[Senate Hearing 116-24]
[From the U.S. Government Publishing Office]
S. Hrg. 116-24
THE APPLICATION OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE PRINCIPLES IN
INVESTING AND THE ROLE OF ASSET MANAGERS, PROXY ADVISORS, AND OTHER
INTERMEDIARIES
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE EVOLUTION OF ESG CONSIDERATIONS BY INSTITUTIONAL
INVESTORS AND HOW INVESTORS ENGAGE WITH COMPANIES ON ESG ISSUES
__________
APRIL 2, 2019
__________
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
36-539 PDF WASHINGTON : 2019
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Joe Carapiet, Chief Counsel
Jen Deci, Professional Staff Member
Laura Swanson, Democratic Deputy Staff Director
Elisha Tuku, Democratic Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, APRIL 2, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 26
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 26
WITNESSES
Phil Gramm, Former U.S. Senator.................................. 4
Prepared statement........................................... 27
Responses to written questions of:
Senator Cortez Masto..................................... 42
James R. Copland, Senior Fellow and Director, Legal Policy,
Manhattan Institute for Policy Research........................ 7
Prepared statement........................................... 29
Responses to written questions of:
Senator Cortez Masto..................................... 42
Senator Sinema........................................... 46
John Streur, President and CEO, Calvert Research and Management.. 8
Prepared statement........................................... 38
Responses to written questions of:
Senator Warren........................................... 49
Senator Cortez Masto..................................... 52
Additional Material Supplied for the Record
Letter submitted by Council of Institutional Investors........... 55
Letters submitted by the National Association of Manufacturers... 63
Letter submitted by Society for Corporate Governance............. 72
Revised and Extended Remarks at the Greenwich Roundtable Panel
Discussion on ESG: Path to Prosperity or Philanthropic
Confusion by Barbara Novick, Vice Chairman, BlackRock.......... 76
``BlackRock Analysis Helps Define Climate-Change Risk'',
Financial Times submitted by Senator Sherrod Brown............. 86
Statement submitted by Jana Morgan, Director of Campaigns and
Advocacy, International Corporate Accountability Roundtable.... 95
Letter submitted by Public Citizen............................... 156
(iii)
THE APPLICATION OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE PRINCIPLES IN
INVESTING AND THE ROLE OF ASSET MANAGERS, PROXY ADVISORS, AND OTHER
INTERMEDIARIES
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TUESDAY, APRIL 2, 2019
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 the role of asset managers,
proxy advisors, and retail investors in engaging with companies
on environmental, social, and governance issues.
Last year, Chairman Clayton expressed concerns that the
``voices of long-term retail investors may be underrepresented
or selectively represented in corporate governance.''
Regardless of the tools that retail investors choose for
investing their hard-earned money, it is critical that they
have a voice in investment decisions that are being made.
Whether it is a company's use of a proxy advisory firm or
an asset manager's investment decision-making policy, the
retail investor should have a clear understanding of the
decisions that are being made which ultimately represent their
shares.
Last year, John Bogle, the creator of the index fund, wrote
an op-ed in the Wall Street Journal about how successful the
index fund has been for investors, noting that if historical
trends continue, a handful of institutional investors will 1
day hold voting control of virtually every large U.S.
corporation.
Even at existing levels, as consumers continue to use index
funds, there has been an evolution in the concentration of
control now held by a small group of asset managers voting a
huge number of shares.
Today index funds hold 17.2 percent of all U.S. shares and
are the largest shareholder in 40 percent of all U.S.
companies.
With the exception of socially responsible funds, most
funds are not targeted at specific environmental or social
impact objectives, and many investors in these funds do not
expect asset managers to engage companies on social and
environmental issues on their behalf.
However, since the 2014 proxy season, institutional
shareholders support for inclusion of environmental and social
proposals has increased from 19 to 29 percent while retail
shareholder support has increased marginally to only 16
percent.
In the 2018 proxy season, ESG proposals were the largest
category of shareholder proposals on proxy ballots with 15
percent of proposals climate-related and 14 percent related to
political contributions.
It is important to understand how institutional investors
are voting the shares of the money they manage to make sure
that retail investors' interests are being reflected in these
voting decisions.
Today I look forward to hearing from our witnesses on the
following questions: How are the retail investors being engaged
within the proxy voting process and in setting the policies
used by the asset managers of the passive funds with which they
invest? Are these shares being voted to drive productivity in
our economy and increase investors' return on their hard-earned
investments, or are intermediaries using other people's money
unbeknownst to them in order to advance environmental, social,
and other political policies? What financial and other criteria
are used in identifying social issues for engagement and
measuring engagement success for end investors?
I look forward to hearing the views of all of our witnesses
on these issues, and, again, I thank them for coming here and
their willingness to appear today.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Crapo. Welcome to our
witnesses.
I hope today's hearing will allow the Committee to better
understand the growth of environmental, social, and
governance--ESG--investing principles.
Corporations have become beholden to quarterly earnings
reports. One survey of financial executives from public
companies found that 78 percent would sacrifice economic value
of their own company just to meet financial reporting targets,
telling us something, of course, about--well, about their own
compensation perhaps.
That is no way to grow our economy.
Families do not think in terms of 3-month earning quarters.
They think in terms of school years, 30-year mortgages, and
years left to save for retirement. The more corporations think
about the long-term sustainability of their businesses, the
better off that workers and shareholders and managers and
customers will be.
Corporations spent more than $800 billion on stock buybacks
last year. That money does not end up in the pockets of the
company's workers. It goes right in the pockets of the CEOs and
other corporate managers making that decision.
Last year, for the first time in a decade, corporations
spent more on their own stock than on investing in long-term
capital expenditures and worker investments.
I will say that again. Corporations spent more on their own
stock than on investing in long-term capital expenditures and
worker investments.
We know when companies ignore long-term risks, workers,
small-time investors, and consumers all pay the price.
Look at Wells Fargo, in the news a lot lately. The company
exploited its workers with unsustainable expectations to boost
its stock value, while the board lavished CEOs with pay raise
after pay raise. And consumers still pay the price.
It is not just consumers. It is bad for the company. Wells
Fargo has faced scandal after scandal, fines and enforcement
actions, and the worst stock performance among the biggest
banks. Just last week, for the second time in 2\1/2\ years, the
CEO stepped down under the cloud of the scandals.
Study after study tells us that investors who pay attention
to how companies affect workers and communities and the
environment do better over time.
But it is not always easy to figure out which companies are
thinking long term and which companies are only thinking about
the next round of stock buybacks. We need to make that critical
information available to the public.
Most of the SEC's disclosure requirements were adopted 40
years ago, when more than 80 percent of S&P 500 companies'
assets were fixed, like buildings and factories. Today the
numbers are flipped. More than 80 percent of S&P 500 assets are
intangible--brand names, patents, and investments to enhance
worker skills and effectiveness.
To address that evolution, the SEC Investor Advisory
Committee last Thursday recommended to the Commission that
companies include new human capital management disclosures in
their public filings.
Adding human capital disclosure is just a start. Investors
know there are many environmental, social, or political risks
that could reduce long-term value, but companies are not
providing that information.
So the SEC should act. Enhancing and standardizing these
disclosure requirements will bring the SEC up to date with
other rules around the world.
But disclosure is just one step. It is time that companies
realize that holding executives and directors accountable,
about respecting workers and the dignity of work, about
planning for long-term risks instead of short-term payouts for
CEOs is actually good for business.
Instead, corporations spend their time lobbying against
important tools that allow shareholders to hold corporate
boards and management accountable.
Corporate special interests want to limit investors'
freedom to manage and run their funds. They want to silence the
voices of Main Street investors by making it harder for
shareholders to petition companies to allow all shareholders to
vote on issues significant to the company.
Never mind that corporations never want Government to step
in to protect servicemembers from banks that repossess their
cars or protect families from getting trapped in a downward
spiral of debt with a payday lender--subjects that should be
topics of hearings rather than this.
But now all of a sudden, these rich CEOs want Government to
step in to protect them from ordinary investors and ordinary
Americans who are trying to make their voices heard on climate
change, on protecting Americans from gun violence, on treating
workers with respect. So much for limited Government.
Just a sidelight, Mr. Chairman. The legislature in Columbus
is about to pass legislation that would allow anyone over 19 to
carry a concealed weapon without a permit and with no training.
It also eliminates the requirement that, if stopped, a suspect
has to notify the police officer that that suspect is carrying
a gun. Take away all those protections, and sometimes
stockholders speak up, and we have to protect the pampered CEO
from those stockholders, apparently.
It should not take a crisis to focus executives and
directors on the essentials of long-term planning. But too
often short-term thinking takes over; workers, shareholders,
and customers suffer. Just ask Wells Fargo.
I look forward to hearing from the witnesses.
Chairman Crapo. Thank you, Senator Brown.
Today's witnesses are the Honorable Phil Gramm, a former
United States Senator from Texas and former Chairman of this
Committee. Welcome, Senator Gramm.
Also, Mr. James Copland, senior fellow and director of
legal policy at the Manhattan Institute.
And Mr. John Streur, president and chief executive officer
at Calvert Research and Management and Eaton Vance Company.
Again, thank you all for being here today. Your written
testimony has been entered into the record, and we encourage
you each to try to stick with your 5 minutes. Watch the clock
there, please. And, Senator Gramm, you may proceed.
STATEMENT OF PHIL GRAMM, FORMER U.S. SENATOR
Mr. Gramm. Well, Mr. Chairman, first--let me see. Maybe I
better turn on my mic. First, thank you for inviting me. And,
Senator Brown, I am very proud to be here. I spent 18 years on
this Committee, the best part of it when I served as Chairman,
and so I am glad to be back here.
I came back today, I accepted your invitation because I
believe this is a very important subject. I believe that how
corporate governance is structured and who money works for will
have a profound impact on our future prosperity and freedom. I
respect the opinion and the good intentions of those who would
collectivize corporate America's structure, but I believe such
policies would hurt the very people they seek to help. And let
me explain why.
The Enlightenment, which was centered in the 1700s,
liberated the mind, the soul, and property by empowering people
to think their own thoughts, worship their own gods, and
benefit from the fruits of their own labor and thrift. As labor
and capital came to serve their owner, not the crown, the
guild, the church, or the village, medieval economies awakened
from a thousand years of stagnation. The Parliament in England
stripped away the leaching influence of royal charters and
initiated reforms that ultimately allowed businesses to
incorporate by simply meeting preset capital requirements.
Parliament further established in law the principle that
business would be governed by the laws it passed, in a process
of open deliberation, not by the corrosive influences and
rampant cronyism that were pervasive in the medieval
marketplace.
The Enlightenment recognized that the crown, guild, church,
and village had become rent seekers, leaching away the rewards
for work, thrift, and innovation and in the process reducing
productive effort and progress. The Enlightenment principle
that labor and capital were privately owned property, not
communal assets subject to involuntary sharing, unleashed an
explosion of knowledge and production, creating a never before
equaled human flourishing that continues to this day.
Extraordinarily, today in America, the crown jewel and
greatest beneficiary of the Enlightenment, political movements
are afoot that seek to overturn the individual rights created
in the Enlightenment and return to a medieval world of subjects
and subjugation. Today we hear proposals to force businesses to
swear medieval fealty to stakeholders--the modern equivalent of
crown, guild, church, and village--the general public, the
workforce, the community, the environment, societal factors.
These stakeholders would not have to stake any of their toil or
treasure, but as they did in the Dark Ages, they would claim
communal rights to share the fruits that flow from the sweat of
the worker's brow, the saver's thrift, and the investor's
venture.
Whereas the Enlightenment was based on the principle that
people owned the fruits of their labor and thrift, America now
faces a host of proposals to force the sharing of economic
rewards that take us back to the medieval concept of communal
property where the powerful few could extort part of the fruits
of your labor and capital using the logic that if you own a
business, you did not build it.
Thankfully, many of these proposals to overturn the
Enlightenment's concepts and benefits of economic freedom would
at least employ its democratic process by seeking to change the
law. This is the latest struggle in the battle regarding the
survival and success of economic freedom and prosperity, and it
will be played out in elections over the next decade. But an
even greater threat to the Enlightenment's economic foundation
today comes from the battle now being waged in stockholder
meetings and corporate board rooms across America. Today
political activists are pressuring corporations to adopt
political, social, and environmental policies that would
subvert labor and capital in ways that have been rejected by
State legislatures, by Congress, and by the courts.
Past reforms by Congress, the SEC, and the courts, designed
to enhance shareholder rights, have unintentionally empowered
special interest groups to subvert corporate governance,
forcing corporations to deal with political and social problems
they were never designed or empowered to deal with. The
explosion of index funds, whose managers vote shares they do
not own, has dramatically increased the danger posed by
political activists not just to American corporate governance
but to our prosperity and freedom as well.
As the Chairman pointed out, today index funds control 17.2
percent of all U.S. shares and are the largest shareholder in
40 percent of all U.S. companies. Their future growth seems
guaranteed by the tremendous price advantage gained by simply
buying a slice of various equity indexes rather than incurring
the cost of analyzing each individual investment. But that
efficiency in buying a slice of the index is not free. An index
fund's profitability is not significantly affected by the
performance of any given company in the index since their
primary competitors sell the same indices. Therefore, index
funds and their proxy advisors have neither the knowledge nor
the aligned interest to make informed judgments on business-
specific questions that arise in stockholder meetings of
companies in which they control an ever-increasing share of
stockholder votes.
When index funds vote their investor's shares on broad
social and political issues, the problem is not just lack of
aligned interest and knowledge; the problem is that index funds
have a glaring conflict of interest. On those high-profile
issues, the profitability of the scale-driven index fund
business will be affected largely by how the public perceives
the vote the fund cast and how that vote affects the marketing
of the index fund. The index funds' financial interest,
therefore, can and often will be in direct conflict with the
investor's interest.
As the Chairman pointed out, before his death Jack Bogle,
founder of Vanguard, urged legislation to explicitly impose a
fiduciary duty on funds ``to vote solely in the interest of the
fund's stockholder.'' Anybody voting anybody else's shares or
advising on how to vote those shares should be bound by strict
fiduciary responsibility. But even enhanced fiduciary
responsibility will not solve the inherent conflict of interest
that index funds face in voting investor shares on high-profile
social and political issues that have a potential impact on the
marketability of the very funds that are making the vote or
casting the vote. On those issues maybe it is time for the SEC
to require that index funds poll their investors and vote their
shares only as specifically directed. We cannot allow the
economic interest of index funds to effectively convert
``private purpose,'' for-profit C corporations into ``public
benefit,'' not-for-profit B corporations which the investors in
the general index funds did not invest in.
History teaches us that if we want to be prosperous and
free, within the rule of law, we must let private interest
create wealth and reap the rewards of its creation. Only after
wealth has been created should we debate the cost and benefits
of taxing and redistributing it.
Chairman Crapo. Thank you, Senator Gramm.
Senator Brown. Mr. Chairman, I ask that the other two
witnesses, if they need to take an extra 6 minutes, double
their time, that they are able to.
Chairman Crapo. We will do that, but we like to ask
everybody to try to stay to your schedule if you can.
Mr. Copland.
STATEMENT OF JAMES R. COPLAND, SENIOR FELLOW AND DIRECTOR,
LEGAL POLICY, MANHATTAN INSTITUTE FOR POLICY RESEARCH
Mr. Copland. Chairman Crapo, Ranking Member Brown, Members
of the Committee, thank you for the invitation to testify
today. This has been a longstanding and significant focus of my
research, and what we are talking about today is a bit
different from what the Ranking Member was talking about. He
was talking about the voices of Main Street investors, but when
we look at the market today, 70 percent of all the outstanding
shares of publicly traded corporations in the United States are
held by intermediaries, institutional investors, and that
remaining 30 percent that still holds stocks directly, only 29
percent of them vote their shares in these proxy ballots.
The rise of institutional investing is not surprising.
Institutional investors allow the ordinary person, the Main
Street investor, to outsource decisions to knowledgeable
professionals and to diversify holdings even if they have
limited assets. And, similarly, it is not surprising that
common stock ownership remains the principal form of ownership
of large, complex, profit-making business organizations today.
By raising capital with equity rather than debt, entrepreneurs
can finance their ventures without placing any obligation to
pay funders an immediate or regular cash-flow. So I fully
concur with Senator Gramm that our unparalleled economic
success is closely linked to precisely these ownership
structures.
But the central question before the Committee today
involves the intersection of institutional investing and
shareholder corporations. Individuals who entrust their assets
to corporate managers and individuals who entrust their assets
to institutional investors both have some difficulty overseeing
the entities that they give their funds. In each case, we see
what economists call ``agency costs.''
The Federal Government has long played a role in overseeing
both investment companies and stock exchanges. But
institutional investors that dominate voting today have
significant agency costs themselves. Institutional investors
are monitoring corporate boards and managers, but who is
monitoring the monitors?
The rules and regulations of the Securities and Exchange
Commission had been enabling special interests to pursue social
and policy goals. Under current SEC rules, any shareholder in a
publicly traded corporation that has held at least $2,000 in
stock for at least a year may place a proposal on the company's
proxy ballot. In 2016 and 2017, a majority of shareholder
proposals sponsored at Fortune 250 companies involved social or
policy issues largely unrelated to share value, executive
compensation, or traditional board governance concerns.
In February of this year, jeans maker Levi Strauss filed
the paperwork to become a publicly traded corporation. Less
than 1 month later, the People for the Ethical Treatment of
Animals announced it was acquiring the minimum requisite $2,000
in stock in Levi's in order to propose shareholder resolutions
involving the manufacturer's use of leather.
Proxy advisory firms, another intermediary, can serve to
amplify this special interest advocacy. As I summarized in a
2018 report that I coauthored with Stanford's David Larcker and
Brian Tayan, a substantial body of empirical evidence shows
that proxy advisory firms' recommendations influence
institutional investors and corporate managers alike. And at
least some proxy advisory advice may not be in the average
shareholder's interests.
With trillions of dollars of assets under management, large
mutual fund families are less susceptible to capture than proxy
advisors. But at least some large diversified mutual funds like
BlackRock have also been moving to support some social and
environmental causes in discussions with corporate managers.
That is partly due to public pressure campaigns, and it is
partly due to the fact that portfolio managers tend not to
involve themselves heavily in shareholder voting, and instead
large institutional investors staff in-house corporate
governance teams.
As Senator Gramm alluded to, this is particularly strange
in the context of index funds, the premise of which is to
leverage capital market efficiency and minimize active
management costs, in essence to follow the stock market. But in
shareholder voting decisions, such fund families are actively
supporting efforts to modify corporate behavior. There is no
clear investment-based rationale for this obvious tension and
strategy.
In 2015, the Manhattan Institute commissioned an
econometric study of shareholder activism and firm value.
Tracie Woidtke, a professor at the University of Tennessee,
found that ``social-issue shareholder-proposal activism appears
to be negatively related to firm value.''
In conclusion, abetted by SEC rules and procedures,
institutional investors have gained power in the boardroom. By
coopting proxy advisory firms, and, to some degree,
institutional investors, activists have pursued their agendas
at other shareholders' expense. At least some of this social
activism appears to be depressing share value.
Thank you for your time and consideration.
Chairman Crapo. Thank you very much.
Mr. Streur.
STATEMENT OF JOHN STREUR, PRESIDENT AND CEO, CALVERT RESEARCH
AND MANAGEMENT
Mr. Streur. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, I really appreciate your invitation
to testify before you today. Thank you. My name is John Streur.
I am president and CEO of Calvert Research and Management. We
are a global investment firm. We invest in all developed and
emerging markets, equity, and debt. As noted, we are part of
Eaton Vance.
Our primary focus at Calvert is to generate competitive
investment returns for our clients, and we incorporate
information about how company managements are dealing with
environmental, social, and governance risks into our investment
decisions. We do this because, increasingly, these issues
matter to corporate profits.
Today companies and investors throughout the world are
working to better understand exactly how to further the
tremendous progress that corporations, competition, and
capitalism create, as noted by former Senator Gramm, by
conducting deeper analysis of environmental and social impacts
and of corporate governance systems worldwide. All of us are
interested in driving long-term shareowner value, improving the
performance of American companies through a better
understanding of these issues.
In recent years, interest in corporate exposure to issues
such as energy efficiency, water conservation, workplace
diversity, and human rights has intensified. A heightened
awareness of these issues among consumers and investors alike
has pushed ESG investing well into the mainstream. In 2018, in
the United States alone, more than $12 trillion was invested in
strategies that consider ESG criteria. Most of these were not
index strategies, by the way. This is a 38-percent increase
since 2016. The $12 trillion using some form of ESG research
represents 26 percent of professionally managed assets in the
United States. It was revealed this morning that, globally, $30
trillion are invested using some form of ESG research and
analysis.
Investors are not the only ones changing their behavior.
Corporations are really leading this and taking action. Many
companies in the United States have increased their focus on
actively managing and reporting on ESG risks in order to remain
competitive in the global market for products and services and
capital.
Eight years ago, only 20 percent of the S&P 500 companies
provided any type of reporting on relevant ESG risks. Today 90
percent of companies in the S&P 500 actively and voluntarily
report on ESG risks factors. So CEOs of companies in the U.S.
and throughout the world are on the move dealing with these
issues. So the business case for incorporating ESG
considerations into the investment process is strong and it is
well grounded in empirical evidence.
I want to emphasize the concept of financial materiality.
We are not interested in all ESG issues. We are interested in
the ones that matter both to the environment and society and to
corporate profitability.
Corporate disclosure standards have also evolved over time
to reflect changing industry trends as well as regulatory and
judicial developments. Undoubtedly, there has been substantial
debate and discussion on these issues, probably amongst Members
of this Committee. I would like to briefly speak to the issue's
relevance as it pertains to the benefits of standardization and
the competitiveness of U.S. capital markets.
As you know, in the U.S. we are fortunate to have the
deepest, most liquid, most well-developed capital markets in
the world. They are also well known for transparency and
excellent disclosure. Yet when it comes to the issue of
standardizing disclosures related to ESG risk factors,
unfortunately the U.S. is beginning to lag behind our foreign
competitors. This is an issue that will manifest itself in more
difficulty for American companies to access foreign capital
going forward.
Much of the information provided through voluntary
disclosures is difficult to compare and inconsistent across the
issuers of securities, resulting in considerable costs and
resource expenditure for investors. While it is impossible to
discern the amount of expense incurred by investors attempting
to deal with ESG data, one estimate suggests that by 2020, $745
million will be spent annually trying to discern ESG data
alone. So we suggest an effort to create standards for U.S.
issuers of securities to use. Our concern is that if we do not
do it, foreign regulators will, and they will be in a position
to guide what we have to do here in the U.S.
The title of this hearing has to do also with proxy
advisory firms, so I would just like to make a few comments in
terms of how Calvert uses those firms and introduce a couple of
additional concepts in addition to this point about financial
materiality.
A core part of Calvert's investment approach is structured
engagement, our use of the well-designed feedback mechanism for
investors of all types to communicate directly with the
management of companies. The proxy voting process is part of
our capitalist system. It is an opportunity for shareowners to
show their knowledge, give feedback to companies, and attempt
to guide those corporations. The vast majority, perhaps all
investors, do this in an effort to enhance profitability and
drive shareowner returns. All of us have the same financial
incentives here.
At Calvert, we do use proxy advisors. There are two large
ones in the U.S.: ISS and Glass Lewis. I think it is important
for everybody to understand the role they play.
On the one hand, they are an essential part of the
infrastructure. The process of voting proxies is transaction
intensive and it is laborious. Calvert voted 47,000 issues last
year alone across 4,760 annual general meetings. The actual
process of that in the U.S. is cumbersome, so these proxy
advisory firms serve an essential purpose of helping with the
voting, the casting of votes, and the recordkeeping.
Additionally, the number of issues that we have to deal
with is vast. These companies provide expert analysis of our
proxy voting guidelines and make recommendations to us, but
just recommendations. At the end of the day, mutual funds and
institutional investors are fiduciaries, and it is our
responsibility to make sure these votes are cast in a way that
is consistent with our objectives. Our objectives are to drive
long-term shareowner value, make no doubt about that.
So the proxy advisory firms fulfill an essential purpose.
If there is something to be done here, one might consider a
requirement for mutual fund companies and institutional
investors to fully disclose their proxy voting guidelines. Many
of us do on our websites so all investors can understand our
point of view and where we stand on these critical issues.
I would also point out that proxy voting histories are a
matter of public record. Investors who care can access that
information, and they can understand how their mutual fund or
asset manager has voted.
I would like to again thank the Committee for allowing me
the opportunity to share my perspectives on these important
topics. My sincere hope is that this forum provides an
opportunity for constructive dialogue on how to balance the
ongoing competitiveness of U.S. capital markets, investment
management firms, and corporations with the need to ensure that
our capitalist system achieves the most sustainable future
possible.
Thank you.
Chairman Crapo. Thank you, Mr. Streur, and I will start
with you in my questions.
I understand your point that, if I understood you right,
your focus on ESG risk factors is all ultimately to determine
the most profitable position that a corporation can take. Is
that correct?
Mr. Streur. Yes.
Chairman Crapo. And in terms of your discussion of the use
of proxy advisors, I take it that you are comfortable that the
proxy advisors you use are helpful to you in that context. Many
of us are concerned that, with the concentration of power, of
voting power, with those who have proxies, political
considerations rather than profitability considerations will
start or even have started to rule the day.
Do you have that concern or do you think that is not an
issue that we should be worried about?
Mr. Streur. Thank you, sir. I understand your question. We
in the capital markets worry about everything, so I would not
discard your concerns outright. But we are all in this
investment business extremely competitive, so the market is--we
participate in the free market system. It has a way of
governing itself. I do not think you need to worry that any of
us are going to put political considerations in front of
profitability or in front of our track records. I do not think
that concern is well founded at all. I am sorry.
Chairman Crapo. All right. And can I ask Senator Gramm and
Mr. Copland to respond to that same issue?
Mr. Gramm. Well, let me say that my dealings with proxy
advisors basically have been good. I think they listen. I think
it is somewhat concerning there are only two firms, and one of
those firms is very much affiliated with an interest that has a
political position. But I think the problem is not proxy
advisors. I think the problem is that whenever you have
somebody voting somebody else's shares and it is not their
money, you have a potential problem. It is just like when
somebody is spending somebody else's money, you have a
potential problem, even when those are good people.
And so I think the big, big problem is that we are headed
like a freight train toward a situation where corporate
America, the engine of much of our economic progress and mass
production, is going to be controlled by index funds that do
not own shares directly in those companies but are voting
somebody else's shares; and when they are voting those shares,
on high-profile issues like environmental issues, like social
issues, like political issues, they clearly are aware, have to
be aware that the performance of the stock that is affected by
their vote is not going to affect their ability to sell their
index because their competitor is selling the same index. But
how they vote and the publicity it gets is bound to affect
their marketing. And so you have got a conflict of interest
building between the interests of the shareholder and the index
fund, and the index funds are becoming more and more dominant,
even in small companies.
And so wherever you are on the political spectrum, this is
something I think we ought to be concerned about.
Chairman Crapo. Thank you. And, Mr. Copland, you have got
my last 50 seconds.
Mr. Copland. Sure, Mr. Chairman. I agree with everything
the Senator just said. I want to add a few pieces of
information to that. The proxy advisors do often run out in
front of the institutional investors on these issues, and I
show that in my written testimony. I have written about that.
They get ahead in terms--they are much more likely than the
median shareholder to support these social and environmental
proposals for various reasons. And they do influence voting.
Fifteen percentage points is what we did in our econometric
analysis. There are a lot more in that study I did with Larcker
and Tayan. We have seen politics come into play, express
partisan politics. I am sure the Ranking Member likes it that
we see companies get more targeted by labor union pension funds
when they give more money through their PACs to Republicans.
But that is a little troubling if they are actually fiduciaries
there.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. I am not sure your assessment of my opinion
is well founded, but since we know each other so well, feel
free to make it.
Mr. Streur, I think we should do more for workers than just
new disclosures, but if a company describes how it is managing
its workforce or investing in worker training and skills, what
does that tell investors about the long-term value and
sustainability of a company?
Mr. Streur. Well, today the way companies create well-being
for their workforce is a big determinant of their return on
invested capital and their profitability. So investors are
very, very interested in understanding how companies create
well-being for a diverse workforce, and it tells us whether or
not management is expert at creating a workforce that can be
globally competitive for the long term.
Senator Brown. So that is not politics. That is good
business.
Mr. Streur. Totally good business. That is all we are
interested in, really.
Senator Brown. OK. This question is for all three
witnesses. I will start with Mr. Gramm, and I would like an
answer as close to yes or no as you can possibly give. Should
shareholders be able to hold executives and directors of opioid
manufacturers and distributors accountable for misleading the
public about how addictive these drugs are?
Mr. Gramm. I think anybody who misleads the public should
be held accountable.
Senator Brown. OK. Mr. Copland.
Mr. Copland. Assuming, arguendo, that, in fact, there was a
fraud, then there is and could be accountability, sure.
Senator Brown. OK.
Mr. Streur. Absolutely.
Senator Brown. Should large and small shareholders have a
right to question a company's policies if they create financial
or reputational risk for the company? Mr. Gramm.
Mr. Gramm. Small and large stockholders should always have
the right to question a company. That is what a corporate
structure is about.
Senator Brown. OK. Mr. Copland.
Mr. Copland. It depends what you mean by ``question,'' and
that is really what we are talking about, is how do we allocate
the powers. Should a small shareholder be able to impose
massive costs on all the other shareholders through processes
affirmed by the SEC? Probably not.
Remember that when we are talking about publicly traded
corporations, every shareholder has the right to exit. So if
they are really concerned about a company, they can sell their
shares.
Senator Brown. Mr. Streur.
Mr. Streur. Here in America the answer is yes, small and
large shareowners should have rights to question management and
make a contribution.
Senator Brown. Regardless of Mr. Copland's qualifying
statement?
Mr. Streur. Yes, regardless of that.
Senator Brown. OK. Mr. Copland, what do you think about
that?
Mr. Copland. I think he is probably wrong. If they were
forced to internalize their costs, Roberta Romano at Yale Law
School, for instance, suggested a loser-pays type of mechanism
where if a shareholder proposal is introduced and is defeated
by a majority of shareholders, then that sponsoring shareholder
has to reimburse the cost. That sort of idea might make it more
tenable. But, otherwise, you have things like what I have
described where the People for the Ethical Treatment of animals
buying 2,000 shares of stock and generating many multiples of
that of cost on the company to try to hijack the proxy process
to make their political statement.
Now, the political statement might be right, but that is
not what the proxy process should be about.
Senator Brown. Well, you and before, Mr. Streur, since you
have assumed you know how I think, I guess I will assume with
your Manhattan affiliation how you think, that that whole
loser-pays ideas you all find really attractive, I am sure. Mr.
Streur.
Mr. Streur. Well, that is a regressive tax concept if we
are going to talk that small shareowners bear those costs. It
is not what our free market system is all about. We have
already regulatory processes in place at the SEC that create a
set of requirements for what the shareowner can actually get on
the ballot. Those have been adequate. They continue to be
adequate. So we have got a good process in place already, and
the concept of boxing out the little guy is not what our free
markets are all about. It is not what American capitalism is
all about. So these costs are theoretical. We have got a system
in place that deals with those. And we are not interested in
creating a super class of investors in this country. We are
interested in equality and supporting the ability for small
investors to have their voices heard. That is how the system
has been designed, free market.
Senator Brown. Let me ask one last question----
Mr. Gramm. Senator, could I respond to that question as
well?
Senator Brown. Sure.
Mr. Gramm. I think the plain truth is that all over America
this process is being abused. People are buying a small number
of token shares to force corporate board meetings to deal with
issues that have nothing to do with the company, and they are
using up valuable time, and they often end up being bought off.
So I think to suggest that there is nothing wrong with the
system is absurd unless your objective is to see the corporate
system literally tied up in knots for no productive purpose.
But its purpose is to create the prosperity that we enjoy.
Senator Brown. Well, and we have seen no corporate
misbehavior and nothing else seems to be----
Mr. Gramm. Well, look, the fact that corporations misbehave
does not mean----
Senator Brown. ----the White House regulators do not keep
them----
Mr. Gramm. ----the system is not abused.
Senator Brown. ----hold them responsible and accountable.
So I tend to come down on the side of the shareholders.
Mr. Chairman, thank you.
Chairman Crapo. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
I had a kind of sequence here that I wanted to go through,
but, Senator Gramm, I think you have hit on something that I
wanted to explore later on, but I think I am going to go right
to it. And this would be for all of our participating members
here today.
Mr. Copland, in your testimony you noted the great extent
to which retail investors are able to play a part in the
shareholder proposal process. In particular, you cited examples
of which investors who held barely a few dozen shares of stock
representing less than one ten-thousandth of 1 percent of an
entire company were able to place proposals on annual
shareholder ballots. Senator Gramm, you are alluding to a
similar position. This is due largely in part to an SEC
regulations that allows any shareholder in a publicly traded
corporation that has held at least $2,000 in stock for 1 year
to place a proposal on that company's proxy ballot.
Is this low threshold a good idea or is this something that
the SEC needs to revisit? And, Mr. Copland, if your comment is
within the original----
Mr. Copland. I have been on the record suggesting that it
is too low. It has not been revised in 20 years. I have written
on this publicly. If we are not going to do a loser-pays type
of mechanism, we at least ought to require an investment
sufficiently large so that the investor does not have less than
the actual cost. Just the cost of adding this to the proxy
ballot alone--and the SEC has done these studies. They are not
just theoretical costs, like Mr. Streur talked about.
Now, the big costs are what Senator Gramm was talking
about. Taking the time of the board of directors and the CEO of
a large multinational corporation to consider these questions,
that is the big cost. But the direct costs themselves are less
than this.
Is it really squeezing out small investors? I understand
the argument, but that is not what is going on. What is
happening, as I say in my written testimony, is that you have
three individuals and their family members. Who are the
individual investors who are active in this process? Three
individuals and their family members sponsored between 25
percent and 45 percent of all shareholder proposals over the
last several years. So these corporate gadflies are repeat
players in this game, and they are doing it over and over and
over, and they are getting treated like royalty by CEOs.
Senator Rounds. I think, if I could, and I am going to run
out of time, but I think your answer is yes.
Mr. Copland. The answer is absolutely yes.
Senator Rounds. OK. Mr. Gramm, I am going to finish with
you, but I want to go to Mr. Streur for just a minute here, and
I would like your thoughts. You have heard the discussion, and
I think Mr. Copland makes a good point, that there is something
involved, but I suspect that you may not agree with him.
Mr. Streur. Well, I think he does make a good point. There
are exceptions to the rule. He is referencing a number of
shareholder proposals that have been filed by just a few
people. That is not a reason to change a system.
Senator Rounds. You are suggesting that the SEC rule by
itself is appropriate at a $2,000 level of investment?
Mr. Streur. Sure. There are specific requirements in terms
of how you--you cannot just lob a proposal onto a ballot. There
is a process that you have to go through with the Commission.
The company has an opportunity to challenge you through the
SEC. And only if you meet certain conditions will your proposal
actually make it onto a ballot. It is important for us to all
understand.
Senator Rounds. Thank you. That is what I was curious
about, that thought process, that there is a process in place
to sort of weed out some would be your position on it.
Mr. Streur. There is, but I would not discard the concept
that there are a few players who file shareowner resolutions
that we are not interested in. They do not pass the test of
financial materiality. That does not have anything to do with
the size of the investor.
Senator Rounds. Right.
Mr. Streur. So we can always improve systems, but the
radical change that is being put forward here is not what we
need.
Senator Rounds. Thank you.
Senator Gramm.
Mr. Gramm. Well, I think the system is being abused. I
think that it is logical that either you should require greater
ownership, but I think an even better way would be to simply
require that in order to get a vote, you have a certain
percentage of the stock owners that support your amendment. You
cannot get a vote in the greatest deliberative body in the
history of the world, the U.S. Senate, without a second. So why
should you be able to stand up at a General Motors stockholder
meeting and demand votes on trivial issues based on $2,000
worth of General Motors shares? This just makes no sense. And
what is really happening here is two things: one, the seeking
of publicity; and the other, the effort to intimidate the
company--to intimidate the company to support your foundation
or to intimidate the company to negotiate some settlement with
you to simply go away. You do not even have a higher threshold
to offer the amendment the second time. So if I offer an
amendment and I am the only shareholder who votes for it, the
next year I am going to offer it again. I mean, clearly this
does not make any sense, and it ought to be fixed.
Senator Rounds. Thank you, Senator. My time has expired.
Mr. Chairman, I would just make a note that this Committee
has in the past looked at ways in which to literally do a
number of things that are of social value, and one of them--and
I think that we should not miss--in S. 2155 this Committee did
work very hard at protecting our veterans, and particularly
with--there was a comment made earlier that we did not take
care of even our veterans, and yet this Committee in S. 2155
specifically put in language to protect our veterans from
financial ruin due to health care issues and medical bills. But
thank you, Mr. Chairman.
Senator Toomey [presiding]. Thank you, Senator Rounds.
Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman. Thanks to the
testifiers.
Mr. Streur, I have about eight questions for you, so as
close as you can get to yes or no or a brief answer, that would
be great. Is ESG mainstream at this point?
Mr. Streur. Yes.
Senator Schatz. Do firms that have high scores in ESG
perform well compared to firms that do not?
Mr. Streur. High scores on financially material issues,
yes.
Senator Schatz. And what priority does Calvert place on
investment performance?
Mr. Streur. Top.
Senator Schatz. And how does ESG investing help you to meet
your benchmarks?
Mr. Streur. It helps us better understand how good
management is.
Senator Schatz. And so it is fair to say this is consistent
with your fiduciary responsibility?
Mr. Streur. Yes.
Senator Schatz. What information is useful to analysts and
portfolio managers at Calvert as they make investment
decisions? And how available is that information across
companies and industries?
Mr. Streur. That is not a yes-no answer.
Senator Schatz. Yes, I understand. You have been quick, so
I----
Mr. Streur. So what is important to understand is that the
things that matter to a company are very specific to the
business characteristics. So the things that matter to a
utility company are different from the things that matter to a
software company. So your question about what matters, well, it
is very important to understand the specific business that you
are analyzing, so different things matter.
Your question about how available is it, it is most
available on the largest companies, but it is not completely
available through the regulatory filings in the U.S. at all. So
there are various initiatives to help companies understand what
investors are really interested in and help those companies to
create disclosure standards to provide the information that
shareowners want.
Senator Schatz. And as an example, Senator Gramm referred
to ends that are political in nature, and I had to lean back to
my staff to confirm that I think what is being talked about is
climate disclosure, and I would like to ask you whether you
think companies are doing an adequate job of disclosing
material climate risk?
Mr. Streur. It is changing, but we are not close to being
there yet. And I think that companies themselves understand
these risks fairly well because we can see companies taking
action to protect themselves from risks associated with climate
change. As investors, we want to understand how well those
managers are doing in terms of allocating shareowner resources
for this purpose.
Senator Schatz. Right, and your anchoring what you do in
materiality I think is a principled and practical way to move
forward so that we remove the politics from it. I mean, to the
extent that we talk about material climate risks, it ought to
be hard-nosed and related to shareholder value. And the
difficulty--I think there are numerous difficulties here. One
is just that the Securities and Exchange Commission is not
accustomed to doing this. The other is that the window for
consideration as it relates to climate used to be 10, 20 years,
and they could credibly say this is outside of our window. But
what has happened is that, whether it is the Quadrennial
Defense Review or any other Government analysis of climate
risk, it is now within the window that ought to be under the
Securities and Exchange Commission disclosure. So I thank you
for all the work you have done.
I have a question for Mr. Copland, and I want to flesh out
the sort of social-political goal thing. After the Enron
scandal, the number of corporate governance-related shareholder
proposals exploded. This is the ``G'' in ESG, right? And when
U.S. companies divested from South African companies during
apartheid, mostly as a result of shareholder resolutions
calling for divestment, they applied pressure and made change.
And I am assuming you think those were appropriate uses of
shareholder activism. I mean, I am trying to figure out where
the line is or whether it actually--your judgment ends up being
made on the basis of what you think is so much a political
consensus that it is no longer political. In other words, I
assume that you think it is OK for a publicly traded company
and shareholders to say, hey, we do not want to be
discriminating against LGBTQ; we do not want to be investing in
companies that do, you know, wrongful actions but not illegal
actions overseas. There is reputational risk there. Apartheid
is a good example.
Climate is not ripe politically in your mind, but what is
the difference in terms of the law?
Mr. Copland. Well, the difference in terms of the law has
shifted over the years, and it is really not law. It is really
SEC rulemaking. But I think what you were getting on at the
beginning--and I do not agree with all the things you are
talking about that they should be part of the shareholder
proposal process. What you were getting on at the beginning I
think is an important distinction. ESG is this sort of merged
term, but governance issues are different from environmental
and social issues.
Senator Schatz. OK. What about the apartheid example? Do
you think that is an appropriate use of shareholder activism?
Mr. Copland. No, I do not. I think it should be excluded
from the ballot. The SEC used to have a rule that issues of
general social-political concern were excludable from the
ballot. This was the rule from the early years through the
1970s. And then there was litigation that went to the D.C.
Circuit involving the use of napalm in the Vietnam War, with
the underlying against Dow, and the D.C. Circuit sent it back
to the SEC, and the SEC changed the rule. They were not ordered
to change the rule. They changed their rule, and since then now
this is the window through which all these social and political
issues have come into play.
But, no, I think that is a board of directors decision.
Those are the fiduciaries who are running the company. I
totally agree that the boards should be----
Senator Schatz. You do not think there is----
Mr. Copland. ----sensitive to the issue.
Senator Schatz. Hold on. Let me just get one last question
in. You do not think there is--in the case of apartheid, you do
not think there is reputational risk that would impact
profitability?
Mr. Copland. No, no, no. That is not what I said.
Absolutely there is reputational risk. The question is who
decides. Where does the decision lie? Does it lie with the
shareholders or the directors?
Senator Schatz. Hold on. The decision, of course, is the
board of directors. The question is whether an individual
shareholder has the authority to present something to the board
of directors for decision making. Now I get that there are
individual gadflies that are doing what they are doing, but the
basic question of whether a shareholder is a shareholder is a
shareholder or does it depend how much wealth you possess? Does
it depend on the extent to which you are a shareholder? If you
have $2 million, do you have certain rights that a $2,000
shareholder does not have? And there is just no evidence that
we should move in that direction.
I have exceeded my time. Thank you.
Senator Toomey. Thank you.
Senator Tillis.
Senator Tillis. Senator Gramm, finish the thought you had.
Mr. Gramm. Well, what would you think if the resolution
demanded the company not do business in Israel?
Senator Tillis. I think that pretty much sums that one up.
Now I have a question----
Mr. Gramm. The problem is if you start down that----
Senator Brown. Wait a second. Wait, wait. Senator Gramm,
wait a minute. Mr. Schatz did not respond because it is not his
time because Senator Gramm--actually, Mr. Gramm--I will call
him ``Mr. Gramm''--is not actually Chairman of this Committee
now. So if you want to yield time, but do not make a point that
he wins, he loses--he did not speak.
Senator Toomey. So will Senator Tillis yield time to
Senator Schatz to respond?
Senator Tillis. My time?
Senator Toomey. Yes.
Senator Tillis. No.
[Laughter.]
Senator Toomey. OK. The time is yours.
Senator Tillis. I could yield your time, but not my time.
Mr. Gramm. Could I finish the question?
Senator Tillis. Yes, Senator Gramm.
Mr. Gramm. The problem is if you start down this road,
there are all things that we think are bad. I do not know
anybody that does not think apartheid----
Senator Tillis. Well, Senator Gramm, that--because I want
to ask----
Mr. Gramm. The problem is you get into other things.
Senator Tillis. That is exactly the point. That is why we
do sanctions. That is why we exist to take care of those things
and not necessarily put it on the backs of value creators.
The question I had for you, my lane back when I was in the
private sector was in supply chain and supply chain
optimization, and if you look at FTSE and they rate General
Motors and Exxon as having pretty solid supply chains and well-
run organizations. An alternative index for FTSE, though, rates
Tesla higher because of green output. The concern I have
about--Tesla is awesome, love the car, would like to afford one
someday. They have got a great car. They have got a very, very
disturbing supply chain. You see it in the number of products
they bring to market, how long it takes to fix a car when it
gets damaged. They have got a lot of fundamental problems as a
manufacturer that they need to take care of. But the investor
would look at that and say, well, this is probably a pretty
good investment, pretty good buy. How do you feel about that,
rating a company based on output versus their ability to
sustainably produce that output?
Mr. Gramm. I think that investors will make good decisions
if you give them information. I am very much opposed to forcing
companies to do things as part of some social objective. The
problem is all of these--the crisis we had in the housing
industry was a result of trying to force private money to serve
public purpose. Congress made Freddie and Fannie meet quotas on
subprime lending. They forced them to destroy the standards for
making loans. CRA forced banks to make subprime loans. And what
was the result of all that, making private wealth serve public
interest? We call it the ``financial crisis.''
So it is just a bad way. I think you said it well, Senator.
Congress is supposed to make these decisions. Who licensed
General Motors to set public policy? Their duty is to build
good cars and to do it efficiently and to create profits for
the people who invest in the company and a good place to work
for the people that work for the company.
Senator Tillis. By the way, I do not think your point about
Israel is far off. We know all about BSD----
Mr. Gramm. No, it is not far off.
Senator Tillis. ----activist groups out there that are
trying to advance those sorts of things through the corporate
board. So I think it is actually a very good point.
I do have a question about ESG in Europe. You know, Europe
does not have the thriving capital markets liquidity that we
enjoy here. Do you think maybe their interest in this approach
is it drives our performance down? Or is there some other
motivation that you could see other than that? They are never
going to rise to our level of execution, so what is their end
game to actually shift the social responsibility to
corporations? Mr. Copland.
Mr. Copland. I think there is definitely a push afoot in
that. A year ago, in April, I was in Paris talking to some of
the international bodies there at the invitation of the
Administration, and France was considering precisely this, a
move toward a more stakeholder model of capitalism. Your
colleague on the Committee, Senator Warren, has proposed a bill
and wrote in the Wall Street Journal going in that direction. I
think it is precisely the wrong direction for the reasons I
write about at length, including in my written testimony. But,
yes, there is an effort afoot on that.
And I do think that that is distinct, I want to emphasize,
from what Mr. Streur was talking about, where if we can agree
on materiality, financial materiality, we are pretty close
together on that.
Senator Tillis. My time is up, but, Mr. Streur, I want to
tell you I appreciated your thoughtful comments and your
testimony. And I think you are going about this in a reasonable
way. It is not on or off. I just feel like we are going down a
path that will really disincentivize innovation and global
competition, which I am very, very concerned with.
Thank you, Mr. Chair.
Senator Toomey. I want to thank all the witnesses. I want
to start with an observation of my own. It has long seemed to
me that one of the crown jewels of the greatest free enterprise
economy in the history of the world has been our capital
markets, big and broad and liquid, and increasingly in recent
decades democratized in a way that did not look plausible
decades ago. Index funds, low-cost even free equity trading for
retail investors, retirement plans, these have come together to
create investment opportunities for people of modest means that
never occurred before.
What I am worried about is a trend that we are on now most
recently. Since 1997, the number of public companies has been
cut in half. One of the real-world consequences to the delays
of private companies going public is the small investor never
gets a chance for the huge upside that often comes in high-
growth companies.
This is, I think, a huge problem. I think the ESG activism
is contributing to companies choosing to stay private longer
than they otherwise would, and that is depriving retail
investors. And I think we have got an obvious need for reform
in three areas.
One, I think shareholder proposals, the threshold for
introducing them are clearly too low because people who have no
real financial interest in the company are nevertheless able to
tie up huge amounts of resources on behalf of that company.
I think proxy advisors, there is a real question of whether
they are aligned with the interests of investors, and there are
obvious conflicts of interest. I think we need a new rulemaking
to deal with that.
And, finally, institutional investors, mutual funds, and
pension funds, there needs to be a clear and unequivocal
explication requirement that they have a duty to maximize the
return to investors. That is their job. They are fiduciaries.
So I am urging the SEC to take all three of these steps as
quickly as they can, and certainly in time for these new rules
to be in effect for the next proxy season.
I want to go back to this question about shareholder
proposals. Mr. Copland, in your testimony you highlighted an
amazing case where a group that owned 47 shares--not 47,000
shares--47 shares of McDonald's out of the 765 million shares
outstanding could nevertheless force a question. This would be
numerically equivalent to 20 Americans out of the 320 million
Americans, for 20 Americans to force a national referendum on
all of us. It seems to me that it is reasonable to require a
broader interest in an issue before it can be brought. Do you
have a specific change to the threshold in mind? Do you have a
specific reform that you would recommend?
Mr. Copland. I have talked about it before, and, you know,
the House had some legislation on this. I actually thought that
the percentage ownership--they did it as more a percentage
ownership, and there is a percentage in the rule. It is just
irrelevant because the dollars are so low. They had 1 percent,
which I think is too high, probably, especially for large cap
companies. But certainly a material percentage would be one
mechanism. The other would be a loser-pays type of mechanism.
Senator Toomey. And just to be clear, if you establish some
threshold--let us call it 1 percent--that does not mean that
the only person who would be able to drive an issue would be
someone who owns that much but, rather, someone who could
cobble together other investors who shared the interest.
Mr. Copland. You could aggregate shares, and you do see
regularly social investing funds, public pension funds, et
cetera, coming together on some of these issues.
Senator Toomey. So, Senator Gramm, is it your view that the
increasing levels of social-issue shareholder activism does, in
fact, discourage some companies from going public? Does it
delay that?
Mr. Gramm. I think there is no question about that. I think
what is happening is that special interests are trying to force
American business to implement policies that you are rejecting
in the U.S. Senate. We have got special interests that are
trying to force business--banks not to make loans to specific
kind of businesses. I do not understand why people do not see
how dangerous that is, because you can start with no loans to
consumer lenders or no loans to gun dealers, and pretty soon
you have got a policy where you are cutting off sectors of
society from getting access to private services. This is a very
dangerous business. Congress ought to be making those
decisions.
Senator Toomey. And if it is true that companies are
delaying going public out of this very concern, does that not
have the effect of depriving retail investors, people of modest
means, the opportunity to invest in companies that could
generate terrific returns for them?
Mr. Gramm. It is clear that it is discouraging companies
from going public. It is clear that these kind of concerns that
are imposed are like leeches that are leaching away the
productive capacity of not just capital but labor. And I think
we have got to be very careful that we do not let special
interests try to win in the corporate boardroom battles they
cannot win in Congress, cannot win in the legislatures, cannot
win in the courts.
Senator Toomey. Thank you. My time has expired. I think the
Ranking Member has a quick follow-up question he wanted to ask.
Senator Brown. Thank you, Senator Toomey.
I have one follow-up question, Mr. Copland. Talking about
one of the McDonald's shareholder issues, there was a small
shareholder that in 2017 had a proposal about McDonald's use of
antibiotics. The next year, McDonald's announced it would
reduce its use of antibiotics, citing threats to global health
and food security. Doesn't that shareholder proposal, even
though offered by a shareholder with small holdings, doesn't
that seem like an important issue to the company? And then
didn't that result in something even though it was a small--it
was a modest shareholder?
Mr. Copland. My argument is not at all that companies are
nonresponsive to shareholder proposals. Quite the contrary. And
my argument is not that every shareholder proposal is a bad
idea. Quite the contrary. Some of them are good ideas.
The question is the process. The process matters because,
otherwise, you are enabling individuals to just sort of seize
this process. There is no question that antibiotics at
McDonald's is not something that they would never have thought
about if the Benedictine Sisters of Boerne, Texas, had not
bought 52 shares in McDonald's and introduced that shareholder
proposal. I will guarantee you the managers at McDonald's and
the executives and the board is thinking about those sorts of
issues. The question is whether that small group of nuns should
be able to make this a boardroom discussion and an annual
meeting subject on the proxy ballot that the SEC oversees.
Senator Brown. Mr. Streur, would you comment on that?
Mr. Streur. Well, I think, by the way, you are right.
McDonald's and many other food companies have figured out that
the American consumer does not want to eat food from animals
that have been doused with antibiotics for lots of reasons. And
then this concept that the shareholder proposal in and of
itself forces companies to do something is deeply flawed. The
shareholder proposal puts it to a vote, the American system.
The shareholder proposal gets it on the ballot so we can see
what other shareholders think. Then you get a vote, and you can
say, ``Hey, this small group in Texas of nuns has an issue. Put
it on the ballot. Let us see what everybody thinks.'' Wow, 24,
25, 30, 35, maybe even a majority votes in favor of it. That is
how the system works. So it is a good----
Senator Brown. You suggest that even if it does not carry a
majority of shareholders, but if it has 15 or 20 or 30 or 35
percent minority vote, it makes the board think a little more
seriously, particularly in a consumer company, about its
behavior?
Mr. Streur. Sure. And, by the way, there was a lot of
discussion about how index funds vote. Index funds vote mostly
with management. Predominantly, they just throw the lever and
vote with management. That has been the history. So when you
get a 25-percent vote of shareowners knowing how much is held
by index funds and their habit of just supporting management,
it is an important feedback mechanism for that board and that
management. If nobody voted for it, it goes away. You cannot
come back the next year if nobody voted for your proposal. You
have got to get a certain percentage to come back on the----
Senator Brown. If I had sat here through this Committee,
from what you said about index funds just then, and listened to
your two colleagues, I would have thought index funds had a
much more insidious, pernicious influence and almost never
voted with management. It is interesting you say that.
Senator Toomey. So this has amounted to a second round
here, so I am going to ask----
Senator Brown. Senator Van Hollen has not had a first
round.
Senator Toomey. So we usually alternate. I think that is
the tradition of the Committee. So I would like to pose a
question to Mr. Copland, and then we will go to Senator Van
Hollen.
There is a report that I think you referenced in your
testimony by Tracie Woidtke--I may be mispronouncing her name--
about public pension fund activism and firm value. And my
understanding from the executive summary is the conclusion
includes that ownership by public pension funds engaged in
social-issue shareholder-proposal activism is negatively
related to firm value, according to this study. And,
specifically, then ownership by the New York State Common
Retirement system is also negatively related to firm value
during the period in which the fund was actively engaged in
sponsoring shareholder proposals related to social issues.
So I guess the question is: From your research, does it
appear that this kind of activism is actually harmful to
investor interests?
Mr. Copland. From the research we have done, the short
answer is yes, and we commissioned that study precisely because
we wanted to ask the question when we saw what was going on,
because these public pension funds are quite different from
what Mr. Streur--Mr. Streur is absolutely--he is running
Calvert. He has got to hold onto his assets. If he does not get
good returns, people are going to leave his fund and go
somewhere else with their money.
That is not the case for our public pension funds that
exist for the retirement of our public employees. These are run
by boards, but they have got the capital locked in. And in the
case of something like the New York State Common Retirement
Fund, the sole fiduciary is a partisan elected official. So you
have got Tom DiNapoli there who is the State comptroller of New
York, the sole fiduciary of the fund--had no investment
background, by the way, when he got that job. And that fund has
repeatedly introduced social proposals to try to influence
corporate behavior. And what Tracie Woidtke, Professor Woidtke,
discovered in her study--and this was building on a methodology
she had done in her doctoral dissertation--is that this is
actually negatively related with firm value.
I also just want to clarify that what Mr. Streur was
talking about, about, well, you have got to get some support to
get back on the ballot the next year, that is true. But under
the SEC rules, you need 3 percent of the vote. So if 97 percent
of the shareholders vote no but 3 percent vote yes, then the
shareholder proponent can get the same proposal on the ballot
the very next year. One thing we have argued is that seems
really low and probably should be raised.
Senator Toomey. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman, Ranking
Member. Thank you for your testimony.
Senator, I was glad to hear you start out talking about the
Enlightenment and individual rights, and as I listened to this
hearing--and I had to step out for a moment--it seems to me
that you are actually advocating a position that is the
opposite of allowing people to make their individual choices
with respect to these decisions. The gentleman, Mr. Streur,
saying that you are going to try and restrict proxy advisors or
put rules on proxy advisors----
Mr. Gramm. I did not mention proxy advisors----
Senator Van Hollen. No? OK. Well, and institutional
investors.
Mr. Gramm. Well, let me say----
Senator Van Hollen. No, no. I have got my 5 minutes, and I
am going to ask my question.
Mr. Gramm. Well, OK.
Senator Van Hollen. But what it seems to me--because we
have had a lot of testimony. This hearing has been a lot about
proxy advisors and institutional investors.
Mr. Gramm. Not my----
Senator Van Hollen. Well, then, Senator, you will agree
with me--right?--that anyone has a right to choose a proxy
advisor to look into whatever they want, right?
Mr. Gramm. If it is their money, they are paying for it----
Senator Van Hollen. Their money. Exactly.
Mr. Gramm. ----they have a right to do it.
Senator Van Hollen. Because there are a lot of folks
around----
Mr. Gramm. You do not have the right to make them do it,
no.
Senator Van Hollen. No, but, Mr. Copland, you agree, right?
If I want to hire a proxy advisor, that is my right to do it,
and you know what? If I pick a person who makes the wrong----
Mr. Copland. Absolutely. I am not arguing for the
elimination of proxy advisors.
Senator Van Hollen. OK. But as I listened to the testimony,
the suggestion is here they are leading everybody astray, and I
would just ask--because I also represent--you know, T. Rowe
Price has a big office in Baltimore. You know, they want to
hire a proxy advisor; they have been pretty happy with their
proxy advisor. As Mr. Streur said, you know, they take into
account some of the information. They sift through it. They
point out in a letter to me that both ISS and Glass Lewis have
transparent mechanisms in place for issuers to address factual
errors in their data analysis. And then they go on to say, ``We
are more concerned, frankly, with the potential''--and this is
House legislation from last year--``the potential to undermine
and inappropriately influence the independence of proxy
advisors.''
Mr. Streur, if you could just talk about this a little bit,
because I find, you know, the world has sort of turned here. We
have had a lot of people--and I do not want to speak again for
these gentlemen, but we had a lot of testimony, as I heard some
of the testimony, it was like we do not want, you know,
individuals to be able to--we want to protect them from
themselves when it comes to their ability to go out and say,
``I want this institution to vote my stock in a certain way,''
or, ``I want these proxy advisors to provide me information.''
Could you talk a little bit about that?
Mr. Streur. Thank you, Senator Van Hollen. Proxy advisors.
I first want to point out that many of the examples of proxy
issues that we have heard today are at the extreme, things that
do have to do with unusual issues filed by very small
shareowners. The bulk of the activity is around executive
compensation, corporate governance, matters that are extremely
important to the competitiveness of American companies. These
issues are complex, and we need to be able to compare one
company's executive compensation program to peer groups and get
into details in order to properly evaluate resolutions from
management or from other shareowners. Proxy advisory services
fulfill an extremely important part of that system in terms of
aggregating data and information and helping us to understand
best practices sector by sector, industry by industry.
So the reality of proxy voting is that the interesting
issues that we have been talking about today, while they are
important, are the vast minority of what we actually deal with
across the thousands of issues that we face every single year.
So the proxy advisory system, extremely important, useful. At
the end of the day, the fund manager is a fiduciary. They are
responsible for the vote. They make the decision. That is our
case. That is T. Rowe's case. That is everybody's case.
Senator Van Hollen. Could you also just briefly talk a
little bit about the link and correlation between investment
returns and the issue of asking for the ESG standards that you
and your firm--could you talk about that?
Mr. Streur. Yeah, thank you. And I think, again, what is
important to focus in on is this concept of financial
materiality. And I think this gets to the heart of American
competitiveness. And a question was asked earlier about what
are the Europeans up to. The Europeans are attempting to
strengthen their system, to strengthen their companies to be
more competitive with Americans, and to attract foreign
capital. So when we think about ESG information, what we want
is the information that pertains to the profitability, the
long-term value of the companies we are analyzing. There is a
very, very strong linkage there. And regarding this research
about proxy issues, if you focus in on proxy issues that are
filed on financially material issues, you get an entirely
different result. You find that proxy issues associated with
financial materiality are associated with superior investment
performance. This is very important for the Committee to
understand. We want to strengthen the system. We want to make
American companies competitive in an increasingly competitive
market. The Chinese are coming. They want foreign capital. We
have to keep our companies up to date, so the linkage between
financially material ESG performance, profitability, and stock
prices is strong. It has been documented by thousands of
studies. That is what we want. We want better disclosure,
easier to use, on issues that will help us improve corporate
America.
Senator Van Hollen. Thank you.
Senator Toomey. And I think we are out of time here. I want
to thank all of our witnesses for being here today and
providing testimony.
For Senators who wish to submit questions for the record,
those questions are due on Tuesday, April 9th. I encourage the
witnesses, if you receive questions, to please respond
promptly.
And with that, this hearing is adjourned.
[Whereupon, at 11:25 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 the role of asset managers, proxy
advisers, and retail investors in engaging with companies on
environmental, social, and governance issues.
Last year, Chairman Clayton expressed concerns that the ``voices of
long-term retail investors may be underrepresented or selectively
represented in corporate governance.''
Regardless of the tools that retail investors choose for investing
their hard-earned money, it is critical that they have a voice in the
investment decisions that are being made.
Whether it is a company's use of a proxy advisory firm or an asset
manager's investment decision-making policy, the retail investor should
have a clear understanding of the decisions that are being made which
ultimately represent their shares.
Last year, John Bogle, the creator of the index fund, wrote an op-
ed in the WSJ about how successful the index fund has been for
investors, noting that if historical trends continue, a handful of
institutional investors will one day hold voting control of virtually
every large U.S. corporation.
Even at existing levels, as consumers continue to use index funds,
there has been an evolution in the concentration of control now held by
a small group of asset managers voting a huge number of shares.
Today, index funds hold 17.2 percent of all U.S. shares and are the
largest shareholder in 40 percent of all U.S. companies.
With the exception of socially responsible funds, most funds are
not targeted at specific environmental or social impact objectives, and
many investors in these funds do not expect asset managers to engage
companies on social and environmental issues on their behalf.
However, since the 2014 proxy season, institutional shareholders
support for inclusion of environmental and social proposals has
increased from 19 to 29 percent while retail shareholder support has
increased marginally to only 16 percent.
In the 2018 proxy season, ESG proposals were the largest category
of shareholder proposals on proxy ballots with 15 percent of proposals
climate-related and 14 percent related to political contributions.
It is important to understand how institutional investors are
voting the shares of the money they manage to make sure that retail
investors' interests are being reflected in these voting decisions.
Today, I look forward to hearing from our witnesses on the
following questions: How are the retail investors being engaged within
the proxy voting process and in setting the policies used by the asset
managers of the passive funds with which they invest? Are these shares
being voted to drive productivity in our economy and increase
investors' return on their hard-earned investments, or are
intermediaries using other people's money unbeknownst to them in order
to advance environmental, social and other political policies? What
financial and other criteria are used in identifying social issues for
engagement and measuring engagement success for end-investors?
I look forward to hearing the views of our witnesses on these
issues, and I thank them for their willingness to appear today.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you Chairman Crapo and welcome to our witnesses.
I hope today's hearing will allow the Committee to better
understand the growth of environmental, social, and governance, or ESG,
investing principles.
Corporations have become beholden to quarterly earnings reports.
One survey of financial executives from public companies found that 78
percent would sacrifice economic value of their own company just to
meet financial reporting targets.
That's no way to grow our economy.
Families don't think in terms of 3-month earnings quarters--they
think in terms of school years, and 30-year mortgages, and years left
to save for retirement. And the more corporations think about the long-
term sustainability of their businesses, the better off workers,
shareholders, managers, and customers will be.
Corporations spent more than $800 billion on stock buybacks last
year. \1\
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\1\ https://www.axios.com/stock-buybacks-increased-2018-apple-
3ff90545-53f7-41e2-b774-d78ae24ec9af.html
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That money doesn't end up in the pockets of the company's workers--
it goes right in the pockets of the CEOs and other corporate managers
making the decision.
Last year, for the first time in a decade, corporations spent more
on their own stock than on investing in long-term capital expenditures
and worker investments. \2\
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\2\ https://www.axios.com/stock-buybacks-2018-2019-record-high-
54f64348-bcd8-48c4-ae15-da2ef959dcb3.html
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We know when companies ignore long-term risks, workers, small-time
investors, and consumers all pay the price.
Look at Wells Fargo--the company exploited its workers with
unsustainable expectations to boost its stock value, while the board
lavished the CEOs with pay raise after pay raise. And consumers are
still paying the price.
But it's not just consumers--it's bad for the company. Wells Fargo
has faced scandal after scandal, fines and enforcement actions, and the
worst stock performance among the biggest banks. And just last week,
for the second time in 2\1/2\ years, the CEO stepped down under the
cloud of the scandals.
Study after study tell us that investors who pay attention to how
companies affect workers and communities and the environment do better
over time.
But it's not always easy to figure out which companies are thinking
long-term, and which companies are only thinking about the next round
of stock buybacks. We need to make that critical information available
to the public.
Most of the SEC's disclosure requirements were adopted almost 40
years ago, when more than 80 percent of S&P 500 companies' assets were
fixed, like buildings and factories. Today, the numbers are flipped--
more than 80 percent of S&P 500 assets are intangible--we're talking
about brand names, patents, and investments to enhance worker skills
and effectiveness.
To address that evolution, the SEC Investor Advisory Committee last
Thursday recommended to the Commission that companies include new human
capital management disclosures in their public filings.
Adding human capital disclosure is just a start. Investors know
there are many environmental, social, or political risks that could
reduce long-term value, but companies are not providing that
information.
So the SEC should act. Enhancing and standardizing these disclosure
requirements will merely bring the SEC up-to-date with other rules
around the world.
But disclosure is only one step. It's time that companies realize
that holding executives and directors accountable, respecting workers,
and planning for long-term risks instead of short term payouts for CEOs
is good for business.
Instead, corporations have spent their time lobbying against
important tools that allow shareholders to hold corporate boards and
management accountable.
Corporate special interests want to limit investors' freedom to
manage and run their funds.
And they want to silence the voices of Main Street investors by
making it harder for shareholders to petition companies to allow all
the shareholders to vote on issues significant to the company.
Never mind that corporations never want Government to step in to
protect servicemembers from banks that repossess their cars, or protect
families from getting trapped in a downward spiral of debt with a
payday lender.
But now all of a sudden, these rich CEOs want Government to step in
to protect them from ordinary investors and ordinary Americans who are
trying to make their voices heard on climate change, on protecting
Americans from gun violence, on treating workers with respect. So much
for limited Government.
It shouldn't take a crisis to focus executives and directors on the
essentials of long-term planning. But too often short-term thinking
takes over, and workers, shareholders, and customers suffer.
Just ask Wells Fargo.
I look forward to hearing from the witnesses.
Thank you, Chairman Crapo.
______
PREPARED STATEMENT OF PHIL GRAMM
Former U.S. Senator
April 2, 2019
Chairman Crapo and Ranking Member Brown, it is a privilege to
testify before the Committee I served on and chaired for 18 years. I
accepted your invitation because I believe the debate about how
corporate governance is structured and who money works for will have a
profound impact on our prosperity and freedom. I respect the opinions
and good intentions of those who would collectivize America's corporate
structure, but I believe such policies would hurt the very people they
seek to help.
The Enlightenment liberated mind, soul, and property, empowering
people to think their own thoughts, worship their own gods, and benefit
from the fruits of their own labor and thrift. As labor and capital
came to serve their owner, not the crown, the guild, the church, or the
village, medieval economies began to awaken from a thousand years of
stagnation. The Parliament in England stripped away the leaching
influence of royal charters and initiated reforms that ultimately
allowed businesses to incorporate by simply meeting preset capital
requirements. Parliament further established in law the principle that
business would be governed by the laws it passed, in a process of open
deliberation, not by the corrosive influences and rampant cronyism that
were pervasive in the medieval marketplace.
The Enlightenment recognized that the crown, guild, church, and
village had become rent seekers, leaching away the rewards for work,
thrift, and innovation and in the process reducing productive effort
and progress. The Enlightenment principle that labor and capital were
privately owned property and not communal assets subject to involuntary
sharing, unleashed an explosion of knowledge and production, creating a
never before equaled human flourishing that continues to this day.
Extraordinarily in America, the crown jewel and greatest
beneficiary of the Enlightenment, political movements are afoot that
seek to overturn the individual economic rights created in the
Enlightenment and return to a medieval world of subjects and
subjugation. Today we hear proposals to force businesses to again swear
medieval fealty to ``stakeholders''--the modern equivalent of crown,
guild, church, and village--``the general public . . . the workforce .
. . the community . . . the environment . . . societal factors.'' These
stakeholders would not have to ``stake'' any of their toil or treasure,
but, as they did in the Dark Ages, they would claim communal rights to
share the fruits that flow from the sweat of the worker's brow, the
saver's thrift and the investor's venture.
Whereas the Enlightenment was based on the principle that people
owned the fruits of their labor and thrift, America now faces a host of
proposals to force the sharing of economic rewards that take us back to
the medieval concept of communal property where the powerful few could
extort part of the fruits of your labor and capital using the logic
that if you own a business ``you didn't build it.''
Thankfully, many of these proposals to overturn the Enlightenment's
concepts and benefits of economic freedom would at least employ its
democratic process by seeking to change the law. This latest struggle
for the survival of economic freedom and prosperity will be played out
in elections during the next decade. But an even greater threat to the
Enlightenment's economic foundations comes today from the surreptitious
battle now being waged in stockholder meetings and corporate board
rooms across the country. Today political activists are pressuring
corporate America to adopt political, social and environmental policies
that would subvert labor and capital in ways that have been rejected by
State Legislatures, the Congress, and the Courts.
Past reforms by Congress, the SEC and the courts, designed to
enhance shareholder rights, have unintentionally empowered special
interest groups to subvert corporate governance, forcing corporations
to deal with political and social problems they were never designed or
empowered to deal with. The explosion of index funds, whose managers
vote shares they do not own, has dramatically increased the danger
posed by political activists not just to American corporate governance
but to our prosperity and freedom as well.
Today index funds hold 17.2 percent of all U.S. shares and are the
largest shareholder in 40 percent of all U.S. companies. Their future
growth seems guaranteed by the tremendous price advantage gained by
simply buying a slice of various equity indices rather than incurring
the cost of analyzing each investment. But such efficiency is not free.
An index fund's profitability is not significantly affected by the
performance of any given company in the index since their primary
competitors sell the same indices. Therefore index funds and their
proxy advisers have neither the knowledge nor the aligned interest to
make informed judgements on business-specific questions that arise in
the stockholder meetings of the companies in which they control an
ever-increasing share of stockholder votes.
When index funds vote their investor's shares on broad social and
political issues, the problem is not just the lack of aligned interest
and knowledge, the problem is that index funds have a glaring conflict
of interest. On those high profile issues, the profitability of the
scale-driven index fund business will be affected largely by how the
public perceives the vote the fund cast and how that vote affects the
marketing of the firm. The index funds financial interest, therefore,
can and often will conflict with the investor's interest.
Before his death, the great Jack Bogle, founder of Vanguard, urged
legislation to explicitly impose a fiduciary duty on funds ``to vote
solely in the interest of the fund's shareholder.'' Anybody voting
somebody else's shares or advising on how to vote those shares should
be bound by strict fiduciary responsibility. But even enhanced
fiduciary responsibility won't solve the inherent conflict of interest
that index funds face in voting investor shares on high profile social
and political issues that have a potential impact on the marketability
of the fund. On those issues maybe it is time for the SEC to require
that index funds poll their investors and vote their shares only as
specifically directed. We cannot allow the economic interest of index
funds to effectively convert ``private purpose'' C corporations into
``public benefit'' B corporations which the investors in general index
funds didn't invest in.
History teaches us that if we want to be prosperous and free,
within the Rule of Law, we must let private interest create wealth and
reap the rewards of its creation. Only after wealth has been created
should we debate the cost and benefits of taxing and redistributing it.
______
PREPARED STATEMENT OF JAMES R. COPLAND
Senior Fellow and Director, Legal Policy, Manhattan Institute for
Policy Research
April 2, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
I would like to thank you for the invitation to testify today. My name
is James R. Copland. Since 2003, I have been a senior fellow with and
director of legal policy for the Manhattan Institute for Policy
Research, a public-policy think tank in New York City. Although my
comments draw upon my research conducted for the Manhattan Institute,
\1\ my statement before the Committee is solely my own, not my
employer's.
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\1\ Some language in this testimony may be substantially similar
to, or in some places identical, to that in my previous publications
and earlier testimony before other Government bodies.
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Today's topic has been a significant focus of my research.
U.S. capital markets continue to lead the world. But changes in
those markets potentially imperil that leadership place. These changes
should prompt careful scrutiny from Congress and regulators at
administrative agencies including the Securities and Exchange
Commission. I want to focus my testimony on three central points:
1. Shareholder voting today is dominated by institutional investors.
2. Many of these institutional investors, and other intermediaries,
are subject to capture by interest groups with values
misaligned from those of the ordinary diversified investor and
in tension with efficient markets and capital formation.
3. American corporate law and securities regulation, to date, have
not been equipped to address this problem.
Institutional Investors
Institutional investors--such as mutual funds, index funds,
pensions, and hedge funds--own 70 percent of the outstanding shares of
publicly traded corporations in the United States. \2\ The percentage
of corporate shares held by institutional investors has increased over
time. \3\ That's not surprising. Institutional investors have much to
offer the ordinary investor, who can outsource investment decisions to
knowledgeable professionals and diversify holdings even with limited
assets.
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\2\ Broadridge and PricewaterhouseCoopers, ``Proxy Pulse: 2017
Proxy Season Review'', Sept. 2017, available at https://www.pwc.com/us/
en/services/governance-insights-center/library.html.
\3\ See Matteo Tonello and Stephan R. Rabimov, ``The 2010
Institutional Investment Report: Trends in Asset Allocation and
Portfolio Composition'', The Conference Board Research Report, No. R-
1468-10-RR, 27, 2010, available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1707512.
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But this outsourcing of capital also has risks. Ordinary investors
generally lack the capacity to oversee those to whom they entrust their
investment resources. The costs of the principal (in this case, the
investor) monitoring the agent (in this case, the institution managing
the investor's funds) are called ``agency costs'' in the economic
literature.
Federal law attempts to protect ordinary investors who entrust
others with their capital. Mutual funds serving general investors must
comply with the Investment Company Act of 1940. Retirement funds,
except those managed by State and local governments or religious
institutions, must comply with the Employee Retirement Income Security
Act of 1974.
The Fink Letter
Yet the law has little to say about how such institutional
investors exercise their voting rights as shareholders. \4\ In a winter
2018 letter to shareholders, BlackRock chief executive officer Laurence
Fink suggested ``a social purpose'' for corporations benefiting all
``stakeholders,'' not merely corporate shareholders:
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\4\ In the late 1980s, the U.S. Department of Labor issued a
guidance letter instructing retirement benefit funds governed by ERISA
to vote their shares according to a ``prudent man'' standard. See
Letter from U.S. Department of Labor to Helmuth Fandl, chairman of
Retirement Board, Avon Products, Inc. (Feb. 23, 1988); see also 73 FR
61731 (Oct. 17, 2008). In 2003, the SEC clarified that similar
fiduciary duties attach to mutual funds and other registered investment
companies. See 68 FR 6585 (Feb. 7, 2003) (``The duty of care requires
an adviser with proxy voting authority to monitor corporate events and
to vote the proxies. To satisfy its duty of loyalty, the adviser must
cast the proxy votes in a manner consistent with the best interest of
its client and must not subrogate client interests to its own''
(internal citations omitted)).
Society is demanding that companies, both public and private,
serve a social purpose. To prosper over time, every company
must not only deliver financial performance, but also show how
it makes a positive contribution to society. Companies must
benefit all of their stakeholders, including shareholders,
employees, customers, and the communities in which they
---------------------------------------------------------------------------
operate.
BlackRock manages more assets than any other institutional investor
in the world. To some degree, Fink's evoked a truism. But his letter
nevertheless provoked controversy because it weighed in on one side of
a debate that has raged on for a century--and, in one reading, embraced
what has generally been the minority view, at least in terms of legal
responsibilities. \5\
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\5\ Shareholder primacy--the notion that corporate managers have a
near-exclusive fiduciary obligation to shareholders rather than other
corporate ``stakeholders''--is deeply rooted in American law. It traces
at least as far back as Dodge v. Ford Motor Company, in which the
Michigan Supreme Court ruled that Henry Ford had a fiduciary duty to
manage Ford Motor Company for the benefit of shareholders rather than
employees or the broader community. 170 N.W. 668. (Mich. 1919).
In the academic literature, Adoph Berle and Gardiner Means were
early defenders of the primacy of shareholders' interests in governing
corporate managers' fiduciary duties. See Adolph A. Berle and Gardiner
C. Means, ``The Modern Corporation and Private Property'' (1932) (the
classic exploration of agency costs in the American corporation).
Shareholder primacy was buttressed by later law and economics articles
conceiving of the corporate form as a nexus of contracts. See, e.g.,
Armen A. Alchian and Harold Demsetz, ``Production, Information Costs,
and Economic Organization'', 62 Am. Econ. Rev. 777 (1972); Michael C.
Jensen and William H. Meckling, ``Theory of the Firm: Managerial
Behavior, Agency Costs, and Ownership Structure'', 3 J. Fin. Econ. 305
(1976).
Notwithstanding the more modern push for ``corporate social
responsibility,'' cf. Christopher Stone, ``Where the Law Ends'' (1975);
Ralph Nader, Mark Green, and Joel Seligman, ``Taming the Giant
Corporation'' (1976); but see David L. Engel, ``An Approach to
Corporate Social Responsibility'', 32 Stan. L. Rev. 1, 1 (1979) (``Any
mandatory governance reforms intended to spur more corporate altruism
are almost sure to have general institutional costs within the
corporate system itself. . . . But the proponents of `more' corporate
social responsibility have never bothered to analyze or examine, from
any clearly defined starting point, even just the benefits they
anticipate from reform . . . .''), the legal duties of corporate
managers have remained essentially shareholder-focused. Cf. Elizabeth
Warren, ``Companies Shouldn't Be Accountable Only to Shareholders'',
Wall St. J., Aug. 15, 2018 (implicitly acknowledging shareholder
primacy as the operative legal norm in pushing a reorienting of legal
duties through the Accountable Capitalism Act); James R. Copland,
``Senator Warren's Bizarro Corporate Governance'', Economics21.Org,
Aug. 16, 2018, available at https://economics21.org/warren-backwards-
corporate-governance (criticizing Senator Warren's proposal as
inconsistent with three pillars of U.S. corporate law--corporate
federalism, shareholder primacy, and director independence).
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Equity Ownership and Agency Costs
Just as institutional investment vehicles provide enormous value to
individuals who wish to invest their assets, equity ownership is
central to financing innovation and productive investment. By raising
capital with equity rather than debt, entrepreneurs can finance their
ventures from dispersed sources without placing any obligation to pay
funders an immediate or regular cash flow. It is hardly by accident
that common-stock ownership structures, which emerged in the early 17th
century in Holland and Britain, remain the principal form of ownership
for large, complex profit-making institutions today. I fully concur
with Senator Gramm that our unparalleled economic success is closely
linked to these ownership structures.
But just as outsourcing investments has risks, so does equity
ownership. Equity investors, unlike other corporate stakeholders, are
unable to protect their interests by contract. The agency costs of
equity ownership, like those of institutional investing, are very real.
\6\
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\6\ As a general matter, equity ownership has substantially higher
agency costs than alternative forms of ownership. See generally Henry
Hansmann, ``The Ownership of Enterprise'' 35-49 (1996). Equity
ownership has long been the dominant form of organization for complex
profit-making businesses because its other costs of ownership--costs of
collective decision making and costs of risk-bearing--are substantially
lower than alternative ownership forms'. See id. Efforts to turn
homogeneous fiduciary duties (centered on shareholder wealth
maximization) into heterogeneous fiduciary duties (responsive to
various ``stakeholder'' interests) directly undercut the low costs of
collective decision making that have made equity ownership a preferred
structure for large business organizations. See Stephen M. Bainbridge,
``The Case for Limited Shareholder Voting Rights'', 53 UCLA L. Rev. 601
(2006) (arguing that increasing the power of shareholders to hold
managers accountable, including through increased disclosure, imposes
significant costs in reduced managerial authority). See generally
Kenneth J. Arrow, ``Social Choice and Individual Values'' (1963)
(articulating Arrow's Impossibility Theorem, which holds that, given
certain fairness criteria, voters facing three or more ranked
alternatives cannot convert their preferences into a consistent,
community-wide ranked order of preferences).
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American corporate law has been oriented chiefly around managing
equity owners' agency costs. Common law ``fiduciary duties,''
enforceable in court, prohibit management self-dealing. Moreover,
shareholders are protected by their voting rights--chiefly, the ability
to elect directors who oversee management. And in companies whose
shares are traded on public stock exchanges--the regulation of which
has been the province of the Federal Government since the 1930s--equity
investors are able to exit their investments easily, by selling their
shares. Federal securities law aims to require sufficient disclosures
to permit equity owners to exercise such exit rights with good
information.
Who's Monitoring the Monitors?
The central question before the Committee today involves the
intersection of institutional investing and shareholder voting rights.
In general, shareholder voting rights have been thought of as a
tool--complementary to legal fiduciary duties and market exit rights--
to mitigate agency costs between corporate managers and equity owners.
But such voting rights today are dominated by institutional investors.
And most of these institutional investors themselves have substantial
agency costs, between fund managers and individual investors. \7\
Institutional investors--either directly or through other
intermediaries, such as proxy advisory funds--are monitoring corporate
boards and managers. But who's monitoring the monitors?
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\7\ There are exceptions. Some institutional investors, such as
hedge funds, are substantially owned by their managers. These funds'
agency costs are limited precisely because the fund managers have a
large ownership stake--and thus a substantial interest in the funds'
performance. Of course, such funds may pursue the idiosyncratic
interests of their owner-managers.
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The answer is decidedly not the ordinary, average investor.
Individual investors delegate their investment decisions to
intermediaries precisely to avoid complexities like the minutiae of
proxy voting. Individuals may shift their assets from one fund manager
to another; but such moves will be prompted by relative portfolio
performance, or fee structure, or public controversy--not by
shareholder voting.
To be sure, some investors will prefer various social-investing
goals for their assets. That's why social-investing vehicles like Mr.
Streur's have been able to raise significant amounts of capital.
Nothing in my comments should be taken to disparage the appropriateness
of such investment vehicles for investors who prefer them. But
recognizing that an institutional fund manager's social-investing goal
may be appropriate for the informed investor who embraces that goal
does not imply that such a social-investing goal is appropriate for
institutional asset managers that do not clearly announce to investors
their social purpose. And it does not imply that such a social-
investing goal should be imported more generally into our investment,
securities, and corporate laws, nor that such laws should enable actors
pursuing such goals to impose them on corporate managers.
Shareholder Voting and Special Interests
Unfortunately, our current body of Federal securities laws, as
interpreted and enforced by the Securities and Exchange Commission,
have very much been enabling special interests. Under current SEC
rules, any shareholder in a publicly traded corporation that has held
at least $2,000 in stock for at least a year may place a proposal on
the company's proxy ballot. \8\ A shareholder can introduce the same
proposal year after year, even when 90 percent of all voting
shareholders consistently oppose it. \9\
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\8\ See 17 CFR 240.14a-8 (2007).
The SEC determines the procedural appropriateness of a shareholder
proposal for inclusion on a corporation's proxy ballot, pursuant to the
Securities Exchange Act of 1934, Pub. L. No. 73-291, Ch. 404, 48 Stat.
881 (1934) (codified at 15 U.S.C. 78a-78oo (2006 & Supp. II 2009)),
at 78m, 78n, and 78u; 15 U.S.C. 80a-1 to 80a64 (2000) (pursuant to
Investment Company Act of 1940, Pub. L. No. 76-768, 54 Stat. 841
(1940)); but the substantive rights governing such measures and how
they can force boards to act remain largely a question of State
corporate law: as the Supreme Court emphasized in its 1987 decision in
CTS Corp. v. Dynamics Corp., ``[n]o principle of corporation law and
practice is more firmly established than a State's authority to
regulate domestic corporations, including the authority to define the
voting rights of shareholders.'' 481 U.S. 69, 89.
The section of the Securities Exchange Act upon which Rule 14a-8 is
promulgated, 14(a), is principally designed to ensure corporate
disclosures to shareholders to afford investment information and
prevent deception. See J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964)
(``The purpose of 14(a) is to prevent management or others from
obtaining authorization for corporate action by means of deceptive or
inadequate disclosure in proxy solicitation.''). In its 1990 Business
Roundtable decision, the D.C. Circuit Court of Appeals explained
further:
That proxy regulation bears almost exclusively on disclosure stems
as a matter of necessity from the nature of proxies. Proxy
solicitations are, after all, only communications with potential
absentee voters. The goal of Federal proxy regulation was to improve
those communications and thereby to enable proxy voters to control the
corporation as effectively as they might have by attending a
shareholder meeting.
Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990) (``While
the House Report indeed speaks of fair corporate suffrage, it also
plainly identifies Congress's target--the solicitation of proxies by
well informed insiders `without fairly informing the stockholders of
the purposes for which the proxies are to be used.' '' (citing H.R.
Rep. No. 1383, 73d Cong., 2d Sess. 14 (1934))). See also S. Rep. No.
792, 73d Cong., 2d Sess. 12 (1934) (characterizing purpose of proxy
protections as ensuring stockholders' ``adequate knowledge'' about the
``financial condition of the corporation'').
\9\ See Amendments to Rules on Shareholder Proposals, Exchange Act
Release No. 40,018; 63 FR 29,106, 29,108 (May 28, 1998) (codified at 17
CFR pt. 240).
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These rules have enabled special-interest shareholders to capture
the attention of corporate boards and managers, at all other
shareholders' expense. For example, when McDonald's stockholders
gathered for the company's annual meeting in 2017, they had to vote on
seven shareholder proposals. Among these were a proposal against the
company's use of antibiotics in its meat supply, brought by the
Benedictine Sisters of Boerne, Texas; and one by the nonprofit Holy
Land Principles, which wanted the company to modify its employment
practices in Israel. The Boerne Sisters owned 52 McDonald's shares. The
Holy Land group owned 47. No shareholder sponsoring a proposal at the
company's annual meeting that year owned more than 0.0001 percent of
the company's stock.
This example is not anomalous. In 2016 and 2017, a majority of
shareholder proposals sponsored at Fortune 250 companies involved
social or policy issues largely unrelated to share value, executive
compensation, or traditional board-governance concerns. Last year, many
of our largest publicly traded companies faced four or more shareholder
proposals on their corporate proxy ballot, including AmerisourceBergen,
AT&T, Chevron, Citigroup, Dow Chemical, DuPont, Eli Lilly, Emerson
Electric, ExxonMobil, Facebook, Ford, General Electric, Google, Home
Depot, JPMorgan Chase, McKesson, and Starbucks. \10\ In every year for
the last decade, no more than 1 percent of these shareholder proposals
were sponsored by institutional investors without a social-investing
purpose or orientation, or a tie to public employees or organized
labor. The SEC's lenient shareholder-proposal rules have also empowered
a very small number of investors with limited investment stakes to
assume an outsized role in corporate-boardroom debates; three
individuals and their family members--commonly called ``corporate
gadflies''--have sponsored between 25 percent and 45 percent of all
shareholder proposals in recent years. \11\
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\10\ This list of companies is underinclusive. Some other
companies received multiple shareholder proposals that they ultimately
excluded from their proxy ballots after asking for, and receiving, ``no
action'' letters from the SEC.
\11\ The broader problems with the SEC's Rule 14a-8 are beyond the
scope of this testimony. For a deeper dive into those issues, see my
House subcommittee testimony on the subject from fall 2016, referenced
and linked at the end of this statement.
---------------------------------------------------------------------------
Today, navigating the special-interest investor is simply an
expected cost of being a publicly traded corporation. In February,
jeans-maker Levi Strauss filed the paperwork to become a publicly
traded corporation. In March, the People for the Ethical Treatment of
Animals announced it was acquiring shares in Levi's in order to propose
shareholder resolutions involving the manufacturer's use of leather
patches. PETA's decision was not related to investment concerns; it
announced it was acquiring the minimum number of shares required to
reach the SEC's $2,000 threshold. \12\
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\12\ Tanya Garcia, ``PETA Takes a Stake in Levi's To Press for
Vegan Leather Patches'', Marketwatch, Mar. 22, 2019, https://
www.marketwatch.com/story/peta-takes-a-stake-in-levis-to-press-for-
vegan-leather-patches-2019-03-22.
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Historically, groups like PETA have been able to garner significant
attention through introducing proxy ballot items but have been unable
to win the support of a majority of shareholders for their precatory
ballot items. But some caution is in order. Beyond institutional
investors with an express social-investing purpose, many investment
vehicles with large holdings are affiliated with organized labor. In
2011, the Office of the Inspector General of the Department of Labor
found that labor pension funds may be using ``plan assets to support or
pursue proxy proposals for personal, social, legislative, regulatory,
or public policy agendas.'' \13\ Pension funds managed for State and
municipal public employees, which are often wholly or partly controlled
by partisan elected officials, have often overtly pursued social goals
in managing their investment resources, as well as in voting shares.
---------------------------------------------------------------------------
\13\ Dep't of Labor, Office of the Inspector General, ``Proxy-
Voting May Not Be Solely for the Economic Benefit of Retirement
Plans'', (2011), available at http://www.oig.dol.gov/public/reports/oa/
2011/09-11-001-12-121.pdf.
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The Role of Proxy Advisory Firms
Proxy advisory firms can serve to amplify such special-interest
advocacy. To manage their proxy voting, institutional investors rely
heavily on a pair of proxy advisory firms, Institutional Shareholder
Services, or ISS, which is today owned by private-equity firm Genstar
Capital; \14\ and Glass, Lewis & Co., a subsidiary of the Ontario
Teachers' Pension Plan Board. \15\ Together, these two proxy advisors
control approximately 97 percent of the market for proxy advisory
services, with ISS alone having about a 61 percent share. \16\ By its
own estimation, ISS annually helps approximately 2,000 clients execute
nearly 10.2 million ballots representing more than 4.2 trillion shares.
\17\
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\14\ See Genstar Capital: Institutional Shareholder Services,
https://www.gencap.com/companies/iss/.
\15\ See Robyn Bew and Richard Fields, ``Voting Decisions at U.S.
Mutual Funds: How Investors Really Use Proxy Advisers'', 6 (Tapestry
Networks, Inc. and Investment Research Center Institute, June 2012),
http://www.tapestrynetworks.com/issues/corporate-governance/upload/
Voting-Decisions-at-US-Mutual-Funds-June-2012.pdf.
\16\ See James K. Glassman and J. W. Verret, ``How To Fix Our
Broken Proxy Advisory System'', 8 (Mercatus Center, George Mason Univ.,
2013), available at http://mercatus.org/sites/default/files/
Glassman_ProxyAdvisorySystem_04152013.pdf.
\17\ Institutional Shareholder Services, About ISS, http://
www.issgovernance.com/about/about-iss.
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As summarized in a 2018 report I coauthored with Stanford's David
Larcker and Brian Tayan, a substantial body of empirical evidence shows
that proxy advisory firms' recommendations influence institutional
investor voting and that publicly traded companies are influenced by
proxy advisor guidelines. \18\ A 2012 analysis I coauthored showed that
an ISS recommendation ``for'' a given shareholder proposal, controlling
for other factors, was associated with a 15-percentage-point increase
in the shareholder vote for any given proposal. \19\ As Leo Strine, a
former chancellor on the Delaware Court of Chancery, observed:
``Powerful CEOs come on bended knee to Rockville, Maryland, where ISS
resides, to persuade the managers of ISS of the merits of their views
about issues.'' \20\
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\18\ See James R. Copland et al., ``Proxy Advisory Firms:
Empirical Evidence and the Case for Reform'' (Manhattan Institute
2018), available at https://media4.manhattan-institute.org/sites/
default/files/R-JC-0518-v2.pdf.
\19\ See James R. Copland et al., ``Proxy Monitor 2012: A Report
on Corporate Governance and Shareholder Activism'' 22-23 (Manhattan
Inst. for Pol'y Res., Fall 2012), available at http://
www.proxymonitor.org/Forms/pmr_04.aspx.
\20\ Leo E. Strine, Jr., ``The Delaware Way: How We Do Corporate
Law and Some of the New Challenges We (and Europe) Face'', 30 Del. J.
Corp. L. 688 (2005).
---------------------------------------------------------------------------
My report with professors Larcker and Tayan also cites a
substantial body of empirical evidence demonstrating that at least some
proxy-advisor advice may not be in the average shareholder's interest.
Notwithstanding its substantial influence over shareholder voting, ISS
is a relatively small operation. Prior to its 2014 private acquisition,
ISS had just over $15 million in profits on $122 million in revenues.
\21\ Its small size makes ISS particularly vulnerable to capture, if it
is being managed to maximize its profits. And ISS's voting guidelines
have generally shown a propensity to support various social and
environmental proposals, much more so than the median shareholder.
Historically, ISS has backed some 70 percent of shareholder proposals
related to political spending, 45 percent of those related to
employment rights, and 35 percent of those related to human rights or
the environment \22\--a sharp contrast to the dearth of average
shareholder support for these proposal classes. In general, ISS support
for these social issues has been increasing.
---------------------------------------------------------------------------
\21\ See MSCI 2013 Annual Report 70, ``Summary of Operations'',
``Governance'', available at http://files.shareholder.com/downloads/
MSCI/3458217323x0x739303/DAB046E7-737E-43C7-9114-040465AD560E/
2013_Annual_Report.pdf. ISS was acquired by Genstar in September 2017
for a reported $720 million. See Nikhil Subba and Diptendu Lahiri,
``Genstar Capital To Buy Proxy Advisory Firm ISS for $720 Million'',
Reuters, Sept. 7, 2017, available at https://www.reuters.com/article/
us-institutional-shareholder-services-m/genstar-capital-to-buy-proxy-
advisory-firm-iss-for-720-million-idUSKCN1BI20C. This valuation implies
significant realized growth--or anticipated future growth--for ISS. But
the proxy advisor's market valuation remains very small relative to its
influence over stock market proxy voting.
\22\ See Copland et al., supra n. 23, at 22-23.
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Institutional Investors, Agency Costs, and Shareholder Voting
With trillions of assets under management, large mutual fund
families are less susceptible to capture than proxy advisors. But at
least some large, diversified mutual funds have also been moving to
support some social and environmental causes in discussions with
corporate managers. On March 7, 2017, State Street Global Advisers, the
world's third-largest institutional investor, launched a campaign to
pressure companies to add more women to their boards--symbolically
installing a bronze statue, ``Fearless Girl'', facing the iconic
``Charging Bull'' that has graced Wall Street since 1989. Less than a
week later, BlackRock, the world's largest mutual fund company,
announced that it, too, would prioritize talking with companies on
``gender balance on boards,'' as well as ``climate risk.'' And by the
next winter, Fink issued his letter.
Had institutional investors suddenly decided that their previous
reluctance to embrace social and environmental causes had been
misguided--and that these issues were now key factors in maximizing
share return? The answer is almost surely no, however fund families
spin their efforts through public-relations releases. In the winter of
2017, Walden Asset Management and other social-investing and public-
pension investors had introduced a proposal at BlackRock, scheduled for
the investment firm's own May 2017 annual meeting. \23\ The proposal
asked BlackRock to clarify its own voting policies on social and
environmental shareholder issues. Reportedly, the social investors'
``move was partly motivated by frustration [that] BlackRock and some
other large shareholders like Vanguard . . . declined to support a
single shareholder proposal on board diversity or climate change in
2016.'' \24\ Walden and other investors made similar pushes at JPMorgan
Chase, Bank of New York Mellon, T. Rowe Price, and Vanguard.
---------------------------------------------------------------------------
\23\ See Emily Chasan, ``BlackRock Finds Shareholder Action Goes
Both Ways'', Bloomberg Briefs, Mar. 16, 2017, available at https://
newsletters.briefs.bloomberg.com/document/
ZAq33YrjbIsCER50poBT1g_9ez25goq72ezes8vkh/front.
\24\ Id.
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The sponsors of the 2017 socially oriented proposals did not manage
many assets relative to BlackRock. In total, the sponsoring investors
managed $3.5 billion; BlackRock manages some $5 trillion. Still, the
reaction of BlackRock, State Street, and other fund families may
reflect economic self-interest. Such funds' fee structures tend to be a
function of assets under management. Thus, such institutional investors
may be sensitive to marginal investors' preferences: a sustained and
successful effort to divest from a large mutual-fund family could cause
a drop in the funds' assets under management.
To be sure, assets under management will also be highly sensitive
to investment returns. But the relevant figure for investment returns
is relative to other fund managers. A general decline in market
performance over some baseline will negatively affect fund performance
over the long run, but in the short run, an asset manager's earnings
are likely to be much more sensitive to an asset-divestment campaign.
This is particularly true if other institutional investors are making
parallel choices--as a divestment-style campaign against an
institutional investor would be much more likely to have an impact if a
fund was an outlier among its peers. Thus, social-investing activists
may be able to engender a ``cascade'' effect among fund managers; once
one succumbs to a pressure campaign, others will follow.
Such risks are heightened by the fact that portfolio managers
themselves--those who buy and sell securities for institutional
investing fund families--tend not to involve themselves heavily in
shareholder voting. A survey of 64 asset managers and owners with a
combined $17 trillion in assets, sponsored by RR Donnelley, Equilar,
and the Rock Center for Corporate Governance at Stanford University,
finds that portfolio managers are only moderately involved in voting
decisions. Among large institutional investors with assets under
management greater than $100 billion, portfolio managers are involved
in only 10 percent of voting decisions. \25\
---------------------------------------------------------------------------
\25\ See David F. Larcker et al., ``2015 Investor Survey:
Deconstructing Proxies--What Matters to Investors'', Feb. 2015, https:/
/www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survyey-
2015-deconstructing-proxy-statements_0.pdf.
---------------------------------------------------------------------------
Rather than portfolio managers, large institutional investors tend
to have in-house corporate-governance teams to handle proxy voting
matters. These in-house positions are often staffed by former employees
of proxy advisors--thus sharing those proxy advisors' biases--or are
otherwise at least somewhat committed to environmental- or social-
investing causes. State Street, the world's third-largest institutional
investor, delegates oversight of these issues to Rakhi Kumar, head of
ESG investments and asset stewardship. Ms. Kumar has no apparent
experience trading in securities, \26\ but she envisions for herself a
broad role in overseeing aspects of corporate management both broad and
granular: at the SEC's proxy process roundtable in November 2018, Ms.
Kumar talked about how she was working with corporate executives to
change terms of maternity leave and to manage hog farms in North
Carolina. It is hard to see what specialized expertise Ms. Kumar has
over hog farming. But when shares are concentrated in large fund
families' hands--and proxy advisors like ISS threaten to withhold
support for corporate directors who fail to act upon any shareholder
proposal that receives majority shareholder support \27\--it's little
wonder that company leaders pay attention.
---------------------------------------------------------------------------
\26\ See ``State Street Global Advisors--Who We Are: Rakhi
Kumar'', https://www.ssga.com/global/en/about-us/who-we-are/
team.bio.36520799.html.
\27\ See ISS, ``United States Proxy Voting Guidelines: Benchmark
Policy Recommendations'', https://www.issgovernance.com/file/policy/
active/americas/US-Voting-Guidelines.pdf, at 13.
---------------------------------------------------------------------------
Such sweeping policy oversight by institutional investors is far
afield from the agency costs shareholder voting rights are intended to
mitigate. It is particularly strange when employed by index funds. The
premise of such funds is to leverage capital-market efficiency and
minimize active management costs--in essence, to follow the stock
market. Yet in shareholder-voting decisions, such fund families are
actively supporting efforts to modify corporate behavior. There is no
clear investment-based rationale for this obvious tension in strategy.
The Costs of Socially Oriented Shareholder Activism
The aggressive sweep of shareholder influence over corporate
handling of far-flung social and environmental causes can hurt
shareholder value. Entrepreneurs and investors tend to opt for equity
ownership notwithstanding high agency costs. Aside from the risk-
bearing advantages of equity, there is good reason to believe that one
reason why we tend to see shareholder ownership as the dominant form of
complex business organization is that it minimizes collective decision-
making costs. \28\ Other forms of ownership--such as employee
ownership, customer ownership, and supplier ownership--can handle risk-
bearing to some significant extent but tend only to exist in limited
circumstances. And in such cases, rules tend to exist to limit the
costs of disparate interests in decision making--like law firms' strong
bias toward screening partners for a preference for very high work
hours. Understanding that disparate voting interests along multiple
factors can make collective action difficult requires no specialized
understanding of public-choice theory--and should be quite evident to
members of the United States Senate.
---------------------------------------------------------------------------
\28\ See Hansmann, supra n. 10.
---------------------------------------------------------------------------
In 2015, the Manhattan Institute commissioned an econometric study
of shareholder activism and firm value. \29\ Tracie Woidtke, a
professor at the Haslam College of Business at the University of
Tennessee, \30\ examined the valuation effects associated with public
pension fund influence, measured through ownership, on Fortune 250
companies. Woidtke found that ``public pension funds' ownership is
associated with lower firm value'' and, more particularly, that
``social-issue shareholder-proposal activism appears to be negatively
related to firm value.'' \31\ As such, public employee pension funds'
use of the shareholder-proposal process in an effort to affect
corporate behavior in pursuit of social or policy goals may be harming
the financial interests of plan beneficiaries--and ultimately State and
local taxpayers--as well as, by inference, the average diversified
investor.
---------------------------------------------------------------------------
\29\ See Tracie Woidtke, ``Public Pension Fund Activism and Firm
Value'' (Manhattan Institute 2015), available at https://www.manhattan-
institute.org/html/public-pension-fund-activism-and-firm-value-
7871.html.
\30\ See ``The University of Tennessee Knoxville: Tracie
Woidtke'', http://finance.bus.utk.edu/Faculty/TWoidtke.asp.
\31\ See Woidtke, supra n. 29, at 16.
---------------------------------------------------------------------------
Conclusion
In recent years, regulatory changes and changes in market ownership
have combined to increase the shareholder voting power of institutional
investors. Abetted by SEC rules and procedures, idiosyncratic
``corporate gadflies'' and institutional investors with labor
affiliations and social-investing orientations have gained power in the
boardroom. By coopting proxy advisory firms--and, to some degree,
institutional investors facing their own significant agency costs--
these activists have pursued their agendas at other shareholders'
expense. At least some of this social activism appears to be depressing
share value.
Diagnosing the problems with the status quo is to some extent
easier than proposing solutions, which is beyond the scope of this
statement. I am happy to discuss ideas with Members of the Committee. I
am also listing below earlier writings I have written or published.
Please consider these citations incorporated by reference, and please
feel free to reach out to me about any of the listed writings as well
as my principal testimony. Thank you for your time and consideration.
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PREPARED STATEMENT OF JOHN STREUR
President and CEO, Calvert Research and Management
April 2, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the invitation to testify before you today. My name is
John Streur and I am the President and Chief Executive Officer of
Calvert Research and Management, an investment management firm based in
Washington, DC, that invests across global capital markets. Our firm
incorporates into our investment decisions information about
corporations' (and other issuers of securities) exposure to, and
management of, financially material environmental, societal, and
governance (ESG) factors. Calvert is a subsidiary of Eaton Vance
Management, a leading global asset manager based in Boston. \1\
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\1\ Calvert Research and Management (``Calvert'' or ``CRM'') is an
investment adviser registered under the Investment Advisers Act of
1940, as amended (Advisers Act). Calvert is a Massachusetts business
trust formed in August 2016 as a wholly-owned subsidiary of Eaton Vance
Management (EVM). On December 30, 2016, Calvert completed its purchase
of substantially all of the business assets of Calvert Investment
Management, Inc. (CIM). Calvert's purchase of the assets of CIM
included all technology, know-how, intellectual property and the
Calvert Research System and processes. After approval of the Board of
Directors/Trustees and shareholders of the Calvert Funds, Calvert also
became the successor investment manager to the registered investment
management companies that CIM had been manager of prior to the
transaction. In addition, Calvert hired the vast majority of the
employees that were part of CIM's sustainability research department.
As a result, references related to the activity of CIM prior to the
purchase of its assets on December 30, 2016, are deemed herein to be
the activity of Calvert.
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Our firm sponsors one of the largest and most diversified families
of responsibly invested mutual funds, encompassing active, and
passively managed equity, fixed income, alternative, and multi-asset
strategies. As of February 28, 2019, across our portfolios, we held
more than 5,600 securities from over 4,800 issuers in developed and
emerging markets. Our primary focus is to generate favorable investment
returns for our clients by allocating capital consistent with
financially material ESG analysis and through structured engagement
with portfolio companies.
As a participant in the global capital markets focused on long-term
value creation for our clients, we understand that most corporations
and other issuers of securities deliver a strong net benefit to
society, through their products and services, creation of jobs and the
sum of their behaviors. The world has experienced unmatched economic
growth over the course of the last century and we recognize that free
market capitalism and competition have made a significant contribution
in lifting living standards globally.
Today, companies and investors throughout the world are working to
better understand how to further the tremendous progress that
corporations, competition and capitalism create by conducting a deeper
analysis of environmental and societal impacts and of corporate
governance systems in place worldwide. As a firm, we are part of a
rapidly expanding base of institutional investors and asset owners
globally who seek to strengthen corporations and capitalism through
improved performance on financially material environmental risk
management, job creation, operational efficiency, and other factors
understood through analysis of environmental and social impact factors.
The Evolution of ESG Investment Strategies
In recent years, interest in corporate exposure to issues such as
energy efficiency, water conservation, workplace diversity and human
rights has intensified. A heightened awareness of these issues among
consumers and investors alike has pushed ESG investing well into the
mainstream. In 2018, more than $12 trillion in the United States was
invested in strategies that consider ESG criteria--a 38 percent
increase since 2016.This $12 trillion represents 26 percent of
professionally managed assets in the United States, which total $46.6
trillion. \2\
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\2\ US SIF: The Forum for Sustainable and Responsible Investment.
2018 Report on U.S. Sustainable. Responsible and Impact Investing
Trends. Data points are as of December 31 of the preceding year.
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In 2010, there were 281 registered investment companies that
incorporated ESG factors into their investment process. Last year, in
2018, that figure had risen to 730--a 2.6x increase in just 8 years.
\3\
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\3\ Ibid.
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Investors are not the only ones changing their behavior--
corporations are also taking action. Many companies in the United
States have increased their focus on actively managing and reporting on
ESG risks in order to remain competitive in the global market for
products and services. Eight years ago, just 20 percent of the S&P 500
provided any type of reporting on relevant ESG risks. Today, 85 percent
of companies in the S&P 500 actively report on ESG risks factors. \4\
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\4\ Governance and Accountability Institute, Inc. ``Flash Report:
85 percent of the S&P 500 Companies Published Corporate Sustainability
Reports in 2017''. March 20, 2018.
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A common misconception about ESG investment strategies is that
incorporating environmental, social, and governance considerations into
an investment process requires the investor to sacrifice returns.
Calvert partnered with Professor George Serafeim at Harvard University
to conduct research on this topic. Among other findings, we learned
that firms in the top quintile of performance on financially material
ESG issues significantly outperformed those in the bottom quintile. If
an investor had invested $10,000 in 1993 in a portfolio of stocks
performing in the top quintile on relevant ESG factors, by 2014 that
portfolio would have returned more than twice that of a portfolio of
stocks performing in the bottom quintile on financially material ESG
factors. \5\
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\5\ George Serafeim, ``The Role of the Corporation in Society:
Implications for Investors'', September 2015. Source: Adapted from
Khan, Mozaffar and Serafeim, George and Yoon, Aaron S., ``Corporate
Sustainability: First Evidence on Materiality'', (November 9, 2016).
``The Accounting Review'', Vol. 91, No. 6, pp. 1697-1724. Available at
SSRN: https://ssrn.com/abstract=2575912 or https://dx.doi.org/10.2139/
ssrn.2575912.
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The business case for incorporating ESG considerations into the
investment process is well grounded in empirical evidence. A recent
study that aggregated the results of 2,200 studies on the topic
concluded that the vast majority found positive correlations between
corporate financial performance and ESG considerations that are
financially material to that business. \6\ Associated financial
benefits included lower costs of capital, improved operating
performance, and stronger free cash flow.
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\6\ Gunnar Friede and Timo Busch, ``ESG and Financial Performance:
Aggregated Evidence From More Than 2,000 Empirical Studies''. 2015.
available at: https://www.tandfonline.com/doi/full/10.1080/
20430795.2015.1118917.
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The rapidly growing action being taken to incorporate ESG factors
into the business practices of U.S. corporations and the investment
processes of U.S. investment management firms is a conscious attempt by
these entities to strengthen our capitalist system and ensure U.S.
firms maintain a competitive position globally. The Principles for
Responsible Investment (PRI), an international network of firms
incorporating ESG factors into their investment and ownership decisions
that launched at the U.S.'s own New York Stock Exchange in 2006, now
include over 2,300 investment firms globally as signatories. \7\
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\7\ Principles for Responsible Investment, ``About'', 2018,
available at: https://www.unpri.org/pri/about-the-pri.
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All too often, a genuine focus on ESG considerations by corporate
entities and financial firms is associated with a narrow set of
politicized issues, and the potential withholding of capital access or
other financial products and services from lawful and legitimate
businesses. Our firm seeks to inclusively invest in issuers that are
positioned to capitalize on what we see as a long-term macroeconomic
trend toward a more sustainable future. It is critical that the U.S.
capital markets' infrastructure and regulatory policy keep pace with
these global trends in order to maintain our economic competitiveness.
Disclosure Standardization of Environmental, Social, and Governance
Risk Factors
Corporate disclosure standards have evolved over time to reflect
changing industry trends as well as regulatory and judicial
developments. Undoubtedly, there has been a great deal of discussion
and debate amongst the investment community, regulatory authorities,
and Members of this Committee as to the need or degree to which
particular environmental, social or governance data should be disclosed
by public issuers of securities. Rather than address specific proposals
or existing petitions for actions on rulemaking, I would like to
briefly speak to this issue's relevance as it pertains to the benefits
of standardization and the competitiveness of U.S. capital markets.
In the United States, we are fortunate to have the deepest, most
liquid and most developed capital market in the world. Our financial
economy has proven to be a strategic competitive advantage for the
Nation. The efficient flow of capital that it provides has enabled
companies of all sizes to innovate, create jobs, and contribute to an
enhanced quality of life for Americans. Yet, when it comes to the issue
of standardizing disclosures related to ESG risk factors, we are behind
many other developed economies around the globe.
As I mentioned earlier, 85 percent of companies in the S&P 500
already actively report on ESG risk factors voluntarily, through
corporate sustainability reports or other corporate disclosures.
However, much of the information provided through voluntary disclosures
is difficult to compare and inconsistent across issuers, resulting in
considerable costs and resource expenditure for investors. While it is
impossible to discern the amount of expense incurred by investors
attempting to discern ESG data, one estimate suggests that by 2020,
$745 million will be spent globally on ESG data alone. \8\
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\8\ ESG Data: Mainstream Consumption, Bigger Spending, January 9,
2019, available at: www.optimas.com/research/428/detail/.
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The PRI, \9\ along with MSCI, a global data and investment research
provider, recently identified 300 policy initiatives that promoted
sustainable finance in 50 of the largest economies around the globe.
Two hundred of those initiatives were corporate reporting requirements
covering ESG factors. \10\ There are now seven stock exchanges--in
Australia, Brazil, India, Malaysia, Norway, South Africa, and the
United Kingdom--where companies must have some degree of environmental
or social disclosure in order to meet the exchanges' requirements to
list. In 2018, the China Securities Regulatory Commission introduced
requirements that will mandate all listed companies and bond issuers in
China disclose environmental, social, and governance risks associated
with their operations. \11\
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\9\ Principles for Responsible Investment, ``About'', 2018,
available at: https://www.unpri.org/pri/about-the-pri.
\10\ PRI and MSCI, Global Guide to Responsible Investment
Regulation, 2016, available at https://www.unpri.org/page/responsible-
investment-regulation.
\11\ Latham and Watkins LLP, ``China Mandates ESG Disclosures for
Listed Companies and Bond Issuers'', 2018, available at https://
www.globalelr.com/2018/02/china-mandates-esg-disclosures-for-listed-
companies-and-bond-issuers/.
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These Nations recognize that the competition for capital and
investment is fiercely competitive and global in nature. Of course, the
United States should always act in the best interests of its own
citizens and balance concerns from a variety of constituencies.
However, failing to take action to standardize ESG disclosures may
afford other Nations the opportunity to shape global standards that
ultimately impact U.S. capital markets and our Nation's economic
competitiveness.
Finally, Calvert recognizes that as investors, our success is
intrinsically linked to the success of the companies and issuers in
which we are invested. We would advocate that any rulemaking or action
regarding disclosure be done in a deliberate and fair process that
balances the need for reliable and complete information on ESG
considerations along with limiting any unnecessary regulatory burden.
Structured Engagement and the Role of Proxy Advisory Firms
Given that the title of today's hearing explicitly addresses the
role of proxy advisory firms, I would like to take this opportunity to
share how our firm utilizes those services. A core part of Calvert's
investment approach is structured engagement with companies and
management teams in an attempt to improve both the enterprise value of
the firms in which we are invested and address their environmental and
social impact. We believe that active ownership is essential for
improving one's position as a shareowner and that including engagement
as a key element of our process is our duty as responsible stewards of
our client's capital.
ESG strategies have often been characterized by the exclusion of
certain companies from a portfolio because of either controversial
events or objectionable products or practices. At Calvert, we believe
it is best to invest as inclusively as possible and work with companies
strategically to drive positive change and long-term shareholder value.
Proxy advisory firms, the two most predominant firms being
Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass
Lewis), play an important role in the institutional investment
ecosystem. We are aware that ISS and Glass Lewis provide ESG-related
voting recommendations and that these organizations have taken
positions related to shareholder proposals on ESG topics.
Calvert views its relationship with proxy advisory firms as one
that can be accurately defined as just that--an advisor. We have
developed our own customized set of Global Proxy Voting Guidelines,
which are publicly available on our website, \12\ and outline our
approach to voting on critical issues facing corporations. In addition
to using a proxy advisory firm to assist in vote execution, we
subscribe to custom research services so that our proxy advisor can
perform the research necessary to make voting recommendations based on
our Global Proxy Voting Guidelines. That said, the decisions on how and
when to vote are solely Calvert's.
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\12\ https://www.calvert.com/Proxy-Voting.php
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In an effort to remain as transparent as possible, we also post
votes to the Calvert website within 72 hours of being cast and, in
almost all cases, in advance of the meeting so that Calvert's clients
and the general public can see how we voted on behalf of our clients.
During the 2018 Proxy Season, which ran from July 1, 2017, to June 30,
2018, we voted at 4,425 meetings on issues ranging from climate change
and energy to board diversity and sustainability reporting.
We believe proxy advisors serve a valuable role in providing
research services to the investment industry. Further, the actual
process of properly casting votes and maintaining records is
transaction intensive and the ability to outsource these functions to
specialized service providers provides operational efficiency to the
U.S. asset management industry.
Much of the criticism that is directed toward proxy advisory firms
in today's policy debate often appears from sources other than the
institutional investors that voluntarily choose to utilize the services
of proxy advisory firms. Ultimately, we would not favor any additional
actions that would compromise the independence of the research and
advice we receive from these vendors or impose unnecessary costs or
burdens on investment firms.
Conclusion
I would like to again thank the Committee for allowing me the
opportunity to share my perspectives on these important topics. My
sincere hope is that this forum provides an opportunity for
constructive dialogue on how to balance the ongoing competitiveness of
U.S. capital markets, investment management firms, and corporations
with the need to ensure that our capitalist system achieves the most
sustainable future possible.
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM PHIL GRAMM
Q.1. Index funds are increasingly voting in favor of ESG issues
to amplify their public image. Investors believe voting for ESG
proposals will help them recruit more investor-clients. Do you
think the existing customers of index funds also support ESG
issues?
A.1. I don't know whether existing customers support ESG issues
or not. There are funds that are committed to promoting ESG
type issues which investors could invest in if they put a
premium on those issues.
Q.2. If a company is vulnerable to legal challenges based on
its actions relating to ESG issues, should investors be aware
of those risks?
A.2. If companies are vulnerable to legal challenges based on
ESG issues you would have to assume that management, in
carrying out its fiduciary responsibility, would be responsive
to these concerns. If the issue is raised at a stockholder
meeting anyone could make a point concerning legal liability.
What legal liabilities rise to the level that the company
should notify stockholders is another question altogether since
companies face the potential of legal liability in literally
thousands of areas.
Q.3. If ESG disclosures would put companies at risk of legal
liability, should investors have this transparency to inform
their future investment decisions?
A.3. If any legal liability is material to the operation of the
company and its future prospects, a company would be required
under current law to notify investors.
Q.4. ESG funds are part of the marketplace of options where
people can invest their hard earned money and do so with
quality returns. Why do you propose restricting Americans'
choices to disinvest from poorly performing companies that go
against their own personal values?
A.4. I don't support restricting anyone's choices. What I
oppose is index funds promoting their profitability and not the
well-being of their investors.
Q.5. During the hearing, you stated that an investor could
offer a shareholder proposal, be the only one to vote for it,
and then offer it again the next year. That is not correct.
What is the minimum thresholds for shareholder proposals to be
offered again in previous years?
A.5. Under current SEC rules, over 97 percent of the
shareholders must vote no on a shareholder proposal or it can
be put up for another vote the very next season. I misspoke in
my Committee testimony.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JAMES R. COPLAND
Q.1. If a company is vulnerable to legal challenges based on
its actions relating to ESG issues, should investors be aware
of those risks?
A.1. As a general matter, publicly traded corporations do
regularly include risk disclaimers of this sort in public
documents filed under SEC regulations. For instance, Amazon's
10-K discloses a host of risk factors, including those related
to legal and regulatory matters:
We may have limited or no experience in our newer
market segments, and our customers may not adopt our
offerings. These offerings may present new and
difficult technology challenges, and we may be subject
to claims if customers of these offerings experience
service disruptions or failures or other quality
issues. . . .
Because we process, store, and transmit large amounts
of data, including personal information, failure to
prevent or mitigate data loss or other security
breaches, including breaches of our vendors' or
customers' technology and systems, could expose us or
our customers to a risk of loss or misuse of such
information, adversely affect our operating results,
result in litigation or potential liability for us,
deter customers or sellers from using our stores and
services, and otherwise harm our business and
reputation. . . .
Other parties also may claim that we infringe their
proprietary rights. We have been subject to, and expect
to continue to be subject to, claims and legal
proceedings regarding alleged infringement by us of the
intellectual property rights of third parties. Such
claims, whether or not meritorious, may result in the
expenditure of significant financial and managerial
resources, injunctions against us, or the payment of
damages, including to satisfy indemnification
obligations. . . .
We are subject to general business regulations and
laws, as well as regulations and laws specifically
governing the Internet, physical, e-commerce, and
omnichannel retail, electronic devices, and other
services. Existing and future laws and regulations may
impede our growth. These regulations and laws may cover
taxation, privacy, data protection, pricing, content,
copyrights, distribution, transportation, mobile
communications, electronic device certification,
electronic waste, energy consumption, environmental
regulation, electronic contracts and other
communications, competition, consumer protection,
employment, trade and protectionist measures, web
services, the provision of online payment services,
information reporting requirements, unencumbered
Internet access to our services or access to our
facilities, the design and operation of websites,
health and sanitation standards, the characteristics,
legality, and quality of products and services, product
labeling, and the commercial operation of unmanned
aircraft systems. It is not clear how existing laws
governing issues such as property ownership, libel,
data protection, and personal privacy apply to the
Internet, e-commerce, digital content, web services,
and artificial intelligence technologies and services.
Jurisdictions may regulate consumer-to-consumer online
businesses, including certain aspects of our seller
programs. Unfavorable regulations, laws, and decisions
interpreting or applying those laws and regulations
could diminish the demand for, or availability of, our
products and services and increase our cost of doing
business. . . .
Our contracts with U.S., as well as state, local, and
foreign, government entities are subject to various
procurement regulations and other requirements relating
to their formation, administration, and performance. We
may be subject to audits and investigations relating to
our Government contracts, and any violations could
result in various civil and criminal penalties and
administrative sanctions, including termination of
contract, refunding or suspending of payments,
forfeiture of profits, payment of fines, and suspension
or debarment from future Government business. In
addition, such contracts may provide for termination by
the Government at any time, without cause. . . .
Some of the products we sell or manufacture may expose
us to product liability or food safety claims relating
to personal injury or illness, death, or environmental
or property damage, and may require product recalls or
other actions. Certain third parties also sell products
using our services and stores that may increase our
exposure to product liability claims, such as if these
sellers do not have sufficient protection from such
claims. Although we maintain liability insurance, we
cannot be certain that our coverage will be adequate
for liabilities actually incurred or that insurance
will continue to be available to us on economically
reasonable terms, or at all. In addition, some of our
agreements with our vendors and sellers do not
indemnify us from product liability. . . .
The law relating to the liability of online service
providers is currently unsettled. In addition,
governmental agencies could require changes in the way
this business is conducted. Under our seller programs,
we may be unable to prevent sellers from collecting
payments, fraudulently or otherwise, when buyers never
receive the products they ordered or when the products
received are materially different from the sellers'
descriptions. We also may be unable to prevent sellers
in our stores or through other stores from selling
unlawful, counterfeit, pirated, or stolen goods,
selling goods in an unlawful or unethical manner,
violating the proprietary rights of others, or
otherwise violating our policies. Under our A2Z
Guarantee, we reimburse buyers for payments up to
certain limits in these situations, and as our third-
party seller sales grow, the cost of this program will
increase and could negatively affect our operating
results. In addition, to the extent any of this occurs,
it could harm our business or damage our reputation and
we could face civil or criminal liability for unlawful
activities by our sellers.
Beyond such a broad recitation of potential risks, it is
not at all prudent to have a disclosure rule for securities
issuers that would, with specificity, outline facts that might
spur litigation or regulatory action. To the extent any such
disclosures were factual and meaningful--and not simply
recitations of general risks facing any business in a given
industry--they might involve trade secrets or other proprietary
information, or otherwise put businesses trading on U.S.
exchanges at a competitive disadvantage relative to privately
held or foreign-listed companies. To the extent a disclosure
was not factual but speculative, it would be disfavored, as are
speculative, forward-looking statements generally in our
securities-disclosure regime. To the extent they involved
actual ongoing litigation, disclosures could compromise a
company's litigation position-and statements might be used in
litigation as implicit admissions, even when not so intended,
to the detriment of investing shareholders' interests.
Of course, there may be specific regulatory-risk issues
that are sufficiently significant and material that the SEC
might develop a disclosure regime as consistent with its
mandate to protect investors, maintain efficient markets, and
facilitate capital formation. For example, in 2010, the SEC
promulgated new climate-change disclosure rules along these
ends. See Commission Guidance Regarding Disclosure Related to
Climate Change, Exchange Act Release No. 34-61469, 75 FR 6290,
6291, 6296. Whether or not the specific disclosure rules being
promulgated were provident, this type of disclosure rule can--
at least in theory--fit within a rational disclosure regime, if
it involves assessments of firm assets or positions that might
be particularly vulnerable to a prospective or known regulatory
rule of materially sizable magnitude.
Q.2. If ESG disclosures would put companies at risk of legal
liability, isn't it better for investors to have this
transparency to inform their future investment decisions?
A.2. No. If a disclosure as a disclosure creates a liability
risk--because an enterprising plaintiffs' lawyer could excerpt
the disclosure and use it to suggest a corporate admission or
to fulfill a knowledge (scienter) requirement, whether
warranted or not--then that is a reason NOT to require a
disclosure. Liability risks should be predicated upon facts;
the last thing we should want is for our Government disclosure
regime itself to facilitate spurious class-action or other mass
litigation claims.
Q.3. ESG funds are part of the marketplace of options where
people can invest their hard earned money and do so with
quality returns. Why do you propose restricting Americans'
choices to disinvest from poorly performing companies that go
against their own personal values?
A.3. I do not propose ``restricting Americans' choices'' to
invest or divest their funds in accordance with their own
social or policy values, including through institutional
intermediaries. To the contrary, in my written testimony, I
expressly state:
To be sure, some investors will prefer various social-
investing goals for their assets. . . . Nothing in my
comments should be taken to disparage the
appropriateness of such investment vehicles for
investors who prefer them. But recognizing that an
institutional fund manager's social-investing goal may
be appropriate for the informed investor who embraces
that goal does not imply that such a social-investing
goal is appropriate for institutional asset managers
that do not clearly announce to investors their social
purpose. And it does not imply that such a social-
investing goal should be imported more generally into
our investment, securities, and corporate laws, nor
that such laws should enable actors pursuing such goals
to impose them on corporate managers.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JAMES R. COPLAND
Q.1. Mr. Copland, you stated in your testimony that certain
decisions that institutional investors, social-investing
organizations, and proxy advisory firms have collectively made
constitute ``social activism'' that ``appear to be depressing
share value.'' What specific examples of ``social activism''
can you cite where a decision on a proposal has causally
depressed share value? How does one determine that a proposal
has causally depressed share value?
A.1. In my testimony, I claimed that ``[a]t least some
[shareholder-based] social activism appears to be depressing
share value.'' A 2015 study published by the Manhattan
Institute, cited in footnote 33 [29 herein] of my long-form
written testimony, forms the principal empirical basis for that
claim. The study, ``Public Pension Fund Activism and Firm
Value: An Empirical Analysis'', was conducted by Tracie
Woidtke, Head of the Finance Department at the Haslam College
of Business at the University of Tennessee, where she serves as
the David E. Sharp/Home Federal Bank Professor in Banking and
Finance. The study is available online at https://
www.manhattan-institute.org/html/public-pension-fund-activism-
and-firm-value-7871.html.
Because many factors can influence short-term stock-price
movements, it is difficult to infer that any single stock-price
decline is attributable to social activism on the part of a
shareholder. Professor Woitdke--both in our Manhattan Institute
study and in earlier research examining different questions--
has asked the question using a different methodology. Professor
Woidtke looks at lagged ownership data on the part of
institutional investors engaged in shareholder-activism
campaigns--calculated as the number of shares as a proportion
of shares outstanding at the end of the preceding quarter.
Using this data, Professor Woidtke conducts an econometric
regression looking at the relationship between this
institutional-ownership data and firm value (as measured by
Tobin's Q, a measure of the contribution of the firm's
intangible assets to its market value, commonly used to assess
firm value in regression analyses of this type).
Because large institutional investors managing more than
$100 million in assets are required by the SEC to file Form 13F
ownership data on their directly owned equity shares, Professor
Woidtke was able to gather such data for a large number of
institutional investors, including both private mutual funds
and public pension funds. And certain of these public pension
funds--notably the California Public Employees Retirement
System (CalPERS), California State Teachers Retirement System
(CalSTRS), New York State Common Retirement System (NYSCR), and
Florida State Board of Administration (FSBA)--have over the
years engaged in a variety of forms of shareholder activism,
both related to social and environmental issues and related to
more traditional corporate-governance and executive-
compensation concerns. By comparing firm value with lagged
pension-fund ownership--and assessing whether firms with shares
held by the public pension fund were the targets of public
shareholder-activism campaigns, as collated on the Manhattan
Institute's ProxyMonitor.org database of shareholder
proposals--Professor Woidtke was able to test for an average
associational relationship between the activism campaign and
firm value.
Professor Woidtke's study covers the years from 2001
through 2013. The public pension funds studied held in the
aggregate approximately 2.5 percent of the S&P 500 companies'
equity. Professor Woidtke's analysis accounts for a host of
control variables found to influence Tobin's Q in prior
research, including industry, firm size, prior-year firm
income, firm leverage, firm research and development expenses,
firm advertising expenses, firm insider ownership, firm
membership in the S&P 500 stock index, firm-specific stock
transaction costs, and year fixed effects. She assesses both a
Fortune 250 and an S&P 500 dataset. Because ownership was
lagged, we can broadly reverse-causality explanations.
Professor Woidtke's analysis concluded:
Social-issue shareholder-proposal activism appears to
be negatively related to firm value. In this paper, the
negative relationship between public pension fund
ownership and firm value is significant for firms
targeted by public pension funds engaging in social-
issue activism--across two different firm samples--in
2008-13, when the two large funds focused on social-
issue activism, CalSTRS and the NYSCR, were engaged in
shareholder-proposal activism.
Interestingly, while Professor Woidtke found that socially
oriented shareholder activism had a negative relationship to
firm value, she also found that ``No significant valuation
effect is found for ownership by public pension funds that
sponsor corporate governance proposals during any period.''
Thus, public pension funds that tried to engage companies in
shareholder-activism efforts for the ``G'' portion of ESG
advocacy did not seem to affect share price significantly
(either positively or negatively).
Q.2. Given that share value is constantly determined by a
variety of factors, many of which are not within a corporate
board's direct control, how do you quantify a decision's
commensurate reduction in share value?
A.2. Controlling for a large number of factors, the
relationship that Professor Woidtke found was strong, vis-a-vis
the stylized ``industry-adjusted Tobin's Q'' variable,
particularly for companies targeted in the social-activism
campaigns of the New York State Common Retirement Fund (the
most-active sponsor of shareholder proposals among public-
pension funds reporting 13F ownership data):
Consistent with social-issue activism having negative
valuation effects, Tobin's Q is 22 percent lower (1.42
vs. 1.83) and industry-adjusted Tobin's Q is 141
percent lower (-0.12 vs. 0.29) for companies targeted
by NYSCR with a social issue proposal than for other
companies in the Fortune 250. These results are robust
for companies in a larger dataset, the S&P 500, for
which Tobin's Q is 21 percent lower (1.59 vs. 2.02) and
industry-adjusted Tobin's Q is 91 percent lower (0.04
vs. 0.45) for companies targeted by NYSCR with a
social-issue proposal than for other companies.
More than the point estimates indicated, I would focus on
the statistical significance of the finding, robust across
different datasets for aggregate as well as specific pension
funds being studied:
For S&P 500 firms, the negative relationship between
pension-fund ownership and firm value is significant at
the 1 percent level, both for ownership by all social-
issue shareholder-proposal sponsoring pension funds and
for the NYSCR in particular--in the full 2001-13 period
and in the more recent period, but not for the earlier
2001-07 period, when neither CalSTRS nor NYSCR actively
sponsored shareholder proposals.
That said, I would share your implicit concern about
quantifying the share-value impact described above with
specificity, certainly in a cost-benefit analysis framework.
This is one study, applied for one set of investors (large
public pension funds) across one time series (2001 through
2013) and one set of activism campaigns.
But that does not mean that its central findings do not
offer an important cautionary tale. Large public pension funds
of the sort studied in the Woidtke paper own more than $3
trillion in stock market assets. They regularly lead socially
oriented shareholder-proposal campaigns. See, e.g., James R.
Copland, ``Proxy Monitor 2013 Finding 3, Special Report: Public
Pension Fund Activism'', available at https://
www.proxymonitor.org/Forms/2013Finding3.aspx. And unlike
private institutional investors that must compete for assets
under management, their investment portfolios are captive
(i.e., public employees who depend on these funds to manage
their retirement assets cannot move their investments to
another provider); and their institutional leadership is often
driven by policy-related and other social concerns, see James
R. Copland and Steven Malanga, ``Safeguarding Public-Pension
Systems: A Governance-Based Approach'' (Manhattan Institute
2016), available at https://www.manhattan-institute.org/html/
safeguarding-public-pension-systems-governance-based-approach-
8595.html.
(For a discussion of how these ESG campaigns relate to such
plans' fiduciary duties, see Max M. Schanzenbach and Robert H.
Sitkoff, ``Reconciling Fiduciary Duty and Social Conscience:
The Law and Economics of ESG Investing by a Trustee'', Stanford
Law Review (forthcoming), Northwestern Law and Econ Research
Paper No. 18-22, available at https://papers.ssrn.com/sol3/
Papers.cfm?abstract_id=3244665.)
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JOHN STREUR
Q.1. The most recent volume of the National Climate Assessment,
a scientific report issued by 13 Federal agencies in November
2018, stated that climate change may cause losses of up to 10
percent of the U.S. economy by 2100. \1\ Additionally, a 2015
report from The Economist Intelligence Unit wrote that, of the
world's current stock of manageable assets, the expected losses
due to climate change are valued at $4.2 trillion by the end of
the century. \2\
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\1\ New York Times, ``U.S. Climate Report Warns of Damaged
Environment and Shrinking Economy'', Coral Davenport and Kendra Pierre-
Louis, November, 23, 2018, https://www.nytimes.com/2018/11/23/climate/
us-climate-report.html.
\2\ The Economist Intelligence Unit, ``The Cost of Inaction'',
2015, p. 41, https://eiuperspectives.economist.com/sites/default/files/
The%20cost%20of%20inaction_0.pdf.
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Would understanding which assets of public companies may be
materially affected by climate change help you make more
informed decisions about the risk of your investments?
A.1. Yes. The climate-related risk to individual corporate
assets, overall corporate performance at the company level, and
the wider financial system are currently poorly understood. The
Financial Stability Board's Task Force on Climate Related
Financial Disclosures (TCFD) has developed guidelines that
categorize climate risk into (i) transition risk and (ii)
physical risk. These disclosure frameworks represent positive
developments but remain voluntary. A growing number of firms
are making progress on disclosing transition related risks
while far fewer have made progress on disclosing physical
climate risk exposures.
Q.2. Would it be useful as an investor to understand public
companies' contributions to greenhouse gas emissions and their
exposure in the event of a Government- or market-mandated
transition towards a lower-carbon economy?
A.2. Yes. A Government- or market-mandated transition to a low
carbon economy would almost certainly require actions that
would result in a direct financial impact to firms across every
industry and therefore investors would be interested in
understanding the nature of that particular risk exposure.
Q.3. A Government Accountability Office (GAO) report from
February 2018 states, ``[Securities and Exchange Commission
(SEC)] reviewers may not have access to the detailed
information that companies use to arrive at their determination
of whether risks, including climate-related risks, must be
disclosed in their SEC filings.'' \3\ While the SEC has issued
guidance for considering effects of climate change, the SEC has
not mandated disclosures for how climate risk materially
affects returns.
---------------------------------------------------------------------------
\3\ United States Government Accountability Office, ``Climate-
Related Risks'', February 2018, pp. 17-18, https://www.gao.gov/assets/
700/690197.pdf.
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If Federal regulators do not have the information needed to
fully understand public companies' climate-related risks under
current law, do you as an investor have the adequate
information needed to make informed decisions about companies'
risks?
A.3. Many public companies do supply information related to
risks associated with climate change on a voluntary basis. As
an investor we find this information helpful but often
incomplete. Because consistent disclosure is not mandated by
Federal regulators, considerable information asymmetry exists.
Investors that are focused on climate-related risks must
conduct significant levels of diligence using information
sources outside of the traditional audit and regulatory filing
process. We would support a uniform standard for disclosing
climate-related risks that would facilitate consistent
comparison across issuers of securities.
Q.4. The GAO report also states, ``Climate-related disclosures
vary in format because companies may report similar climate-
related disclosures in different sections of the annual filings
. . . SEC reviewers and investors may find it difficult to
navigate through the filings to identify, compare, and analyze
the climate-related disclosures across filings, especially
given the size of each individual filing.'' \4\ There is,
however, a clear desire for shareholders to understand the
impacts of climate-related risks for companies, as was shown in
a 2017 vote of ExxonMobil shareholders calling on the company
to report on business risks associated with new technology and
changes in climate policy. \5\
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\4\ Id.
\5\ New York Times, ``Exxon Mobil Shareholders Demand Accounting
of Climate Change Policy Risks'', Diane Cardwell, May 31, 2018, https:/
/www.nytimes.com/2017/05/31/business/energy-environment/exxon-
shareholders-climate-change.html.
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Do you believe that a mandatory uniform standard for
disclosing climate-related risks would help you better
understand how these risks may affect returns and compare
across companies?
A.4. If the standard is strong, the answer would be ``Yes.''
However, if the standard was inadequate or poor, the answer
would be ``No.''
Q.5. In response to Senator Schatz's question of whether you
think companies are doing an adequate job of disclosing
material climate risk, you responded, ``It's changing, but
we're not close to being there yet . . . Companies themselves
understand these risks fairly well.''
What actions are some companies taking that demonstrate
that they're aware of climate risk?
A.5. The actions taken by firms to address climate-related risk
can vary considerably. Some firms have taken no action. Others
have substantially taken steps to reduce the GHG footprint of
their operations or incorporate more sources of renewable
energy. Still others have made efforts to capitalize on the
opportunities associated with the transition to a lower carbon
economy and partially or completely pivoted their corporate
strategy. Actions vary widely and are generally unique to the
firm and industries in which they operate.
Q.6. What companies are doing the best job of disclosing
climate risk and what do these disclosures include?
A.6. The Carbon Disclosure Project's (CDP) annual A List should
serve as a worthwhile reference to address this question. The
CDP A List names the world's businesses leading on
environmental disclosure and performance. To address the
question of what companies Calvert views as strong performers,
we would kindly direct you to the annual Barron's annual The
100 Most Sustainable U.S. Companies list. The methodology for
this ranking was developed by Calvert Research and Management.
https://www.barrons.com/articles/these-stocks-are-winning-as-
ceos-push-for-a-sustainable-future-51549657527; https://
www.calvert.com/impact.php?post=how-we-did-it-barrons-top-100-
sustainable-companies-&sku=31313.
Q.7. How have these disclosure improvements allowed your firm
to generate favorable investment returns for your clients?
A.7. ESG disclosures provide a more complete and transparent
picture of company's performance relative to peers in what we
view to be deep secular trends toward a more sustainable and
inclusive economic system. This enables us to differentiate
among issuers and select investments that may be better
positioned to outperform the respective benchmark over the long
term, all else being equal.
Q.8. In your written testimony, you wrote, ``The efficient flow
of capital that [our financial economy] provides has enabled
companies of all sizes to innovate, create jobs, and contribute
to an enhanced quality of life for Americans. Yet, when it
comes to the issue of standardizing disclosures related to ESG
risk factors, we are behind many other developed economies
around the globe.'' \6\ You go on to state that there are
currently seven stock exchanges where companies are required to
have some environmental or social disclosures and that failing
to standardize U.S. environmental, social, and governance
disclosures may allow other Nations to shape global standards.
---------------------------------------------------------------------------
\6\ Written testimony of John Streur to the U.S. Senate Committee
on Banking, Housing, and Urban Affairs, April 2, 2019, https://
www.banking.senate.gov/imo/media/doc/Streur%20Testimony%204-2-19.pdf.
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Would requiring uniform standards for public companies to
disclose critical information about their environmental risks
be an adequate step forward in modernizing U.S. disclosures?
A.8. Yes, such an action would be viewed as strong progress.
However, any potential disclosure mandates should consider both
the costs and benefits associated with implementation as to not
improperly disincentivize or disrupt access to capital.
There are currently multiple voluntary ESG related
disclosure frameworks from sources such as SASB, GRI, CDP, and
others. Some corporations have noted ``survey or disclosure
fatigue.'' A single, regulatory-backed set of disclosure
standards would likely lower the reporting burden for companies
currently reporting this information and improve the quality of
what is available to investors.
Ideally, any additional disclosure requirements would be
implemented as a part of a more comprehensive effort to
modernize the United States' financial disclosure regime and
ensure any potential regulatory burden on public firms is
minimized while still ensuring we address information
requirements related to the pertinent risks companies face in
the 21st Century.
Q.9. What countries have the best disclosure frameworks? What
makes them so useful?
A.9. The European Union has led on critical issues of ESG
disclosure and performance. Please see release below from
earlier this year for reference. https://www.unepfi.org/news/
industries/investment/eu-policy-makers-achieve-political-
agreement-on-investor-disclosures-and-esg/
Please also reference various examples I shared in my
testimony. The PRI has provided a Global Guide to Responsible
Investment Regulation, which identified 300 policy initiatives
that promoted sustainable finance in 50 of the largest
economies around the globe. Two hundred of those initiatives
were corporate reporting requirements covering ESG factors.
https://www.unpri.org/sustainable-markets/global-guide-to-
responsible-investment-regulation/207.article
Additionally, there are now seven stock exchanges--in
Australia, Brazil, India, Malaysia, Norway, South Africa, and
the United Kingdom--where companies must have some degree of
environmental or social disclosure in order to meet the
exchanges' requirements to list. While we do not believe China
has best-in-class policies on ESG related exposure, in 2018 the
China Securities Regulatory Commission did introduce
requirements that will mandate all listed companies and bond
issuers in China disclose environmental, social, and governance
risks associated with their operations.
As we noted previously in this response, the financial
economy of the United States has different characteristics than
that of the European Union and other countries we have
mentioned (i.e., mix of financing provided through capital
markets versus the banking system). The U.S. will need to
determine what disclosure regime is most optimal for its
market. A regulatory backed disclosure framework that requires
companies to quantitatively report the impact of only those ESG
matters that are financially material to the industry in which
the company does business would represent significant progress
in this regard.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JOHN STREUR
Q.1. What would you say is the average length of an investor
relationship at Calvert? In your opinion, are most asset
managers and pension funds interested in short-term profit or
long-term gain?
A.1. Historically, the average length of an investor
relationship with Calvert is over 12 years. We believe this is
longer than investor relationships seen in other mutual funds.
Many asset managers do attempt to apply a long-term strategic
focus to investing. However, we feel that short-term thinking
is prevalent in our financial markets. This is reflected in
corporate sentiment, investor holding period data, and other
market and human behavioral incentives that all contribute to
short-term pressures that both asset managers and companies
face.
Q.2. Would you agree that someone who invests their retirement
savings in an index fund is the ultimate long-term investor?
And if so, do you think it is the fiduciary duty of the manager
of that index fund to ensure that that investor's assets are
profitable over the long term and are not impacted by factors
like climate change?
A.2. Investors investing their retirement savings will have
different investment horizons based upon their time to
retirement, but it is likely that a significant percentage of
those investors are planning to invest for the long term. Index
funds managers are obligated to implement the index as created
by the index provider. It would be the obligation of the
fiduciary to a retirement plan to assure that the options
available in the plan are appropriate investment options for
plan participants.
Q.3. Would you have concerns if Congress made it more difficult
for proxy advisors to provide advice to your firm?
A.3. Yes. As I stated in my testimony, we believe proxy
advisors serve a valuable role in providing research services
to the investment industry. Ultimately, we would not favor any
additional actions that would compromise the independence of
the research and advice we receive from these vendors or impose
unnecessary costs or burdens on investment firms.
Q.4. Do you think ESG funds are being accurately and fairly
marketed to investors?
A.4. As it pertains specifically to marketing efforts by asset
managers, both regulators and FINRA have rules and have issued
guidance related to the marketing of funds. If funds are
subjected to standardized criteria for disclosing their ESG
strategies, the result would be enhanced consistency and
transparency in marketing ESG funds.
More broadly, we feel that there is a much greater
opportunity for the marketplace to define what ``ESG'' is and
what it means exactly from an investment perspective. As a
result of this void, the ESG label is often used across a wide
variety of strategies that range from simply considering ESG
factors to fully optimizing to seek positive impact. The
marketplace would certainly benefit from a more detailed
taxonomy that is generally accepted. Clear, required
disclosures for issuers of securities would likely assist in
the development of broader clarification in the marketplace but
any additional disclosure mandates for issuers should consider
both the costs and benefits associated with implementation.
Morningstar's Jon Hale provided a worthwhile analysis of this
issue in the February 2019 report, Sustainable Funds U.S.
Landscape Report. https://www.morningstar.com/lp/sustainable-
funds-landscape-report.
Q.5. Is there a Federal role for protecting consumers by
ensuring standards, consistency, and transparency in the
marketing of ESG funds?
A.5. Yes. Both Federal and State regulators should act within
their existing authorities as outlined by any relevant
mandates. We believe that Federal regulatory disclosure
guidelines that provide standards, consistency, and
transparency for issuers of securities on ESG considerations
would be helpful to the marketplace.
Q.6. What role does the nonprofit Sustainability Accounting
Standards Board have in ensuring investors looking for
financial investments that align with their values are
appropriately served?
A.6. The Sustainability Accounting Standards Board (SASB) is an
independent standards board that is accountable for the due
process, outcomes, and ratification of the SASB standards. The
SASB disclosure standards are an important tool for issuers of
securities as they provide a standardized framework at the
industry level that assists interested investors in allocating
capital in a manner that aligns with their values.
Q.7. Are you concerned that the Board's standards are only
voluntary?
A.7. Calvert is concerned that there continues to be a lack of
Federal regulatory guidance on disclosures related to
environmental, social, and governance issues. We view this as a
competitive disadvantage for U.S. capital markets. It is
concerning that there remains a lack of clarity on the path
forward for regulatory disclosure standards in the United
States while other Nations move forward in an effort to
modernize their financial markets.
Q.8. ESG fund offerings continue to increase; in fact they will
become more and more mainstream. Who do you see fighting this
inevitability and why do you believe they are fighting it?
A.8. We believe the growth in this form of investment
management is indicative of, and directly commensurate to, the
value that ESG information brings to investors and our economic
system broadly. However, there are political constituencies and
entrenched corporate interests that have business models, fixed
asset bases, and financial outcomes that are not aligned with
the transition to a more environmentally sustainable and
inclusive economic system. For some, alignment with this
secular economic shift will inherently require significant
investment and adaption efforts. Constituencies and companies
that find themselves misaligned with this secular pivot and
unable to adapt accordingly will be most antagonistic to the
growth of ESG investing.
Q.9. Who decides what is financial material? Is investor
interest enough to justify the need for consistent, comparable,
and complete ESG information?
A.9. Financial materiality has been addressed by both
regulatory authorities and independent standard setting bodies.
Generally, we view a financially material issue as one that is
reasonably likely to impact the financial condition or
operating performance of a company and therefore it is
important to investors. If a reasonable investor could have
come to a different investment decision as a result of the
incorporation of certain information it is considered
financially material.
Additional Material Supplied for the Record
LETTER SUBMITTED BY COUNCIL OF INSTITUTIONAL INVESTORS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTERS SUBMITTED BY THE NATIONAL ASSOCIATION OF MANUFACTURERS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY SOCIETY FOR CORPORATE GOVERNANCE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
REVISED AND EXTENDED REMARKS AT THE GREENWICH ROUNDTABLE PANEL
DISCUSSION ON ESG: PATH TO PROSPERITY OR PHILANTHROPIC CONFUSION BY
BARBARA NOVICK, VICE CHAIRMAN, BLACKROCK
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
``BLACKROCK ANALYSIS HELPS DEFINE CLIMATE-CHANGE RISK'', FINANCIAL
TIMES SUBMITTED BY SENATOR SHERROD BROWN
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY JANA MORGAN, DIRECTOR OF CAMPAIGNS AND ADVOCACY,
INTERNATIONAL CORPORATE ACCOUNTABILITY ROUNDTABLE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY PUBLIC CITIZEN
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]