareowners.
    While the SEC has generally applied the rules fairly, there have 
been instances in which the SEC reversed precedent unfairly and to the 
significant detriment of investors, sometimes prompting the NYC Funds 
to seek legal recourse.
    The first such instance was in 1992, when the New York City 
Employees Retirement System (NYCERS, one of the five NYC Pension Funds) 
filed a shareowner proposal asking Cracker Barrel to adopt a policy of 
nondiscrimination based on sexual orientation (the company had a policy 
against hiring gay employees). The SEC not only permitted the company 
to omit the proposal from its ballot because it dealt with ``ordinary 
business,'' but also set a new standard whereby employment-based 
shareowner proposals would ``always be excludable by corporations.'' 
NYCERS challenged the decision in court. While the lawsuit was 
unsuccessful (NYCERS lost on appeal), the resulting investor outcry 
later prompted the SEC to reverse its position, paving the way for 
investors to challenge workplace discrimination and address employment 
practices in shareowner proposals.
    Today, largely in response to hundreds of shareowner proposals 
submitted by the NYC Funds and other investors, nearly 92 percent of 
Fortune 500 companies have nondiscrimination policies protecting 
employees on the basis of sexual orientation, and 82 percent include 
gender identity in those policies. A 2016 analysis by Credit Suisse 
found that 270 companies that provided inclusive LGBTQ work 
environments outperformed global stock markets by 3 percent for the 
previous 6 years.
    Together with proxy access, this is among the NYC Funds' signature 
shareowner initiatives in terms of changing market practice.
    Just as the SEC's Cracker Barrel decision threatened to unfairly 
and permanently exclude shareowner proposals on employee-related 
issues, last year's decision by the SEC to permit EOG Resources to 
exclude a proposal relating to greenhouse gas (GHG) emissions threatens 
to similarly undermine investors' ability to file proposals addressing 
fundamental risks related to climate change. The proposal would have 
required EOG to ``adopt company-wide, quantitative, time-bound targets 
for reducing greenhouse gas emissions and issue a report, at reasonable 
cost and omitting proprietary information, discussing its plans and 
progress toward achieving these targets.'' The SEC staff found 
exclusion appropriate on the grounds that the proposal sought ``to 
micromanage'' the company, despite the broad language in the proposal 
simply seeking the use of goals, as used by many other companies (more 
than 60 percent of Fortune 100 companies already set GHG emission 
targets). This was a sharp reversal of earlier SEC views on climate 
change proposals.
    In 2018, the NYC Funds requested that six additional companies 
include nearly identical resolutions in their proxy solicitation 
materials. The proposal was withdrawn at four of the companies, with 
three agreeing to substantially implement the proposal.
    We plan to file similar proposals for 2019. Already though, one 
recipient of that proposal, perhaps feeling emboldened by last year's 
EOG no-action letter, has sought no-action relief from the SEC on the 
grounds of ``micromanagement.''
    I would like to address two elements of Rule 14a-8 that have 
received particular attention in recent months: the ownership threshold 
(currently $2,000 in shares or 1 percent of shares, whichever is lower) 
and voting support thresholds to resubmit a proposal.
    Ownership threshold: There was no ownership threshold (other than 
ownership of at least one share of stock) until 1983, when the SEC 
began requiring that the proponent(s) have held at least $1,000 in 
shares continuously for at least 1 year. The SEC raised this threshold 
to $2,000 in 1998, more or less in line with inflation in the 
intervening period. The SEC's view in adopting a threshold was that 
retail and other smaller investors should have access to use of 
shareowner proposals, but with some minimal level of ownership.
    In our view, shareowners of any size should have the opportunity to 
use the shareowner proposal mechanism. Large institutional investors do 
not have a monopoly on good ideas. New York City pension funds 
supported about 77 percent of shareowner proposals in 2018, many from 
smaller investors including retail shareowners.
    Section 844 of the Financial Choice Act, approved by the U.S. House 
of Representatives in 2017, includes a provision that would 
dramatically increase the ownership threshold, and require investors to 
have held a minimum of 1 percent of an issuer's voting securities for 
at least 3 years. If this had applied in the past, it would have 
eliminated all or nearly all shareowner proposals that have ever been 
submitted. For example, despite being among the largest pension 
investors in the world, NYC Funds rarely hold more than 0.5 percent of 
any individual company, and most often hold less. As a result, the 
Choice Act would effectively prevent our funds entirely from 
participating in the shareowner proposal process. To submit a 
shareowner proposal today at Microsoft or Apple, given share prices at 
the end of November, would have required ownership of at least $85 
billion in shares at each company, far more than the $1.6 to $2.2 
billion we currently have invested in each of these two companies.
    Keith Higgins, the former director of Corporation Finance at the 
SEC, said in 2018: ``How do you ever determine the `right' level of 
ownership that should trigger the right to cause the company to include 
a shareowner proposal in its proxy statement? $2,000 seems low--but 
what is a better number? A February memo from the House Financial 
Services Committee suggested modernizing the threshold for inflation, 
but that is unlikely to have any meaningful impact.'' (An adjustment 
for inflation would put the threshold at about $3,000 in 2018 dollars.)
    Resubmission thresholds: In 1948, the SEC first set a resubmission 
threshold, providing that a proposal that failed to earn at least 3 
percent support in a year could be excluded from company proxy 
materials the next year. In 1954, the SEC set the current rule, 
providing for exclusion if a proposal did not earn at least 3 percent 
support the first year it is voted on, 6 percent the second year and 10 
percent the third and subsequent attempts within 5 years. Attempts to 
raise the thresholds modestly in 1983 and drastically in 1997 failed, 
in 1997 because of overwhelming investor opposition that led the SEC to 
conclude that higher thresholds just did not make sense.
    There is good reason for keeping resubmission thresholds relatively 
low. It can take many years, and different approaches and iterations, 
to build investor support for a shareowner proposal. The proposal for a 
sexual orientation nondiscrimination policy at Cracker Barrel received 
only 14 percent of the vote when it was first on the ballot in 1993. 
Similar proposals received less than 10 percent of the vote into the 
early 2000s, but by 2011, the NYC Funds received a 62 percent majority 
vote on such a proposal at KBR. Similarly, proposals for annual 
election of all directors, increased board diversity, and better 
disclosure on environmental impacts and risks all started out with 
limited support that grew substantially over the years.
    Moreover, a proposal with limited support in a given year can 
become highly important if circumstances change. In 2007, a nonbinding 
shareowner proposal for an independent chair at Bank of America won 
only 16 percent support. Two years later, an unusual binding proposal 
for an independent chair was approved by Bank of America shareowners, 
after the company's share price had declined more than 90 percent in a 
short period of time during the financial crisis. That proposal became 
a key element in expression of shareowner views on changing leadership 
at the bank, without the necessity or disruption of a hedge fund 
activist campaign to elect a new board majority. While not diminishing 
regulatory influence in improving Bank of America governance, I would 
argue that that successful shareowner
proposal, which received such limited support 2 years earlier, was 
critical in
evolutionary change that built a much better, more stable bank that was 
responsive to shareowners as well as regulators.
    To highlight another concern, the SEC resubmission rule applies 
broadly to proposals ``on the same subject matter.'' A proxy access 
proposal at Netflix received support from 4.4 percent of the vote in 
2013. From 2015 to 2018, Netflix shareowners annually approved a 
different NYC Funds' proxy access proposal--advocating different 
eligibility requirements--that would have been excluded if thresholds 
had been raised. And recently, we have seen efforts to pre-empt 
proposals in a given year urging stronger policies on climate change by 
a group submitting a proposal to go in the opposite direction. With 
high resubmission thresholds, that kind of mischief-making would be 
encouraged on a broader scale as long as the SEC policy refers to ``the 
same subject matter'' rather than ``the same proposal.''
    The Netflix case points to another concern: the playing field is 
tilted in favor of management when shareowners propose change. The fact 
that Netflix has refused to implement multiple shareowner proposals 
receiving majority votes, and challenges to shareowners in submitting 
binding proposals of the sort used at Bank of America in 2009, shows 
this is not an even playing field, as does the fact a company is 
unlimited in the length it can use to oppose a proposal, while the 
shareowner proponent is limited to 500 words; corporate management can 
call on company resources to hire counsel to pursue no-action requests, 
while the proponent engages in that debate at her own cost; and 
management has access to preliminary voting tallies, which can help 
management organize its effort when there is a close vote, while the 
shareowner proponent now has access to such tallies only with 
permission of management.
    Finally, we need to recognize that a significant subset of U.S. 
companies provide insiders with special voting rights that make the 
current resubmission thresholds effectively quite high, as they are 
based on ``votes'' and not ``shares.'' At Facebook this year, a 
shareowner proposal requesting that the board establish a risk 
oversight committee received support from 11.6 percent of votes, but 
that appears to represent 34.2 percent of shares held in the publicly 
traded share class (that is, setting aside the super-voting shares with 
10 votes per share held almost completely by insiders). Another 
proposal requested a report to shareowners on management of risks posed 
by content management policies (including election interference, fake 
news, hate speech, sexual harassment and violence) to the company's 
finances, operations and reputation. That proposal was supported by 
10.2 percent of votes, but apparently our votes were among the 30.0 
percent of shares held in the publicly traded share class that voted 
for the proposal.
    While Facebook minimized the need to improve risk management, 
others would point to the substantial loss of shareowner value since 
the company's 2018 annual meeting as validating the concerns of a 
significant portion of outside shareowners. It would be unfortunate if 
resubmission thresholds ruled shareowner proposals on risk management 
at Facebook out of bounds for the next several years.
Retail shareowner participation
    All shareowners regardless of their ownership stake, should have 
the opportunity to fully exercise the rights of share ownership, 
casting proxy votes consistent with their investment preferences and 
objectives, and submitting shareowner proposals.
    Retail shareowner participation in proxy voting has fallen in 
recent years. According to Broadridge, retail voting participation 
averaged 28.4 percent for the 10 years ending June 30, 2017, compared 
to over 90 percent for institutional shareowners. While encouraging 
retail shareowner participation is commendable, it may be that some 
retail shareowners prefer to abstain from voting so that they can defer 
to the corporate governance expertise of institutional investors who 
have a fiduciary duty to vote. One trend is apparent from the data. The 
recent decline in retail voter participation is directly correlated to 
companies choosing to eliminate paper mailings of proxy materials as a 
cost savings measure. Retail shareowners are twice as likely to vote 
when they receive paper proxy materials relative to e-delivery or 
notice and access mailings, illustrating that technology-based 
solutions can have unintended consequences . For this reason, the 
electronic delivery of proxy materials should be opt-in, not opt-out.
    We should encourage efforts like CorpGov.net, FundVotes, and Stake 
PBC that in various ways seek to foster retail voting and participation 
in the shareowner proposal process. Some other proposals on the table, 
such as client directed voting, whereby a shareowner could choose to 
automatically vote with management, are potentially problematic. Such a 
system would only be democratic if retail shareowners are given a 
genuine choice in who would cast their votes.
    Absent genuine choice, client-directed voting would simply be a 
form of ``robo-voting'' for management. It is curious that some of the 
same groups who are advocating for client-directed voting are sounding 
alarms that some institutional investors may follow vote 
recommendations from independent, expert proxy advisors.
Conclusion
    In summary, I would argue that the rights of investors to vote 
proxies, consistent with our investment objectives and preferences as 
informed by the advice of our expert advisers, and to constructively 
engage our portfolio companies using shareowner proposals are the kind 
of system of property rights that Nobel Prize winning economist Milton 
Friedman argued are fundamental to the efficient functioning of a 
Capitalist economy. Friedman also argued that the proper role of 
Government should be to protect and enforce property rights. We oppose 
any SEC actions that would infringe on these fundamental investor 
rights, which in their present form have served investors and market 
participants well.
    Thank you again for the opportunity to testify today. I commend the 
Committee for holding this hearing and welcome your questions.
                                 ______
                                 
                 PREPARED STATEMENT OF THOMAS QUAADMAN
 Executive Vice President, Center for Capital Markets Competitiveness, 
                        U.S. Chamber of Commerce
                            December 6, 2018
        The U.S. Chamber of Commerce is the world's largest business 
        federation, representing the interests of more than three 
        million businesses of all sizes, sectors, and regions, as well 
        as State and local chambers and industry associations. The 
        Chamber is dedicated to promoting, protecting, and defending 
        America's free enterprise system.

        More than 96 percent of Chamber member companies have fewer 
        than 100 employees, and many of the Nation's largest companies 
        are also active members. We are therefore cognizant not only of 
        the challenges facing smaller businesses, but also those facing 
        the business community at large.

        Besides representing a cross-section of the American business 
        community with respect to the number of employees, major 
        classifications of American business--e.g., manufacturing, 
        retailing, services, construction, wholesalers, and finance--
        are represented. The Chamber has membership in all 50 States.

        The Chamber's international reach is substantial as well. We 
        believe that global interdependence provides opportunities, not 
        threats. In addition to the American Chambers of Commerce 
        abroad, an increasing number of our members engage in the 
        export and import of both goods and services and have ongoing 
        investment activities. The Chamber favors strengthened 
        international competitiveness and opposes artificial U.S. and 
        foreign barriers to international business.
                                 ______
                                 

    Chairman Crapo, Ranking Member Brown, and Members of the Committee 
on Banking, Housing and Urban Affairs: my name is Tom Quaadman, 
Executive Vice President of the Center for Capital Markets 
Competitiveness (``CCMC'') at the U.S. Chamber of Commerce 
(``Chamber''). Thank you for the opportunity to testify today regarding 
the rules governing the U.S. proxy system and potential regulatory 
changes that we believe must be implemented to modernize our capital 
markets.
    Over the past several years, the Chamber has put forward a number 
of reports and recommendations to improve corporate governance in the 
United States and to make the public company model more attractive to 
growing businesses. These reports have included:

    2013: Best Practices and Core Principles for the 
        Development, Dispensation, and Receipt of Proxy Advice, a 
        report that helped kick-start an important debate over the 
        broken proxy advisory system in the United States;

    2014: Corporate Disclosure Effectiveness: Ensuring a 
        Balanced System that Informs and Protects Investors and 
        Facilitates Capital Formation, a report that included two dozen 
        specific recommendations to modernize the SEC's disclosure 
        regime;

    2017: Essential Information: Modernizing Our Corporate 
        Disclosure System, which emphasized the importance of the 
        longstanding ``materiality'' standard for corporate disclosure; 
        and

    2017: Shareholder Proposal Reform: The Need to Protect 
        Investors and Promote the Long-Term Value of Public Companies, 
        which outlined seven recommendations on how to fix the outdated 
        shareholder proposal system under Rule 14a-8 of the Securities 
        Exchange Act.

    Earlier this year, the Chamber--along with seven other 
organizations--issued a report entitled Expanding the On-Ramp: 
Recommendations to Help More Companies Go and Stay Public, which 
included 22 recommendations that would expand upon the success of the 
2012 Jumpstart our Business Startups (JOBS) Act. Many of these 
recommendations have also been incorporated into the JOBS And Investor 
Confidence Act, legislation that the Chamber strongly supports and 
which passed the House of Representatives in July by an overwhelming 
vote of 406-4.
    The Chamber also appreciated the opportunity to participate in the 
recent Securities and Exchange Commission (``SEC'' or ``Commission'') 
roundtable on the proxy process, which we believe was an important step 
toward reform. In advance of that roundtable, the Chamber offered the 
following reform recommendations to the SEC:
Proxy Advisory Firms
  1)  The SEC should take steps to ensure that the guidance laid out in 
        Staff Legal Bulletin 20 results in appropriate changes to 
        compliance systems for proxy advisory firms and investment 
        advisers, particularly in light of the recent withdrawal of the 
        2004 Egan-Jones and ISS no-action letters;

  2)  The SEC should enhance the conditions that a proxy advisory firm 
        must satisfy to be exempt from the disclosure and filing 
        requirements that apply to proxy solicitations;
Shareholder Proposals
  3)  The resubmission thresholds under Rule 14a-8 should be raised so 
        that proponents must receive a meaningful level of support 
        before resubmitting proposals that are overwhelmingly unpopular 
        with investors;

  4)  The SEC should withdraw Staff Legal Bulletin 14H (CF) issued in 
        October 2015;

  5)  Shareholder proposal proponents should be required to provide 
        sufficient disclosure regarding their economic interests and 
        objectives for any company in which they submit a proposal;
Universal Proxy
  6)  The SEC should abandon efforts to mandate the use of universal 
        proxy cards during proxy contests; and

Retail Investor Participation
  7)  Initiatives to increase retail investor participation in the 
        proxy process--such as client directed voting (``CDV'')--should 
        be pursued.
Discussion
    The Chamber has long advocated for policies that promote effective 
communication between public companies and their shareholders. Strong 
corporate governance is critical to promote the long-term performance 
of public companies and to enhance shareholder value.
    Over the past 15 years, significant progress has been made to 
improve corporate governance and transparency. There has been a marked 
increase in the level and quality of communication amongst boards, 
management, and investors, and many asset managers have taken steps to 
enhance their due diligence regarding proxy voting.
    However, a number of negative developments have also occurred 
during this time. Public companies and their shareholders are 
increasingly targeted through the proxy system and other means over 
issues that are unrelated to--and sometimes, even at odds with--
enhancing long-term performance. Topics that should be reserved for the 
legislative and executive branches of government--including a variety 
of social and political issues that may not be directly correlated to 
the success of the company--are increasingly finding their way into 
proxy statements and being debated in boardrooms. This has created 
significant costs for shareholders and in many instances has distracted 
boards and management from focusing on the best interests of the 
company.
    As the Manhattan Institute has pointed out, labor-affiliated 
pension plans have historically been the most active at advancing such 
agendas that do not correlate with long-term performance. From 2006-
2015, labor-affiliated investors sponsored 32 percent of all 
shareholder proposals at the Fortune 250, many of which deal
topics of a social or political nature.\1\ Both the Department of Labor 
(DOL) Inspector General and the United States Court of Appeals for the 
D.C. Circuit have expressed skepticism as to whether the shareholder 
activism engaged in by labor-affiliated funds is actually connected to 
increasing share value.\2\
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    \1\ Manhattan Institute Proxy Monitor 2016 Report https://
www.manhattaninstitute.org/sites/default/files/pmr_2016.pdf.
    \2\ E.g. Business Roundtable & Chamber of Commerce of the U.S. v. 
SEC, 647 F. 3d 1144, 1152 (D.C. Cir. 2011); Department of Labor OIG 
report ``Proxy Voting May Not Be Solely for the Economic Benefit of 
Retirement Plans (March 31, 2011).
---------------------------------------------------------------------------
    The DOL took action this year in order to ensure that Employee 
Retirement Income Security Act (ERISA) fiduciaries are making 
investments based on economic factors and not elevating environmental, 
social, or governance (ESG) impacts over returns. On April 23, 2018, 
the DOL issued Field Assistance Bulletin No. 2018-01 to provide further 
guidance on Interpretive Bulletins 2015-01 and 2016-01 relating to ESG 
investments and proxy voting in ERISA plans.\3\ Specifically, FAB 2018-
01 reiterates that ``the Department has rejected a construction of 
ERISA that would . . . permit plan fiduciaries to expend trust assets 
to promote myriad public policy preferences. Rather, plan fiduciaries 
may not increase expenses, sacrifice investment returns, or reduce the 
security of plan benefits in order to promote collateral goals.'' This 
is an important step in order to ensure that fiduciaries are making 
investments in investors' best interests based on economic returns as 
the primary consideration.
---------------------------------------------------------------------------
    \3\ https://www.dol.gov/agencies/ebsa/employers-and-advisers/
guidance/field-assistance-bulletins/2018-01.
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    FAB 2018-01 should also be viewed in the context of evidence that 
has also been put forth regarding shareholder activism and its impact 
on returns for public pension plans. A 2015 Manhattan Institute Report 
found that the social activism engaged in by certain public pension 
plan systems--such as the California Public Employee Retirement System 
(CalPERS) and the New York State Common Retirement System (NYSCR)--is 
actually correlated with lower returns for the plans.\4\ In other 
words, public pension plan beneficiaries and taxpayers in such 
jurisdictions are
actually harmed when the overseers of public pension plans emphasize 
social or political goals over the economic return of the plan.
---------------------------------------------------------------------------
    \4\ Tracie Woidtke--Public Pension Fund Activism and Firm Value 
(September 1, 2015).
---------------------------------------------------------------------------
    Outdated SEC proxy rules have allowed motivated special interests 
to take advantage of this system to the detriment of Main Street 
investors and pensioners. The problems we face today have in part 
stemmed from a lack of proper oversight over proxy advisory firms and a 
failure to modernize corporate disclosure requirements. Activists have 
been able to hijack shareholder meetings with proposals concerning pet 
issues--all to the detriment of the vast majority of America's 
investors.
    The deficiencies within the U.S. proxy system must also be viewed 
against the backdrop of the sharp decline of public companies over the 
past two decades. The United States is now home to roughly half the 
number of public companies than existed in the mid-1990s and the 
overall number of public listings is little changed from 1983. While 
the JOBS Act helped arrest that decline, too many companies are 
deciding that going or staying public is not in their long-term best 
interest. There is little doubt that the current proxy system--which 
disadvantages long-term investors and creates serious challenges for 
companies--has made the public company model less attractive. With 
fewer public companies come fewer investment opportunities for Main 
Street investors and fewer growth opportunities for the U.S. economy.
    The public company model has been a key source of strength and 
growth which has made the United States economy the strongest and most 
prosperous in world history. When businesses go public, jobs are 
created and new centers of wealth are formed. During the 1980s and 
1990s, stories of the Microsoft executive assistant or the UPS driver 
becoming a millionaire were not uncommon after a company went through 
the initial public offering (``IPO'') process. A 2012 study done by the 
Kaufmann Foundation found that for the 2,766 companies that went 
through the IPO process between 1996 and 2010, employment cumulatively 
increased by 2.2 million jobs.\5\ Other benefits also accrue to 
companies when they go public, such as revenue growth.
---------------------------------------------------------------------------
    \5\ Post-IPO Employment and Revenue Growth for U.S. IPOs June 1996-
2010.
---------------------------------------------------------------------------
    Activist campaigns, as well as routine proxy matters that companies 
deal with today, are also magnified by the outsized influence of proxy 
advisory firms. Two firms--Institutional Shareholder Services (``ISS'') 
and Glass Lewis--constitute roughly 97 percent of the proxy advisory 
firm market, yet both are riddled with
conflicts of interest, operate with little transparency, and are prone 
to making
significant errors in vote recommendations that jeopardize the ability 
of investors to make informed decisions in their best interests.
    In addition, the economic interests of proxy advisory firms is not 
always aligned to ensure the firms are best equipped to research and 
understand the conditions of the companies they are rating. These 
factors combine to create an incentive system that does not prioritize 
accurate recommendations or to provide accountability throughout the 
rating process. The Chamber and many others have long called for 
greater oversight of this industry in order to better protect investors 
and maintain the competitiveness of our vibrant public markets.
    These firms by some estimates can ``control'' up to 38 percent of 
the shareholder vote because some of their clients van automatically 
follow vote recommendations.\6\ And according to ISS, the firm covers 
more than 20,000 companies around the globe, and executes 9.6 million 
ballots representing over 3.7 trillion shares. Such an unfettered role 
in the public capital markets demands an oversight function to ensure 
that investor returns are always a top priority.
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    \6\ ISS 24.7 percent Glass Lewis 12.9 percent Source: Ertimur, 
Yicca, Ferri, Fabrizio, and Oesch. Shareholder Votes and Proxy 
Advisors: Estimates from Say on Pay (February 25, 2013).
---------------------------------------------------------------------------
    The recent decision taken by the SEC staff to withdraw the 2004 
Egan-Jones and ISS staff no-action letters (``2004 no-action letters'') 
was an important step toward fixing a broken proxy advisory system.\7\ 
These letters allowed investment advisers to outsource their fiduciary 
voting duties to proxy advisory firms, thus entrenching the position 
and influence of the firms. The letters also allowed investment 
advisers to rely on the general policies and procedures a proxy 
advisory firm had related to its own conflicts, instead of requiring 
the identification of specific conflicts related to a particular 
company. The unintended consequence of these letters was to allow 
conflicts of interest to proliferate in the proxy advisor system, and 
to further bolster the role and influence of the two dominant firms.
---------------------------------------------------------------------------
    \7\ Statement Regarding Staff Proxy Advisory Letters--Division of 
Investment Management https://www.sec.gov/news/public-statement/
statement-regarding-staff-proxy-advisory-letters.
---------------------------------------------------------------------------
    With the 2004 no-action letters now withdrawn, the SEC should take 
steps to ensure that the 2014 guidance laid out in Staff Legal Bulletin 
20 \8\ (``SLB 20'') will actually result in appropriate changes to 
compliance systems for proxy advisory firms and investment advisers. 
The conditions that a proxy advisory firm must satisfy in order to be 
exempt from the proxy solicitation rules should also be enhanced in 
order to address many of the concerns that have been raised over the 
years regarding proxy advisory firm recommendations and reports.
---------------------------------------------------------------------------
    \8\ Proxy Voting: Proxy Voting Responsibilities of Investment 
Advisers and Availability of Exemptions from the Proxy Rules for Proxy 
Advisory Firms, June 30, 2014.
---------------------------------------------------------------------------
    In addition to addressing proxy advisory firms, the SEC should 
implement reforms to the shareholder proposal process under Rule 14a-8 
of the Exchange Act, and implement a Client Directed Voting (``CDV'') 
framework that empowers retail shareholders by making it easier for 
them to participate in the proxy process. We also believe that the SEC 
should abandon its ill-advised 2016 proposal on universal proxy 
ballots.
SEC Roundtable
    The November 15th SEC roundtable examined all aspects of the U.S. 
proxy system, including proxy voting and proxy ``plumbing'' issues, the 
shareholder proposal system, and proxy advisory firms. While many 
issues were laid on the table, we believe that the top priority for the 
SEC should be reforming the proxy advisory system.
    As the Chamber pointed out in our November comment letter (see 
https://www.centerforcapitalmarkets.com/wp-content/uploads/2018/11/
11.12.18-Chamber-Proxy-Roundtable-Letter.pdf?) for the roundtable, we 
have long been concerned about the concentration, conflicts of 
interest, and lack of transparency in the proxy advisory system. ISS 
and Glass Lewis also have a significant level of influence over the 
manner in which public companies are operated. All of these factors 
harm our capital markets, impair capital formation, and discourage 
companies from going and staying public.
    One key takeaway from the November 15th roundtable is that there is 
no uniform, baseline set of regulations or even standards that apply to 
proxy advisory firms. Just about every other market participant in the 
proxy process--brokers, banks, transfer agents, asset managers, public 
companies--are subjected to at least some type of regulatory oversight. 
The lack of an oversight regime for proxy advisory firms stands in 
stark contrast to past determinations made by the SEC and Congress 
regarding the need to oversee and regulate the proxy process for public 
companies.
    The roundtable also reinforced that the two largest proxy advisory 
firms view their roles and responsibilities very differently. ISS has 
chosen to register under the Investment Advisers Act and holds itself 
out as a fiduciary, stating that ``we have a fiduciary obligation to 
our clients to provide advice that is in their best interest.''\9\ 
Glass Lewis, on the other hand, has chosen not to register at all with 
the SEC and therefore presumably does not view itself as a fiduciary.
---------------------------------------------------------------------------
    \9\ ISS Comment Letter for November 15 Roundtable.
---------------------------------------------------------------------------
    Furthermore, ISS continues to operate a consulting business to 
issuers in addition to its core institutional investor business. ISS 
claims that such a business model is not a problem because of the way 
it manages conflicts, and claims the existence of a ``firewall'' 
between the two divisions. Glass Lewis, meanwhile, stated in a recent 
letter to Members of the Senate Banking Committee that ``unlike ISS, 
Glass Lewis does not provide consulting services to issuers. We believe 
the provision of consulting services creates a problematic conflict of 
interest that goes against the very governance principles that proxy 
advisors like ourselves advocate.''\10\ (Emphasis added).
---------------------------------------------------------------------------
    \10\ http://www.glasslewis.com/wp-content/uploads/2018/06/Glass-
Lewis-Response-to-May-9-2018-Chairman-Heller-Letter_0601_FINAL.pdf.
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    We can think of no other area under the securities laws where two 
dominant market participants in the same industry operate under two 
completely different sets of rules and standards--with one of those 
participants choosing not to register with the SEC at all. While 
commenters will disagree as to the proper regulatory regime for proxy 
advisors, we think there should be broad agreement that allowing proxy 
advisory firms to choose their own regulatory model is not the right 
approach. From the Chamber's viewpoint, we believe that the business 
and regulatory models of both ISS and Glass Lewis are deficient, and 
would advocate that the SEC or Congress adopt baseline standards for 
proxy advisory firms to follow.
Congressional Action to Address Proxy Advisory Firms
    In December 2017, the House of Representatives passed H.R. 4015, 
the Corporate Governance Reform and Transparency Act, bipartisan 
legislation which would
require proxy advisory firms to register with the SEC and become 
subjected to a robust regulatory regime. The Chamber strongly supports 
this legislation as we believe it will provide for much needed 
transparency and oversight by requiring proxy advisory firms to 
disclose conflicts of interest, grant companies sufficient time to
respond to voting recommendations, and require that firms demonstrate 
their capabilities to provide fair and accurate voting recommendations.
    The Chamber also appreciates the work of Sens. Reed, Perdue, 
Tillis, Kennedy, Jones, and Heitkamp to introduce S. 3614, the 
Corporate Governance Fairness Act. This legislation would require 
certain proxy advisory firms to register under the Investment Advisers 
Act, and directs the SEC to conduct periodic inspections of firms. The 
SEC would also be required to submit a report every 5 years to the 
Senate Banking and House Financial Services Committee that evaluates 
the policies and procedures proxy advisory firms have to, amongst other 
things, manage conflicts of interest and avoid making false statements 
in vote recommendations. While the Chamber continues to evaluate this 
legislation, we believe such a bipartisan effort in the Senate 
demonstrates the broad belief that the status quo of the proxy advisory 
firm industry must be changed.
Recommendations
Proxy Advisory Firms
    In 2013, the Chamber released a report, Best Practices and Core 
Principles for the Development, Dispensation, and Receipt of Proxy 
Advice. (``Chamber principles'') The goal of this report was to improve 
corporate governance by ensuring that proxy advisory firms:

    Are free of conflicts of interest that could influence vote 
        recommendations;

    Ensure that reports are factually correct and establish a 
        fair and reasonable process for correcting errors;

    Produce vote recommendations and policy standards that are 
        supported by data driven procedures and methodologies that tie 
        recommendations to shareholder value;

    Allow for a robust dialogue between proxy advisory firms 
        and stakeholders when developing policy standards and vote 
        recommendations;

    Provide vote recommendations to reflect the individual 
        condition, status, and structure for each company and not 
        employ one-size-fits-all voting advice; and

    Provide for communication with public companies to prevent 
        factual errors and better understand the facts surrounding the 
        financial condition and governance of a company.

    With the issuance of these principles, the Chamber sought to foster 
an environment where Government would encourage proxy advisory firms, 
public companies, and investors to work together in order to create a 
system of accountability and transparency that would build off other 
positive developments in corporate governance that have occurred in 
recent years. Importantly, since 2013 both Congress and the SEC have 
become interested in reform--the House Capital Markets Subcommittee 
held a hearing on the proxy advisory system in June 2013, and an SEC 
roundtable on the topic was held later that year.
    Staff Legal Bulletin 20--issued in June 2014--implemented several 
concepts from the Chamber principles, and reaffirmed that enhancing 
shareholder value must be the primary consideration for proxy advisory 
firms when dispensing voting advice and for investment advisers when 
making proxy voting decisions. The guidance also reinforces the fact 
that the fiduciary duty of investment advisers permeates all aspects of 
the development and receipt of proxy advice. This was a positive action 
taken by the SEC that drew further attention to issues within the proxy 
advisory firm system.
    Regrettably, notwithstanding the issuance of SLB 20 and the 
increased attention by the Chamber and others regarding the issues, it 
has become clear that many longstanding problems still remain. As 
mentioned previously, without proxy advisory firms having a fiduciary 
duty or an economic interest to the companies they are rating, there is 
very little incentive for these problems to resolve themselves given 
the proxy advisory firms' for-profit business model. Since 2015, the 
Chamber and NASDAQ have conducted an annual survey of public companies 
to better understand the experience that issuers have with proxy 
advisory firms during the proxy season. What these surveys have 
consistently found is that while incremental progress has been made in 
recent years, further action is necessary.
    This year's survey (see https://www.centerforcapitalmarkets.com/
resource/2018-proxy-season-survey/)--which was completed by 165 
companies of varying sizes and across several industries--found that a 
lack of communication and concerns over the quality of vote 
recommendations remain two significant problems.
    For example, when companies requested the opportunity to meet with 
a proxy advisory firm in order to discuss issues subject to shareholder 
votes, that request was denied 57 percent of the time. Companies also 
reported being given insufficient time to provide input both before and 
after a firm's recommendations were finalized, a problem compounded by 
``robo-voting'' practices that lead to the automatic casing of large 
blocks of proxy votes in the immediate aftermath of the proxy advisory 
firms' recommendations. Some companies reported that 10-15 percent of 
their shares would automatically vote in line with an ISS 
recommendation, while others estimated that between 25-30 percent fell 
into that category. The amount of time granted to provide input ranged 
from 30 minutes to 2 weeks, with 1-2 days being the most common 
response. And only 39 percent of companies believe that proxy advisory 
firms carefully researched and took into account all relevant aspects 
of a particular issue for which it was providing a vote recommendation.
    To help the Committee better understand some of the concerns over 
the quality of proxy advisory firm vote recommendations, attached to 
this testimony is a recent compilation of supplemental proxy filings 
made by companies during the 2016, 2017, and 2018 proxy seasons 
detailing issues they have run into with proxy advisory firms. The 
issues outlined in these supplemental proxies include difficulty in 
communicating with proxy advisory firms, issues with peer group 
selection, and in some cases outright errors made on behalf of the 
proxy advisory firms. It is also likely that these issues are only a 
small cross-section of the systemic problems associated with proxy 
advisory firms, as many companies likely do not file supplemental 
proxies.
    This is an error rate of approximately 2 to 2.5 percent. But the 
error rate is much higher as many companies decide not to file a 
supplemental proxy. Such an error rate based upon the fiduciary 
responsibilities is not acceptable. Furthermore, an error rate of over 
2 percent means that proxy advisory firms are failing to provide their 
clients with the decision useful information that they need to make 
proxy voting decisions. If the clients of advisory firms are not 
getting decision useful information then they are not meeting their 
fiduciary duty.
    One of the complaints about process reforms is that it will impose 
costs upon the clients of proxy advisory firms. We agree with those 
concerns. However, an error rate of over 2 percent and failing to 
provide investors with decision investor information also adversely 
impacts return. Lower investor return will harm the retail clients of 
institutional investors to the tune of billions of dollars dwarfing any 
increased costs in process and regulatory compliance.
    The Chamber also remains very concerned regarding the conflicts of 
interest that pervade both ISS and Glass-Lewis which can improperly 
influence voting
recommendations. ISS continues to operate a corporate consulting 
business that
provides advice to companies as to how they can achieve better 
corporate governance ratings. ISS's ownership of both a research 
division and a consulting arm--accepting fees from both the 
institutional investors who receive their proxy voting advice as well 
as the companies that are the subject of that advice--has rightly been 
a focal point of criticism over the conflicts inherent in this business 
model.
    While Glass Lewis does not operate a consulting division, its 
ownership structure presents a different conflict of interest. Glass 
Lewis is owned by activist institutional investors--the Ontario 
Teachers' Pension Plan and the Alberta Investment Management 
Corporation. The Chamber has in the past brought to the attention of 
the SEC examples of how this ownership structure could result in 
tainted vote recommendations.\11\
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    \11\ See e.g., Letter of May 30, 2012, to SEC Chair Mary Schapiro 
http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/2012-
5.30-Glass-Lewis-letter-release.pdf.
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    While the lack of action to address these issues directly led to 
the congressional action referenced above, the SEC does not need to 
wait on Congress to act. There are actions the SEC can take based on 
its existing authority that would benefit investors by enhancing 
transparency and accountability in the proxy advisory industry.
SLB 20
    In response to criticisms of proxy advisory firms raised by market 
participants, academics, Members of Congress, and others, SEC staff 
issued SLB 20 in June 2014. This guidance provides public companies, 
proxy advisory firms, and investment advisers with five principles to 
adhere to:

    Fiduciary duties permeate and govern all aspects of the 
        development, dispensation, and receipt of proxy advice;

    Enhancing and promoting shareholder value must be the core 
        consideration in rendering proxy-voting advice as well as 
        making proxy voting decisions;

    The proper role of proxy advisory firms is to provide 
        accurate and current information to assist those with voting 
        power to fulfill their fiduciary duty and further the economic 
        best interests of those who entrust their assets to portfolio 
        managers;

    Clarifies the scope of portfolio managers' obligations to 
        exercise a vote on proxy issues, and it emphasizes the broad 
        discretion investment advisers have to refrain from voting on 
        every, or even any, proposal put before shareholders for a 
        vote; and

    In light of the direction provided, proxy advisory firms, 
        portfolio managers, and public companies need to reassess their 
        current practices and procedures and adopt appropriate changes 
        necessitated by SLB 20.

    There is an important nexus between the withdrawal of the 2004 no-
action letters and the fact that SLB 20 remains in effect. At its core, 
SLB 20 emphasizes that, as a fiduciary, an investment adviser must 
exercise proper oversight over a proxy advisory firm when the adviser 
uses such firm's recommendations in deciding how to vote. This helps 
ensure that the adviser is sufficiently confident in the soundness of a 
recommendation that the adviser relies on when voting. The value of 
oversight is heightened where so many concerns have been raised about 
inaccurate information and conflicts of interest affecting proxy 
advisory firm recommendations. Accordingly, the SEC should take steps, 
such as Commission guidance, rulemaking, or a combination of the two, 
that will ensure that the guidance laid out in Staff Legal Bulletin 20 
results in appropriate changes to compliance systems for investment 
advisers and, by extension, proxy advisory firms themselves.
Exemption from the Proxy Solicitation Rules
    Under the Exchange Act, entities, including proxy advisory firms, 
which engage in a proxy ``solicitation,'' are subject to various 
disclosure and filing requirements in accordance with the SEC's proxy 
rules. The SEC Divisions of Investment Management and Corporation 
Finance have explained in SLB 20 that the Commission generally has 
found that furnishing proxy voting advice, as a proxy advisory firm 
does, constitutes a solicitation. However, a proxy advisory firm may be 
able to rely on one or more exemptions to the proxy rule disclosure and 
filing requirements if the firm meets certain conditions.
    In light of the many legitimate concerns that have been raised over 
the years about proxy advisory firm recommendations and reports, the 
SEC should enhance the conditions that a proxy advisory firm must 
satisfy to be exempt from the
disclosure and filing requirements that apply to solicitations. The 
enhanced conditions would help ensure that a proxy advisory firm's 
failure to comply with the proxy rule disclosure and filing 
requirements does not unduly compromise the goals of transparency.
    Specifically, to get the benefit of an exemption, a proxy advisory 
firm, should, at a minimum, have to:

    ensure that any recommendation that the firm makes is not 
        based on materially inaccurate information or unsubstantiated 
        assumptions, by requiring that the proxy advisor:

      identify any information the firm is using in the 
        analysis which is contested by the issuer or differs from the 
        information disclosed by the issuer; and

      include a written justification for why the issuer's 
        disclosed information was not used

    adequately disclose and otherwise manage any conflicts of 
        interest;

    provide an issuer with adequate time to meaningfully review 
        a recommendation and, relatedly, the proxy advisory firm must 
        accept engagement requests by the issuer before publishing a 
        recommendation and require that the proxy advisory firm 
        disclose the nature of the engagement;

    not proceed with any automatic voting of client proxies if 
        a company contests an adviser's recommendation so that the 
        client has an opportunity to review both the adviser's 
        explanation and any additional information the company may 
        choose to provide and can make its own fully formed voting 
        decision;

    explain in sufficient detail the proxy advisory firm's 
        methodologies and how the proxy advisory firm has adhered to or 
        deviated from such methodologies in determining each 
        recommendation as to an issuer, including the extent to which 
        the firm has relied on the recommendations, analysis, or 
        rankings of any third party and, if so, which ones;

    explain in sufficient detail the reason for the proxy 
        advisory firm's peer group selection(s) if it has chosen to 
        construct its own peer group in lieu of the issuer's, including 
        a detailed description of the impact of the proxy firm's 
        decision to change an issuer's peer group and how the analysis 
        or resulting recommendation of an issuer's executive 
        compensation program would have differed had the issuer's own 
        peer group been used; and

    explain in sufficient detail why the proxy advisory firm 
        has determined that any one-size-fits-all recommendations are 
        appropriate given the particular facts and circumstances of the 
        issuer and how the analysis or resulting recommendation would 
        have differed had the issuer's own disclosed performance 
        measures been utilized.
Shareholder Proposals
    The current rules governing shareholder proposals are administered 
by the SEC under Rule 14a-8 of the Securities Exchange Act. For 
decades, the basic purpose of the shareholder proposal system was to 
allow investors to put forth constructive ideas on how to improve a 
company's governance and performance. The SEC often rightly took the 
position that proposals dealing with personal grievances, or those of a 
social or political nature, were not proper subjects to be considered 
or debated at annual meetings, largely because such proposals sought to 
advance idiosyncratic objectives rather than enhance the long-term 
performance of the company.
    Unfortunately, the shareholder proposal system today has become 
dominated by a minority of special interests that exploit an outdated 
system in order to advance parochial agendas. According to the 
Manhattan Institute's Proxy Monitor report, 56 percent of shareholder 
proposals at Fortune 250 companies during the 2017 proxy season dealt 
with social or policy concerns.\12\ And a small group of activists is 
responsible for a significant proportion of all shareholder proposals, 
a vast majority of which relate to governance matters--in fact, during 
2017, just three individuals and their family members sponsored 25 
percent of proposals submitted at the Fortune 250.\13\
---------------------------------------------------------------------------
    \12\ Proxy Monitor 2017: Season Review, available at https://
www.manhattan-institute.org/html/proxy-monitor-2017-season-review-
10757.html.
    \13\ Id.
---------------------------------------------------------------------------
    In July 2017, the Chamber released a report, Shareholder Proposal 
Reform: The Need to Protect Investors and Promote the Long-Term Value 
of Public Companies, which outlined seven recommendations for how to 
improve Rule 14a-8. The most impactful of these recommendations would 
be to raise the ``resubmission thresholds'' which determine when a 
proponent is allowed to resubmit a proposal which previously garnered 
low support. In 2014, the Chamber along with eight other organizations 
also submitted a rulemaking petition calling on the SEC to raise the 
resubmission thresholds under Rule 14a-8.\14\
---------------------------------------------------------------------------
    \14\ Petition for Rulemaking Regarding Resubmission of Shareholder 
Proposals Failing to Elicit Meaningful Shareholder Support (April 9, 
2014) Petition submitted by U.S. Chamber of Commerce, National 
Association of Corporate Directors, National Black Chamber of Commerce, 
American Petroleum Institute, American Insurance Association, The 
Latino Coalition, Financial Services Roundtable, Center on Executive 
Compensation, and Financial Services Forum.
---------------------------------------------------------------------------
    Current rules allow a company to exclude a shareholder proposal if 
it failed to receive the support of:

    Less than 3 percent support on the previous submission if 
        voted on once within the previous 5 years;

    Less than 6 percent support on the previous submission if 
        voted on twice within the previous 5 years;

    Less than 10 percent support on the previous submission if 
        voted on three or more times within the previous 5 years.

    Thus, a proponent can keep resubmitting a proposal even if nearly 
90 percent of shareholders have rejected it on multiple occasions. Such 
a system forces the vast majority of investors--who are primarily 
concerned about the economic return of their investments--to bear the 
costs of having to deal with frivolous proposals year after year. It 
also creates significant distractions for the board and management of a 
company, which should focused on long-term performance.
    We believe that, at a minimum, the SEC should raise the 
resubmission thresholds to levels that were first proposed by the 
Commission in 1997.\15\ That proposal would have raised the 
resubmission thresholds from the current 3-percent-6-percent-10-percent 
system to a more reasonable 6-percent-15-percent-30-percent. Raising 
the thresholds would still allow retail and others shareholders to 
submit a proposal and have their voice heard, but would require that 
they receive a reasonable level of support before submitting it again 
in a subsequent year.
---------------------------------------------------------------------------
    \15\ Proposed Rule: Amendments to Rules on Shareholder Proposals 
Release No. 34-39093 Sep 19, 1997.
---------------------------------------------------------------------------
    To help the SEC better understand the need to raise the 
resubmission thresholds, in October 2018 the Chamber released a report 
(https://www.center-
forcapitalmarkets.com/wp-content/uploads/2018/10/CCMC_ZombieProposal_
Digital.pdf) on ``zombie'' shareholder proposals. A zombie proposal is 
defined as one which has been submitted at a company three or more 
times but has failed to receive majority support. The Chamber report 
highlights a recent thought leadership piece that examined 2,449 
shareholder proposals submitted from 2001 to 2018 relating to special 
meetings, environmental and social, political and social, and human 
rights matters. According to this analysis:

    Only 5 percent of these types of proposals passed;

    Zombie proposals made up 32 percent of all failed 
        proposals; and

    Out of the 2,449 total proposals examined, 723 were zombie 
        proposals--almost a full 30 percent.

    Importantly, had the SEC implemented a new threshold rule of 6 
percent-15 percent-30 percent prior to the period examined, only 27 
percent of zombies would have been eligible for a fourth year on 
company ballots. In other words, more reasonable thresholds would in 
many cases have protected shareholders and companies from the costs and 
distraction associated with having to register their opposition on 
multiple occasions.
    In addition to raising the resubmission thresholds, two important 
reforms to Rule 14a-8 are necessary: The SEC should withdraw Staff 
Legal Bulletin 14H and require shareholder proponents to provide 
sufficient disclosure regarding their economic interests and 
objectives.
    Staff Legal Bulletin 14H was issued in the wake of a January 2015 
decision to suddenly reverse a previous SEC staff decision regarding a 
shareholder proposal at Whole Foods. This bulletin ultimately limited 
the ability of companies to use an exemption under Rule 14a-8(i)(9) 
which allows for the exclusion of a proposal if it conflicts with one 
of the company's own proposals and has added a great deal of 
uncertainty to the no-action process. Although it significantly altered 
the utility of an exemption recognized by Rule 14a-8, Staff Legal 
Bulletin 14H was never considered or approved by the full Commission.
    The SEC should also take steps to ensure transparency regarding the 
proponents of shareholder proposals. There is currently a gap between 
the information a company must provide to investors in its proxy 
statement and the information--or lack of information--that is provided 
by many shareholder proponents. This gap is particularly pronounced 
when proposals are submitted via proxy in whom the proponent nominally 
represents the true beneficial owner of the shares, yet owns no shares 
of its own. To level this playing field and protect investors, 
proponents should--at a minimum--be required to disclose:

    Personal information such as name and address;

    The number of shares that the proponent owns or has a right 
        to acquire, as well as why the proponent acquired the shares 
        and the objectives the proponent has with respect to the 
        issuer;

    A description of any contracts or arrangements the 
        proponent has with another person to provide any type of 
        benefit in relation to the submission of the proposal;

    Whether the person has submitted the same or a 
        substantially similar proposal to another issuer and the 
        identity of such issuer(s);

    In cases where the person submitting the proposal is acting 
        as a proxy or representative on behalf of someone else, the 
        beneficial owner of the shares should be required to make 
        similar disclosures; and

    The SEC should define what it means to ``own'' shares in 
        the context of eligibility for submitting a proposal; this 
        would help ensure that a proponent has an economic interest in 
        the company.

    We believe these are modest reforms to Rule 14a-8 that would 
protect against abuse of the system while still preserving the ability 
of retail investors to have their voice heard in corporate matters. 
Retail investors would retain the ability to bring forward a proposal 
at a company--or multiple companies if they feel it involves a 
pervasive issue--but would have to comply with basic transparency 
requirements and demonstrate that their idea can elicit a meaningful 
level of support.
Universal Proxy
    In October 2016, the SEC proposed a rule that would mandate the use 
of a universal proxy ballot in contested director elections.\16\ The 
proposal would ostensibly level the playing field for shareholders that 
do not attend a company's annual meeting. In reality, the mandated use 
of universal proxies would increase the frequency and ease of proxy 
fights for dissident shareholders and empower special interests at the 
expense of Main Street investors.
---------------------------------------------------------------------------
    \16\ Proposed Rule: Universal Proxy Release No. 34-79164; IC-32339, 
October 26, 2016.
---------------------------------------------------------------------------
    For decades, SEC rules have allowed a shareholder who is willing to 
commit the necessary resources to conduct a proxy contest to seek a 
change in board composition. If such a shareholder is able to nominate 
credible, qualified candidates that gain the support of other 
investors, the shareholder is sometimes able to alter the composition 
of the board. If shareholders wish to split their votes among a 
company's nominees and a dissident's nominees, they are able to attend 
the annual shareholder meeting in order to cast a vote. This 
longstanding system of voting for public company directors is well-
understood by the market and has been the foundation for numerous 
orderly director elections over the years.
    The mandated use of a universal proxy ballot would encourage proxy 
fights by either individual or small groups of shareholders who do not 
owe the same fiduciary duty to shareholders as the board of directors 
and management do. Such dissident shareholders are not bound by the 
company's corporate governance policies and may seek to nominate 
directors to advance their own parochial interests without regard to 
the broader best interests of the company and its shareholders as a 
whole. Following this reasoning, in rejecting Rule 14a-11 (the SEC's 
mandatory proxy access rule), the D.C. Circuit cited the SEC's failure 
to assess the risk of giving special interest groups new powers to 
pursue self-interested objectives rather than the goal of maximizing 
shareholder value.\17\
---------------------------------------------------------------------------
    \17\ See Business Roundtable v. SEC, 647 F.3d 1144, 1152 (D.C. Cir 
2011).
---------------------------------------------------------------------------
    In addition to these fundamental flaws of a mandated universal 
proxy ballot, the Commission's proposing release contained some 
provisions that would further tilt the balance in favor of special 
interests. For example, dissident shareholders would be permitted to 
send proxy statements to shareholders representing only a majority of 
the voting power of shares entitled to vote in an election. Because the 
proposed rules would not require an insurgent to solicit all 
shareholders, it stands to reason that retail investors would be 
ignored, and the only investors solicited would be ones most likely to 
favor the dissident slate. A dissident could even satisfy this 
requirement by soliciting only a handful of a company's largest 
institutional investors. Such an outcome would be detrimental to the 
interests of investors as a whole, and particularly to retail investors 
who would be left without a voice.
    To be clear, we do not object if private ordering leads individual 
companies voluntarily to elect to use a universal proxy card. Our 
objection is only to an SEC mandate on the subject. As such, we believe 
the SEC should abandon the universal proxy ballot rulemaking in its 
entirety, and instead focus on other areas of reform for the U.S. proxy 
system, which could be much more impactful in advancing the mission of 
the SEC.
Increasing Retail Investor Participation--Client Directed Voting
    As the Commission noted in its announcement for the roundtable, 
retail investors have in recent years had very low participation rates 
in the proxy process relative to institutions, with 29 percent of 
retail shareholders voting their shares in 2018 (compared to 91 percent 
of institutional investors voting their shares). The Chamber has long 
been concerned that the failure to empower retail investors in the 
proxy process creates unequal classes of investors with differing 
abilities to provide input to public companies.
    We continue to support implementation of the Client Directed Voting 
model (``CDV'') as a means to boost retail investor participation. CDV 
involves a process by which a retail shareholder can provide advance 
voting instructions to an entity authorized to vote his or her shares, 
while retaining the ability to change voting instructions in the 
future. Adoption of the CDV model would provide an alternative to 
examining every individual proxy issue, and instead allow retail 
investors to establish standing instructions on proxy voting that are 
in line with their investment philosophy and strategy. Furthermore, 
advances in technology since CDV was last considered could likely 
alleviate some of the concerns originally raised, which the SEC is well 
suited to consider.
    Allowing the use of a CDV model would give retail shareholders 
access to the same mechanisms used by many institutional shareholders 
who regularly provide standing proxy voting instructions. This 
innovative change could allow for greater retail involvement in the 
proxy process and create a more level playing field for all investors.
Conclusion
    We appreciate the good work of the Senate Banking Committee in 
finding ways to improve the competitiveness of our Nation's capital 
markets. Reform of the U.S. proxy rules is a critical piece of 
encourage more companies to go and stay public, and we look forward to 
working with all Members of Congress and the SEC in order to modernize 
an outdated system.

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM DANIEL M. 
                           GALLAGHER

    I am happy to provide the following written answers to the 
additional questions submitted by Senator Warner. As requested 
by Chairman Crapo in his letter of January 3, 2019, I have 
repeated below each of Senator Warner's four questions, 
followed in each case by my answer.
    As was the case with my testimony, the answers below are 
given in my personal capacity, including as a former 
Commissioner of the Securities and Exchange Commission. I do 
not speak for any employers or other associates, either past or 
present.

Q.1. This hearing is about the proxy process, which is a key 
way shareholders communicate their views on important issues to 
boards and companies. But it is not the only way that 
shareholders engage in a dialogue with boards and management.

Q.1.a. Can you describe what informal communication occurs 
between shareholders or a particular shareholder and the board 
or management?

A.1.a. Informal communications between shareholders and the 
directors and management of the companies in which they invest 
can occur throughout the year, often via email or phone calls 
or at investor conferences or individual investor meetings.

Q.1.b. What topics are frequently discussed, and who is 
involved in those conversations?

A.1.b. While the topics vary, common ones include corporate 
strategy, corporate governance and executive compensation. The 
participants from the company vary depending on the topic but 
often include a member of the company's investor relations team 
and other members of management. Some conversations may also 
include one or more directors, including the chairman of the 
board, the lead independent director or the chair of a relevant 
board committee. I believe portfolio managers and/or members of 
a shareholder's governance team (depending on the size and 
structure of the shareholder) typically represent the 
shareholder at those conversations.

Q.1.c. Do those communications sometimes lead to policy or 
other changes at corporations?

A.1.c. Yes. Various companies have amended their governance 
rules and documents, acted on recommendations about new 
director nominations, revised their executive compensation 
programs and enhanced their public disclosures, among other 
changes, as a result of such communications.

Q.2. There are two main proxy advisory firms. What are the 
barriers to entry in this space that prevent more competition?

A.2. Many institutional investors and pension funds have such 
large portfolios that smaller proxy advisory firms--whose 
coverage is more limited than that of the two main proxy 
advisory firms--simply are not able to provide the scope and 
breadth of coverage and services to those investors that the 
two main proxy advisory firms can. In other words, costs and 
limited resources prevent many smaller proxy advisory firms 
from being able to enter the market and scale their business 
offerings sufficiently to attract business from institutional 
investors.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM MICHAEL 
                            GARLAND

Q.1.a. Can you describe what informal communication occurs 
between shareholders or a particular shareholder and the board 
or management?

A.1.a. There is a certain degree of formality involved in most 
substantive communications between shareholders and a company, 
regardless of whether the dialogue is initiated by the company 
or its shareholders.
    Shareholders generally initiate discussions by sending a 
letter or submitting a shareholder proposal.
    Separate from these more formal meetings and discussions, 
there is very little informal communication. Informal 
communication often occurs at investor conferences (some larger 
companies with the capacity make an effort to participate in 
events) and via phone or email, and may relate to a particular 
shareholder question on something in the company's proxy 
statement.

Q.1.b. What topics are frequently discussed, and who is 
involved in those conversations?

A.1.b. Company-initiated discussions often occur in advance of 
the company's annual meeting and revolve around the various 
proposals subject to a shareholder vote at the annual meeting. 
Many companies will initiate discussions with shareholders 
following a negative voting recommendation from the proxy 
advisors, often on management's say-on-pay proposal. Some 
companies may also convene off-season discussions to hear 
shareholder feedback on the company's disclosures, corporate 
governance practices and policies and executive compensation.
    Common topics of discussion include the company's corporate 
governance policies and practices, including the structure of 
the board and the independence of its leadership, as well as 
executive compensation.
    Shareholders often initiate engagements to gain a better 
understanding of how the company is addressing a particular 
risk, and whether and how the board is involved, or to advocate 
for a particular corporate governance policy or practice, or 
for enhanced disclosure.
    Typical management participants include the Corporate 
Secretary, Investor Relations and representatives with subject 
matter expertise relevant to the shareholder's request or 
concern, which could include someone from human resources to 
discuss employment practices or executive compensation, or 
someone involved in the company's sustainability program to 
review environmental or supply chain risks and responses. It is 
often helpful to have the participation of the Corporate 
Secretary given their knowledge of, and access to, the Board of 
Directors, whose approval of the request policy may be 
required.
    Corporate directors sometimes participate in discussions, 
often in response to a specific request from shareholders, and 
their participation is valued by investors. Directors can 
provide shareholders with a window into how the board thinks 
about and oversees a particular risk or practice, and 
shareholders welcome the opportunity to make their case for 
particular reforms directly to the directors, whose support and 
approval is required, including for new shareholder rights or 
company disclosures, that might be opposed by management. Some 
topics are most appropriately discussed with independent 
directors, rather than executives who may be accountable to the 
CEO; these topics include the CEO's compensation and the 
leadership of the board in instances where the CEO also serves 
as board chairman.

Q.1.c. Do those communications sometimes lead to policy or 
other changes at corporations?

A.1.c. Yes. While some shareholders may engage mainly for 
informational purposes, the engagements initiated by the New 
York City Comptroller and pension funds are most often to 
advocate for a particular policy or practice, often 
successfully. During 2018, companies responded to our 
engagements by amending their bylaws to give shareholders the 
right to nominate directors using the company's proxy statement 
(``proxy access''), strengthening their executive compensation 
clawback policies, and disclosing data on the race and gender 
of their workforce, and whether they have a gender pay gap. 
Most of these successful engagements were initiated with a 
shareholder proposal. In our experience, shareholder proposals 
are far more likely to result in policy changes than 
engagements initiated in other ways.

Q.2. There are two main proxy advisory firms. What are the 
barriers to entry in this space that prevent more competition?

A.2. I believe the primary barriers to entry are the required 
economies of scale due mainly to the global nature of the 
portfolios of large institutional investors, such as leading 
asset owners like the New York City Pension Funds and leading 
asset managers, who are the primary clients of the proxy 
advisors. Given the paucity of competitors and new entrants, I 
suspect that proxy advisory services are a low margin business.
    As I stated in my written testimony, the New York City 
Pension Funds use both of the main proxy advisors, ISS and 
Glass Lewis. Our decision to add a redundant advisory service 
followed (1) the enactment of the Dodd-Frank Act of 2010, which 
mandated advisory vote on executive compensation at U.S. 
companies, and (2) certain concurrent changes to our proxy 
voting guidelines governing how we vote on individual director 
candidates. Given the complexity of executive compensation and 
the importance we attach to director elections, it is valuable 
to have multiple research sources to enable us to apply our 
proxy voting guidelines on executive compensation and director 
elections.
    While we would welcome the addition of qualified new 
vendors to the market, such vendors would need to meet our 
needs including providing sufficient coverage for our global 
portfolio. For the year ending June 30, 2018, our office cast 
71,000 individual ballots at 7,000 shareowner meetings in 84 
markets around the world, each market with its own language, 
governance norms and matters subject to shareowner voting. It 
is therefore essential that our proxy advisors have local 
market expertise. While smaller, market-specific vendors could 
team up, either through partnerships or more formally through 
mergers and acquisitions, to meet investors' global voting 
needs, this can create particular challenges for investors like 
us, who value receiving research reports in a standardized 
format that enables our voting staff to quickly and easily 
locate the information and metrics we need to apply our voting 
guidelines.
    I believe the inability to provide global coverage was 
among the leading obstacles to the growth and success of Proxy 
Governance, a new proxy advisory service established in 2004 
with the explicit support of the then-chairman of the Business 
Roundtable, which was then and now among the leading critics of 
ISS and Glass Lewis. In a 2004 memo to BRT members, then-
chairman Henry McKinnell reportedly called on BRT members to 
help Proxy Governance ``thrive in the marketplace'' by using 
its services. Significantly, the BRT was reportedly Proxy 
Governance's first subscriber, buying about 160 subscriptions 
to its service for its members (see Morgenson, Gretchen, 
``Pfizer and the Proxy Adviser,'' New York Times, April 21, 
2006, a copy of which is enclosed).
    According to the enclosed New York Times column, Proxy 
Governance described itself ``as a new breed of advisory 
service, providing advice that is ``completely free of conflict 
and ``with the goal of truly building long-term shareholder 
value, a formulation that appears to speak to the BRT's long-
standing critique of ISS and Glass Lewis.
    In addition to its inability to provide clients with a 
consistent global product, I understand that Proxy Governance's 
initial practice of sharing advance copies of its research 
reports to issuers was a source of concern to potential 
investor clients, who were apparently concerned about potential 
conflicts of interest or delayed receipt of research.
    In light of the continuing attacks on the proxy advisors by 
the U.S. Chamber of Commerce and the BRT, encourage the 
Committee to examine the history and experience of Proxy 
Governance. I have attached an April 2006 column, entitled 
``Pfizer and the Proxy Adviser,'' by Gretchen Morgenson of the 
New York Times, that describes Proxy Governance's history and 
perceived conflicts of interest, which I would like included 
for the record with my testimony and written responses to the 
Committee's follow-up questions.
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 RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM THOMAS 
                            QUAADMAN

    This hearing is about the proxy process, which is a key way 
shareholders communicate their views on important issues to 
boards and companies. But it is not the only way that 
shareholders engage in a dialogue with boards and management.

Q.1.a. Can you describe what informal communication occurs 
between shareholders or a particular shareholder and the board 
or management?

A.1.a. The Chamber has long supported effective and ongoing 
communication between shareholders, boards, and management. 
Over the last 15 years, we have observed a marked increase in 
both the level and quality of communication that occurs between 
these groups. According to the Chamber's most recent annual 
proxy survey, nearly 80 percent of companies report that they 
have some type of year-round regular communication program with 
institutional investors. Effective and transparent corporate 
governance systems that encourage shareholder communication and 
participation are critical for public companies to grow and 
compete.
    While some communications are more formal, like a letter 
from a large asset manager to a company CEO, other 
communications are more informal such as phone conversations or 
meetings between investors and company executives or board 
members. In the past, many institutional investors may have 
only sought to engage on specific proxy issues that were up for 
a vote in a given year. Today, however, investors are engaging 
companies on a regular basis about the long-term strategy and 
risk management companies employ to ensure long-term 
profitability. Investors often communicate directly with the 
company, either through their investor relations department or 
directly with the board or management. Oftentimes, 
institutional investors have a team in their investment 
stewardship or governance team that handles engaging directly 
with companies on these issues.
    In recent years, many large institutional investors have 
also started publicly announcing the largest topics they focus 
on from a corporate governance standpoint, and will conduct 
their conversations accordingly with companies. Because of 
this, issuers are more aware than ever about the types of 
baseline standards and practices investors are looking for, and 
therefore are better prepared to meet the expectations of their 
shareholder base.

Q.1.b. What topics are frequently discussed, and who is 
involved in those conversations?

A.1.b. The Chamber hears consistently from company directors 
and management that one of the top issues businesses face today 
is the effect of technological disruption on long-term 
performance. The rise of machine learning, artificial 
intelligence, and the growing ``FinTech'' industry all present 
challenges to established industries and companies, which must 
remain nimble and competitive in an ever-changing environment. 
Many institutional investors also engage on a number of 
traditional corporate governance issues, such as board 
composition, executive compensation, and management 
performance. There is also an increase in investor interest and 
engagement on environmental and social issues. As a result and 
to be responsive to this interest, over 80 percent of S&P 500 
companies now publish an annual sustainability report that 
includes discussion of how companies handle environmental, 
social, and governance (ESG) issues.
    While shareholder engagement doesn't always lead to an 
environmental or social proposal on the proxy statement, 
according to the Manhattan Institute's Proxy Monitor report, 56 
percent of shareholder proposals at Fortune 250 companies 
during the 2017 proxy season dealt with social or policy 
concerns. While the vast majority of these proposals have 
failed to garner majority support of investors, they have shown 
up on company ballots with increasing frequency over the last 
decade.

Q.1.c. Do those communications sometimes lead to policy or 
other changes at corporations?

A.1.c. In many instances, these communications can lead to 
policy or other changes at corporations without having to be 
settled through the proxy process. Many board members and 
executives use shareholder engagement throughout the year to 
learn where their shareholders stand on the strategic direction 
of the company overall as well as key policy considerations 
before getting to the annual meeting. This allows management to 
gauge how patient and supportive their shareholder base is as 
they implement long-term strategies at the company designed to 
generate growth. Additionally, many asset managers use 
shareholder engagement as a tool to seek policy changes at a 
company, with a vote on a shareholder proposal or director 
election used as a last resort. However, with some estimates 
that proxy advisory firms can ``control'' up to 38 percent of 
the shareholder vote, shareholder engagement often can only go 
so far in working toward a constructive conclusion on a policy 
matter in some cases.
    Proactive steps taken by issuers can also result in better 
communication and engagement between companies and issuers. For 
example, the Edison Electric Institute (EEI) recently launched 
an initiative that develops baseline standards for 
sustainability reporting in the electric utility industry. This 
project was the result of collaboration between both companies 
and investors and has been positively received by many market 
participants. EEI reported that as a result of the initiative 
and increased communication, 17 shareholder proposals at its 
member companies were withdrawn during the 2018 proxy 
season.\1\ Since shareholder proposals are often submitted only 
after a breakdown in communication between shareholders and 
businesses, this should be viewed as a positive development and 
way forward for other companies to manage expectations related 
to ESG reporting.
---------------------------------------------------------------------------
    \1\ http://www.eei.org/issuesandpolicy/finance/Documents/
EEI%20ESG%20White%20Paper_
Nov2018.pdf.

Q.2. There are two main proxy advisory firms. What are the 
---------------------------------------------------------------------------
barriers to entry in this space that prevent more competition?

A.2. As has been mentioned, two firms--Institutional 
Shareholder Services (ISS) and Glass Lewis--constitute roughly 
97 percent of the proxy advisory firm market. Both companies 
have significant conflicts of interest. ISS for instance 
operates a subsidiary that
provides consulting services to businesses seeking favorable 
vote recommendations on shareholder proposals, and Glass Lewis 
is owned by an activist investor pension fund. Additionally, 
the economic interests of proxy advisory firms are not always 
aligned to ensure the best interests of the companies they are 
rating. Given proxy advisory firms' for-profit business model, 
this creates less incentives for them to make accurate 
recommendations or to provide accountability throughout the 
rating process. This limits competition among proxy advisory 
firms by pushing them to make ``one-size-fits-all'' voting 
recommendations and limiting the amount of due diligence they 
can perform, thereby creating an ultimately inferior product.
    Additionally, the sheer volume of vote recommendations 
performed currently by proxy advisory firms represents a 
significant barrier to entry. According to ISS, the firm covers 
more than 20,000 companies around the globe and executes 9.6 
million ballots representing over 3.7 trillion shares. 
Additionally, as of June 2017, the ISS Global Research team 
covered 40,000 shareholder meetings with approximately 270 
research analysts and 190 data analysts. Glass Lewis purports 
to analyze fewer issues but as fewer analysts to do so 
(approximately 200 in 2014) ensuring that its analysts are 
equally overwhelmed with their responsibilities in a short 
period of time.
    Attempts have been made to enter the market. In the late 
2000s PGI and a few years ago Proxy Mosaic attempted with 
varying levels of success. However, neither was successful over 
a long period of time. The barriers to entry appear to be 
somewhat similar to the Credit Ratings Agencies.

              Additional Material Supplied for the Record
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