[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
EXPOSING THE PROXY ADVISORY CARTEL:
HOW ISS & GLASS LEWIS INFLUENCE MARKETS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CAPITAL MARKETS
of the
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
__________
APRIL 29, 2025
__________
Serial No. 119-17
Printed for the use of the Committee on Financial Services
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
60-549 PDF WASHINGTON : 2025
HOUSE COMMITTEE ON FINANCIAL SERVICES
FRENCH HILL, Arkansas, Chairman
BILL HUIZENGA, Michigan, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking Member
ANN WAGNER, Missouri NYDIA M. VELAZQUEZ, New York
ANDY BARR, Kentucky BRAD SHERMAN, California
ROGER WILLIAMS, Texas GREGORY W. MEEKS, New York
TOM EMMER, Minnesota DAVID SCOTT, Georgia
BARRY LOUDERMILK, Georgia STEPHEN F. LYNCH, Massachusetts
WARREN DAVIDSON, Ohio AL GREEN, Texas
JOHN W. ROSE, Tennessee EMANUEL CLEAVER, Missouri
BRYAN STEIL, Wisconsin JAMES A. HIMES, Connecticut
WILLIAM R. TIMMONS, IV, South BILL FOSTER, Illinois
Carolina JOYCE BEATTY, Ohio
MARLIN STUTZMAN, Indiana JUAN VARGAS, California
RALPH NORMAN, South Carolina JOSH GOTTHEIMER, New Jersey
DANIEL MEUSER, Pennsylvania VICENTE GONZALEZ, Texas
YOUNG KIM, California SEAN CASTEN, Illinois
BYRON DONALDS, Florida AYANNA PRESSLEY, Massachusetts
ANDREW R. GARBARINO, New York RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin RITCHIE TORRES, New York
MIKE FLOOD, Nebraska NIKEMA WILLIAMS, Georgia
MICHAEL LAWLER, New York BRITTANY PETTERSEN, Colorado
MONICA DE LA CRUZ, Texas CLEO FIELDS, Louisiana
ANDREW OGLES, Tennessee JANELLE BYNUM, Oregon
ZACHARY NUNN, Iowa SAM LICCARDO, California
LISA McCLAIN, Michigan
MARIA SALAZAR, Florida
TROY DOWNING, Montana
MIKE HARIDOPOLOS, Florida
TIM MOORE, North Carolina
Ben Johnson, Staff Director
------
SUBCOMMITTEE ON CAPITAL MARKETS
ANN WAGNER, Missouri, Chairman
ANDREW R. GARBARINO, New York, BRAD SHERMAN, California,
Vice Chairman Ranking Member
FRANK D. LUCAS, Oklahoma DAVID SCOTT, Georgia
PETE SESSIONS, Texas GREGORY W. MEEKS, New York
WARREN DAVIDSON, Ohio JUAN VARGAS, California
BRYAN STEIL, Wisconsin JOSH GOTTHEIMER, New Jersey
MARLIN STUTZMAN, Indiana VICENTE GONZALEZ, Texas
MICHAEL LAWLER, New York SEAN CASTEN, Illinois
ANDREW OGLES, Tennessee EMANUEL CLEAVER II, Missouri
ZACHARY NUNN, Iowa STEPHEN F. LYNCH, Massachusetts
LISA McCLAIN, Michigan CLEO FIELDS, Louisiana
MARIA SALAZAR, Florida JANELLE BYNUM, Oregon
TROY DOWNING, Montana
MIKE HARIDOPOLOS, Florida
C O N T E N T S
----------
Tuesday, April 29, 2025
OPENING STATEMENTS
Page
Hon. Ann Wagner, Chairwoman of the Subcommittee on Capital
Markets, a U.S. Representative from Missouri................... 1
Hon. Brad Sherman, Ranking Member of the Subcommittee on Capital
Markets, a U.S. Representative from California................. 2
STATEMENTS
Hon. French Hill, Chairman of the Committee on Financial
Services, a U.S. Representative from Arkansas.................. 4
Hon. Maxine Waters, Ranking Member of the Committee on Financial
Services, a U.S. Representative from California................ 4
WITNESSES
Mr. Charles Crain, Managing Vice President, Policy, National
Association of Manufacturers (NAM)............................. 5
Prepared Statement........................................... 7
Ms. Elizabeth Ising, Partner, Gibson Dunn........................ 16
Prepared Statement........................................... 18
Mr. Paul Rose, Dean, School of Law, Case Western Reserve
University..................................................... 29
Prepared Statement........................................... 31
Mr. Paul Washington, President and CEO, Society for Corporate
Governance..................................................... 34
Prepared Statement........................................... 36
Ms. Nell Minow, Vice Chair, ValueEdge Advisors................... 52
Prepared Statement........................................... 54
APPENDIX
MATERIALS SUBMITTED FOR THE RECORD
Hon. Troy Downing:
Egan-Jones Proxy Services.................................... 84
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses to questions for the record from Representative
Maxine Waters
Mr. Charles Crain............................................ 89
Mr. Paul Rose................................................ 90
Ms. Nell Minow............................................... 91
LEGISLATION
H.R. ------, a bill to amend the Securities Exchange Act of 1934
to provide for the registration of proxy advisory firms........ 92
H.R. ------, a bill to amend the Securities Exchange Act of 1934
to provide for liability for certain failures to disclose
material information or making of material misstatements....... 116
H.R. ------, a bill to amend the Securities Exchange Act of 1934
to require certain disclosures by institutional investment
managers in connection with proxy advisory firms............... 118
H.R. ------, a bill to amend the Securities Exchange Act of 1934
to provide for certain requirements related to proxy voting.... 124
H.R. ------, a bill to amend the Securities Exchange Act of 1934
to require the Securities and Exchange Commission to study
certain issues with respect to shareholder proposals, proxy
advisory firms, and the proxy process.......................... 127
H.R. ------, the Stopping Proxy Advisor Racketeering Act......... 132
EXPOSING THE PROXY ADVISORY CARTEL:
HOW ISS & GLASS LEWIS INFLUENCE MARKETS
----------
Tuesday, April 29, 2025
U.S. House of Representatives,
Subcommittee on Capital Markets,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:32 p.m., in
room 2128, Rayburn House Office Building, Hon. Ann Wagner
[chairwoman of the subcommittee] presiding.
Present: Representatives Wagner, Hill, Lucas, Sessions,
Davidson, Steil, Stutzman, McClain, Salazar, Downing,
Haridopolos, Sherman, Waters, Vargas, Casten, and Bynum.
Chairwoman Wagner. The Subcommittee on Capital Markets will
come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time but will not.
This hearing is titled, ``Exposing the Proxy Advisory
Cartel: How ISS & Glass Lewis Influence Markets.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the chair for
inclusion in the record.
I now recognize myself for 4 minutes for an opening
statement.
OPENING STATEMENT OF HON. ANN WAGNER, CHAIRWOMAN OF THE
SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM
MISSOURI
Good afternoon, everyone. I want to thank our witnesses and
all those in attendance for joining us for today's hearing on a
critical yet underexamined issue in our capital markets: the
outsized influence and unchecked power of proxy advisory firms,
particularly Institutional Shareholder Services, ISS, and Glass
Lewis.
This hearing is part of an ongoing effort by this
subcommittee to shine a light on how the proxy of process is
functioning and, in many ways, failing today's markets.
The purpose of this hearing is to examine the role,
practices, and market influence of proxy advisory firms on
corporate governance practices, investor returns, and broader
market outcomes. We will also use today's hearing to assess
transparency, accountability, potential conflicts of interest,
and the overall impact of proxy advisory firms on the
functioning and fairness of capital markets.
Two firms, ISS and Glass Lewis, control 97 percent of the
proxy advisory market. That concentration alone would warrant
scrutiny, but more troubling is how their influence goes far
beyond research. They now routinely dictate outcomes of
shareholder votes.
When ISS or Glass Lewis recommend voting against a
director, their clients are over 30 percent more likely to
follow suit than nonclients. Their platforms even prepopulate
voting recommendations, contributing to what has become known
as robo-voting, a troubling abdication of fiduciary
responsibility.
These firms are not neutral observers. They are for-profit
businesses that often sell consulting services to the very
companies they evaluate, sometimes with clear conflicts of
interest.
ISS, for instance, simultaneously rates and advises
companies on its own environmental, social, and governance
(ESG) metrics. Last year, after ExxonMobil sought judicial
relief from an activist campaign that included Glass Lewis as a
member, Glass Lewis then recommended that its clients vote
against one of the ExxonMobil's own directors.
Let's be clear. This is not about silencing shareholders.
It is about ensuring that the proxy process advances long-term
investor value, not narrow political agendas.
We have seen a surge in shareholder proposals that are
ideological in nature but marginal in economic relevance. Costs
associated with responding to these proposals with both direct
and indirect are climbing into the hundreds of millions of
dollars annually and ultimately fall on ordinary investors.
The Securities Exchange Commission (SEC) must reassert its
role in ensuring the system is fair, is transparent, and is
accountable. That is why last month Chairman Hill, and I sent a
letter to then-acting Chairman Uyeda, commending the Commission
for rescinding Staff Legal Bulletin No. 14L, but also urging
the SEC to go further by restoring the original intent of rule
14a-8, eliminating the significant policy exception and
enhancing oversight of proxy advisory firms.
These reforms are critical to safeguarding retail
investors, refocusing the proxy process on long-term value
creation, and restoring trust in our capital markets. Our
capital markets work best when participants are guided by
economic rationale, not political pressure. I look forward to a
robust and thoughtful discussion today on how we can bring
greater accountability to proxy advisors and strengthen the
integrity of the shareholder voting process.
The chair now recognizes the ranking member of the
subcommittee, the gentleman from California, Mr. Sherman, for 4
minutes for his opening statement.
OPENING STATEMENT OF HON. BRAD SHERMAN, RANKING MEMBER OF THE
SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Mr. Sherman. These firms have clients who pay them, those
are the investors, the capitalists, who make our capitalism
work. The question is whether we are going to deprive them of
the advice that they want and that they pay for.
There is no barrier to entry to third, fourth, or fifth
companies getting into this and, as a matter of fact, Vivek
Ramaswamy has entered this market, and I can be confident that
when he does, he will not be providing woke advice.
The argument here is between Ronald Reagan and Leon
Trotsky. There are those who think that the commanding heights
of the economy should be controlled by the party line, and
there are others who believe that investors, because it is
their money, should actually control what the companies that
they own do.
We have before us bills that would require that investment
advisory firms--that proxy advisory firms only give advice on
what maximizes profit and to tell the eco investors, ``Go to
hell.''
What does that mean? That means that if there is a proposal
on the ballot that the company get involved in the pornography
industry, investment advisors will be required by law passed by
the Republicans to say, yes, go into that business because it
is profitable. If you deny the rights of liberals to get advice
on how they can invest in companies that do not engage in slave
labor, in companies that do not ruin the environment, then your
own voters must be deprived of investment advice on how to
avoid investing in pornography.
Now, since I represent the San Fernando Valley, maybe that
is a good district issue for me, but it is not for you.
Investors ought to get the advice they want from the people
they select to get that advice. They should be able to invest
in mutual funds that seek to maximize profit or to maximize
profit but no fossil fuels, or maximize profit, no pornographic
movies. Instead, the most powerful people in the country, those
who control thousand or so giants on Wall Street, do not want
the investors to control the company. They think the small
clique of managers should control the company.
How dare anybody who is just a mere owner suggest a change
in company policy, let alone demand a vote on it, let alone let
people get advice on how to vote.
This is not a war on the proxy advisors. This is a war on
the idea that the people whose money it is get to make the
decision.
What religious tradition teaches us that anyone with money
must exclusively make all their decisions on how to make more
money? I think there are some religious traditions that would
say, invest your money to help the poor. Invest your money to
help the planet. Maybe even invest your money to promote
traditional family values and to instead say, no, let
management do what they want, and do not allow--this is a
country of the First Amendment--do not allow anyone to advise
you to do the contrary.
I do not know why we are having this hearing. I do not know
why we are opposing the idea that those with the capital get to
control the companies they own, and I certainly do not know
why--because I know none of you represent the San Fernando
Valley--why you have a pro-pornography agenda here.
I yield back.
Chairwoman Wagner. I wish I could use the chairman's
minutes, but I shall not.
The chair recognizes the chairman of the full committee,
Mr. Hill, for 1 minute.
STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON
FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS
Chairman Hill. Thank you, Chair Wagner. Thank you for our
panel today. I want to--appreciate Chair Wagner's consistent
leadership over many years on examining the proxy advisory
firms and their outsized influence over our public markets.
Today, ISS and Glass Lewis shape the outcomes of
shareholder votes across the market, especially as large index
funds often vote in lockstep with their recommendations. In my
view, that is not just advice; it is intimidating de facto
control.
Even more troubling, companies are frequently reporting
factual errors in proxy reports and are rarely given a chance
to correct them before votes are cast. We need greater
transparency, due process, and oversight to ensure that proxy
voting remains accountable to the shareholders, not outsourced
to this largely unregulated duopoly.
I look forward to our discussion today, and I yield back.
Chairwoman Wagner. The chairman yields back.
The chair recognizes the ranking member of the full
committee, Ms. Waters, for 1 minute.
STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE
COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Ms. Waters. Thank you very much.
This hearing is titled, ``Exposing the Proxy Advisory
Cartel,'' but there is a very real cartel happening right in
front of our faces: Donald J. Trump and associates. The
President and his family have made millions off the Trump meme
coin to date, and they just even made more with his
announcement of a private dinner for top owners of the coin.
That is not all. The President has pumped the stock of his
media company, promoted Elon Musk's failing car company on the
White House lawn, and is providing his billionaire friends with
insider tips to take advantage of the chaos he is causing in
the stock market.
Our committee should be focused on this blatant financial
corruption. With that, we ignore it at our peril. I yield back
the balance of my time.
Chairwoman Wagner. The gentlelady yields back.
Today we welcome the testimony of Charles Crain.
Mr. Crain is the Managing Vice President of Policy at the
National Association of Manufacturers, NAM.
Elizabeth Ising: Ms. Ising is a Partner at Gibson Dunn &
Crutcher LLP. She serves as the firm's Co-Chair of Securities
Regulation and Corporate Governance Practice.
Paul Rose: Professor Rose is a Dean and a Professor of Law
at Case Western Reserve University School of Law.
Paul Washington: Mr. Washington is the President and CEO of
the Society for Corporate Governance. He is former Deputy
General Counsel and Corporate Secretary of Time Warner Inc.
Nell Minow: Ms. Minow is a Vice Chair of ValueEdge
Advisors, and she is the former President of ISS.
We thank each of you for taking your time to be here today.
Each of you will be recognized for 5 minutes to give an oral
presentation of your testimony. Without objection, your written
statements will be made part of the record.
Mr. Crain, you are now recognized for 5 minutes for your
oral presentation.
STATEMENT OF CHARLES CRAIN, MANAGING VICE PRESIDENT, POLICY,
NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. Crain. Thank you, Chair Wagner, Ranking Member Sherman,
as well as Chairman Hill and Ranking Member Waters.
My name is Charles Crain, as the chair said, and I am the
Managing Vice President of Policy for the National Association
of Manufacturers.
Proxy advisory firms have had a significant and damaging
impact on manufacturers, manufacturing workers, and main street
investors. These firms' outsized influence and their
problematic business practices dictate corporate decisions, and
they endanger shareholder returns.
First and foremost, proxy firms operate with glaring and
often undisclosed conflicts of interest. For example, ISS'
consulting service has been known to use the negative vote
recommendations from its proxy voting service as a way to drum
up business.
Proxy firms are also unwilling to allow companies to review
their draft reports, and they are resistant to correcting the
mistakes and misunderstandings that imbue their final
recommendations. Those recommendations are often based on a one
size fits all view of how public companies should be run. In
other words, proxy firms' benchmark policies enforce their
beliefs about corporate governance, executive compensation,
and, increasingly, environmental and social topics.
Now, despite these obvious flaws, proxy firms still control
a significant share of investors' proxy votes. That means they
have significant sway over important corporate decisions. The
SEC, under both parties, has investigated these issues over the
course of more than a decade, finally adopting a proxy firm
rule back in 2020.
This subcommittee has played a critical important role as
well with hearings and legislation designed to shine a light
and ultimately to reign in proxy firms. Despite this clear
momentum for reform from both Congress and the SEC, proxy firms
remain stubbornly unregulated to the detriment of public
companies and their investors.
The SEC's 2020 rule has spent 5 years hung up in court. The
NAM has had to defend that rule across three separate court
cases, one of which, in fact, has oral arguments scheduled for
this coming Friday.
This delay is despite the fact that the 2020 rule was a
significant compromise as compared to the SEC's 2019 proposal.
In fact, manufacturers continue to believe that critical
provisions from that 2019 proposal, such as draft review, would
be important reforms to adopt today.
Proxy firms, of course, would prefer zero SEC or
congressional oversight. ISS is now claiming in court that the
SEC lacks a statutory authority to regulate proxy voting advice
at all.
Now, the Exchange Act is actually quite clear that the SEC
does have the authority to regulate proxy voting advice, but
there may come a time for Congress to reiterate that directive,
either to remind the court of Congress' unambiguous statutory
intent or to reverse an errant court decision.
Even assuming, though, that the NAM is successful in
defending the SEC's authority, there is more work still to be
done. That is why we appreciate that Congress and members of
this committee have offered commonsense reforms that would
institute much needed guardrails for the proxy firms. These six
bills would prioritize main street investors' retirement
security over the proxy firms' agendas.
First, Congressman Steil's bill, which would create a
comprehensive registration regime for proxy firms. It would
increase SEC oversight, company engagement and transparency,
while minimizing conflicts of interest and errors.
Mr. Steil also has a separate bill that would ensure that
the proxy firms remain subject to any fraud liability.
Congressman Fitzgerald has introduced legislation to ban
certain conflicts of interest.
Congressman Nunn has a bill that would target robo-voting,
which is a common practice that disenfranchises Main Street
investors as well as institutional investors.
Congressman Loudermilk has a bill that would focus on the
fiduciary duties of those institutional investors.
Finally, Chair Wagner's legislation would direct the SEC to
conduct a comprehensive study of the proxy process, including
the damaging role that proxy firms can play.
The time to act on these bills is now. Awareness of the
risks that proxy firms pose is far more widespread than it was
back in 2010 when the SEC started looking into this issue, and
both Congress and the SEC now have a clear understanding of
what must be done. Policymakers must preserve the SEC's
existing authority over proxy firms while also instituting
further guardrails that address the firms' conflicts, their
errors, their robo-voting, their one size fits all standards,
their ESG agendas, and more. Manufacturers and Main Street
investors are counting on it.
Thank you.
[The prepared statement of Mr. Crain follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairwoman Wagner. Thank you, Mr. Crain.
Ms. Ising, you are now recognized for 5 minutes for your
oral presentation.
STATEMENT OF ELIZABETH ISING, PARTNER, GIBSON DUNN
Ms. Ising. Thank you for the invitation to testify today. I
appreciate the opportunity to share with you my observations on
the significant influence of proxy advisory firms and the need
to regulate them. My observations are based on 25 years of
practicing as a Securities and Corporate Governance Lawyer.
Proxy advisors play an important role and have considerable
influence in the U.S. proxy system. Shareholders rely on the
U.S. proxy system to exercise their corporate voting rights,
and public companies rely on it to obtain approval of important
corporate governance matters, many of which facilitate capital
formation and foster long-term shareholder value.
The U.S. proxy system and many of its participants are
regulated. The key exception is proxy advisory firms. Yet
Institutional Shareholder Services and Glass Lewis, the two
major firms, exercise significant influence over voting on
thousands of proxy proposals every year and lack fiduciary
duties to consider what is in the best interest of companies
and their shareholders. I want to highlight several concerns
that demonstrate the need to subject proxy advisors to
reasonable, commonsense regulation.
First, the consulting services offered by the proxy
advisory firms call into question the objectivity and
reliability of their recommendations. ISS and Glass Lewis sell
advisory service to public companies regarding the very same
matters in which they make voting recommendations, using opaque
voting policies and analytical tools that are available only to
their consultants. Notably, before it even began offering
consulting services to companies, even Glass Lewis publicly
stated that these services create conflicts. Proxy advisors
also benefit from other conflicts. The number of proxy
proposals has increased approximately 730 percent at Russell
3000 companies since 2000.
More proposals mean that investors with large portfolios
need more support from proxy advisors. Yet it is these firms
that are encouraging additional proposals for, by example,
encouraging annual say-on-pay votes even though the Dodd-Frank
Act requires those votes only every 3 years.
Next, there are significant concerns about errors in proxy
advisory reports, and often the burden is on public companies
to scramble to correct the records since they cannot preview
these firms' analyses.
For example, one company's Glass Lewis report stated that
the board did not oversee cyber security risk. The company
pointed Glass Lewis to their SEC filing with the section titled
``Oversight of Cyber Security,'' but Glass Lewis did not revise
its report. For these reasons, proxy advisors should face
potential liability for making materially false or misleading
statements.
Proxy advisory firms also encourage robo-voting, which is
when an investor follows a firm's voting recommendations
without independently assessing it. Proxy advisors may say that
they are just implementing their client's voting guidelines,
but that does not explain certain investors repeatedly voting
lockstep with the firms or saying that they cannot override
those firms' recommendations.
In addition, the firms' voting guidelines include numerous
case-by-case policies where voting recommendations are not
based on objective standards, making it important for the
firms' clients to understand the underlying rationale of those
recommendations. Yet, there is often a flood of votes that
mirror each firms' recommendations that come in almost
immediately after their release.
Another concern is that proxy advisory firms' voting
policies are based on unfounded biases and presumptions. For
example, both proxy advisors generally oppose supermajority
voting requirements because, in the words of Glass Lewis, they,
quote, can enable a small group of shareholders to overrule the
will of majority shareholders. Yet, each proxy advisory firm
has so-called board accountability policies that expect
companies to achieve supermajority approval on say-on-pay
proposals. Glass Lewis expects board responsiveness unless a
company receives a supermajority vote against the shareholder
proposal.
These policies enable small groups of shareholders to drive
major changes at public companies even though a majority of
shares voted in support of existing practices. As a result, ISS
and Glass Lewis push public companies to expend resources to
support actions not supported by the majority.
ISS and Glass Lewis also essentially act as regulators. By
way of example, unlike the New York Stock Exchange and National
Association of Securities Dealers Automated Quotations
(NASDAQ), who have developed director independent standards,
ISS considers a director to not be independent if a director of
an employee--is an employee of an organization that provides
the company with just over $10,000 in consulting services.
Interestingly, ISS would fail its very own independence test at
companies where it provides both consulting services and issues
voting recommendations.
Finally, proxy advisors make materiality determinations
without a cost-benefit analysis and often without considering
the company's circumstances. For example, Glass Lewis recently
stated that measures related to human capital management are
financially material for all companies. Under the SEC's well-
developed legal standards for materiality, that is not
accurate.
In conclusion, proxy advisory firms directly impact proxy
voting decisions and voting outcomes, and thus, Congress and
the SEC should adopt commonsense regulation of these firms to
protect the integrity of U.S. proxy systems and capital
markets.
Thank you for inviting me to testify.
[The prepared statement of Ms. Ising follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairwoman Wagner. Thank you, Ms. Ising.
Now, Mr.--Professor, I should say, Rose, you are now
recognized for 5 minutes for your oral presentation.
STATEMENT OF PAUL ROSE, DEAN, SCHOOL OF LAW, CASE WESTERN
RESERVE UNIVERSITY
Mr. Rose. Thanks, Chair Wagner and members of the
committee, for the opportunity to testify on an issue that I
have been studying for over 20 years, the concentrated and
largely unregulated power of proxy advisory firms in U.S.
capital markets.
Proxy advisory recommendations can swing vote outcomes and
shift corporate governance, yet they operate without fiduciary
obligations, with limited transparency and minimal
accountability. Today, two firms, ISS and Glass Lewis, dominate
over 90 percent of the proxy advisor market.
Importantly, this dominance is not a natural result of
investor demand. It is, in large part, a byproduct of
regulatory design, specifically the SEC's adoption of rule
206(4)-6 under the Investment Advisers Act of 1940. This rule
adopted in 2003 required investment advisors to adopt proxy
voting policies and procedures and devote client securities in
their best interest.
The SEC then issued no-action letters suggesting that
advisors could fulfill these duties by relying on independent
third-party proxy advisors. By the time the SEC withdrew these
letters in 2018, the proxy advisory industry had grown
significantly. Rule 206(4)-6 transformed an internal fiduciary
duty into an external compliance function, fueling the growth
of ISS and Glass Lewis into de facto gatekeepers.
Many institutional investors now outsource their voting
decisions to these firms. Some of these investors now engage in
robo-voting, mechanically following proxy advisors'
recommendations without independent analysis.
In 2020, over 100 institutional investors, managing a
combined 5 trillion, voted in near total alignment with ISS or
Glass Lewis. Robo-voting may be attractive from a cost-
efficiency standpoint, but it compromises fiduciary
responsibilities. It removes independent judgment from
governance decisions and reduces diversity in shareholder
viewpoints.
Structural conflicts of interest further complicate the
role of proxy advisors. ISS now only provides recommendations
but sells governance consulting services to the very companies
it evaluates. This dual role represents a fundamental conflict.
How can a firm offer objective assessments while advising those
same issuers? We typically do not allow such conflicts in
financial services. Auditors, for example, have long been
prohibited from conflicting activities under Sarbanes-Oxley.
Market concentration exacerbates the problem. With only two
dominant firms, companies have little recourse if they disagree
with recommendations. The market lacks meaningful competition,
making transparency all the more essential.
Proxy advisors often promote uniform governance practices
across industries, ignoring the unique needs of individual
firms. A one size fits all approach may penalize innovative or
long-term strategies, and very little evidence supports the
idea that proxy advisors' specific governance recommendations
improve returns or help companies avoid scandal.
In 2020, the SEC adopted reforms requiring proxy advisors
to disclose conflicts of interest, allowing issuers to review
proxy advice before meetings, and reaffirm that proxy advice
constitutes a solicitation under Federal securities laws. These
reforms were carefully developed over a decade, across two
administrations, to promote transparency and fairness. Yet in
2021, the SEC suspended enforcement and announced plans to
revise the rule before full implementation. In my view, this
regularity whiplash creates uncertainty. It signals that public
input can be ignored, and it erodes trust in the commission.
Again, I wish to stress that the modern proxy advisory
industry has not grown out of market innovation but instead out
of regulatory incentives. Even if proxy advisors perform a
useful function, why should we not hold them to fiduciary
standards and protect investors against conflicts of interest
as we do for other major market actors? By imposing
accountability and oversight, Congress can ensure proxy
advisors serve as responsible facilitators of informed
shareholder participation rather than unregulated gatekeepers
of corporate governance.
Thank you.
[The prepared statement of Mr. Rose follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairwoman Wagner. Thank you, Professor Rose.
Mr. Washington, you are now recognized for 5 minutes for
your oral presentation.
STATEMENT OF PAUL WASHINGTON, PRESIDENT AND CEO, SOCIETY FOR
CORPORATE GOVERNANCE
Mr. Washington. Good afternoon, Chair Wagner, Ranking
Member Sherman, members of the subcommittee. My name is Paul
Washington. I am President and CEO of the Society for Corporate
Governance.
The Society is a nonpartisan, nonprofit organization of
governance professionals who serve approximately 1,000 public
and private companies of almost every size in industry across
our country. We advocate for policies that promote effective
governance, appropriate disclosure, and capital formation, and
we appreciate the opportunity to present our views on proxy
advisory firms today.
Proxy advisory firms play an influential role in capital
markets by advising investors on how they should vote, as
indicated in numerous studies submitted in our written
testimony. The firms' impact is twofold. First, they can
determine the outcome of votes where shareholders have decision
making power. Second, even when shareholder votes are merely
advisory, as is the case with companies' say-on-pay proposals
or many shareholder proposals, they often affect board decision
making.
In addition to providing voting recommendations to
investors, the proxy advisory firms also own and control
software platforms that send votes by investors to the
tabulators for shareholder meetings. In some cases, the
advisory firms decide how to vote and submit the balance for
their clients, and they offer, as has been mentioned, other
services to investors and corporate clients.
Importantly, the influence of proxy advisory firms is
likely only to increase. A number of large U.S. asset managers
are implementing programs that will allow their upstream
clients to decide how to vote their shares rather than having
the asset manager make that determination. In some cases, the
voting options provided to those upstream clients are based on
the proxy advisory firms' own policies or recommendations,
thereby effectively increasing the influence of these firms.
The Society supports what we term the ``light touch''
regulation of the proxy advisory firms. Institutional investors
cast votes on tens of thousands of items each year, and the
Society fully supports investors' ability to enlist outside
assistance in deciding how to vote and in casting votes. At the
same time, we believe regulation can, first, help ensure that
shareholders are provided with accurate information by the
proxy advisory firms before casting votes, and second, increase
transparency regarding proxy advisory firms, thereby enhancing
confidence in the system.
Let me address four areas of reform.
First, as a threshold matter, legislation may be needed to
address the SEC's jurisdiction. For many years, as you know,
the SEC has considered the activities of proxy advisory firms
to be within the scope of proxy solicitation and therefore
subject to the Commission's rules. As you know, ISS has
challenged the SEC's interpretation in a lawsuit in Federal
district court, which is on appeal to the D.C. Circuit. If ISS
prevails and it is determined that the SEC lacks authority to
regulate proxy advisory firms, Congress should move quickly to
enact legislation to confirm the SEC's authority.
Second, and quite importantly, the Society supports
requiring proxy advisory firms to provide advanced copies of
their reports to companies on a complimentary basis with a
reasonable amount of time for companies to identify any
factual, analytical, or other errors. In addition, proxy
advisors should provide clients with a hyperlink to the
company's response to the advisory firm's analysis and
recommendations.
Given the more than 25,000 valid items on Russell 3000
companies each year, it is inevitable that proxy advisory firms
will have some factual errors. Numerous studies confirm that
these errors occur.
An advance review and common process would permit a company
to review and correct any factual, inaccurate information. This
practice would also be consistent with ISS' prior practice in
the United States, its current practice outside the United
States, and the SEC's 2019 proposed rule.
Next, we support increased disclosure of the empirical
basis for proxy advisory firms' voting policies. This is
critical because institutional investors with fiduciary duties
to their shareholder clients rely to varying degrees on proxy
advisory recommendations. Second, as more retail investors
participate in client-directed voting programs, in which their
votes follow proxy advisor recommendations, those retail
investors should know whether and to what extent the
recommendations have a solid empirical foundation.
We also believe that proxy advisor firms should, at a
minimum, provide increased information regarding actual or
potential conflicts of interest that arise from their multiple
roles.
Finally, the Society also supports the regulation of
automated voting, sometimes called robo-voting. This automated
voting outsourcing is of particular concern because, as noted
above, the proxy advisory voting policies may not have an
empirical basis.
We appreciate the legislation that the subcommittee is
considering, and we stand ready to work with you as you refine
the legislation.
Thank you very much for the opportunity to appear before
you this afternoon.
[The prepared statement of Mr. Washington follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairwoman Wagner. Thank you, Mr. Washington.
Ms. Minow, you are now recognized for 5 minutes for your
oral presentation.
STATEMENT OF NELL MINOW, VICE CHAIR, VALUEEDGE ADVISORS
Ms. Minow. Thank you, Madam Chairman and members of the
committee.
I am a graduate of the University of Chicago which taught
me a lot about free markets, and I am the Founder or Co-Founder
of five startups, three which have been sold, and we have
created hundreds of jobs. I am here on behalf of the people
capitalism is named after, the capitalists, the providers of
capital, and on behalf of the shareholders.
I worked in the Antitrust Division of the Justice
Department during the Reagan Administration, so I am aware that
the elements of a cartel are collusion on pricing and imposing
barriers to entry on the market for competitors. Neither of
those are present here, and that is why I am using the word
``cartel'' in quote marks because it just does not apply at
all.
As for entering the market, there have been some that have
tried and failed. There was a really good one started by a
former SEC commissioner, but nobody bought the product because
it was funded by the business roundtable, and they were
suspicious of it.
There have been a couple in the last couple of years, as
Mr. Sherman said, that sell themselves as the anti-woke. There
are also proxy advisors outside the United States that cover
U.S. companies and make their services available.
I could start a new one tomorrow but if you impose new
rules, if you impose new restrictions, you are making it harder
for new people to enter this business and compete with ISS and
Glass Lewis.
Proxy advisory services are purchased exclusively and
voluntarily by the most sophisticated financial professionals
in the world, almost all of them also fiduciaries and subject
to the strictest legal standard that has ever been developed.
No one has to purchase their services, and no one has to follow
their advice.
If indeed they are as influential as the snowflakes over
here are saying, then they should be popping champagne corks,
because over 90 percent of the recommendations of the proxy
advisor services are to vote as management recommends. I do not
know anybody who understands voting better than the members of
this committee and the members of this House. You would be
overjoyed to get 96 percent of the vote, which is what the
unopposed directors get when ISS recommends a vote in favor.
On the 4 percent where ISS parts from the recommendations
of management, the data shows very clearly that the fiduciary
financial professionals read the analysis and make their own
decisions. In my opinion, the single most outrageous item that
has ever been on a proxy is the $58 billion pay package for
Elon Musk at Tesla. ISS recommended a vote against. It got a
strong majority vote in favor.
I have a lot of data in my submission about the number of
votes that go contrary--cast by clients of the proxy advisors
that go contrary to their recommendations, as well as data
about the different recommendations that ISS and Glass Lewis
have, showing, again, that there is no collusion, and many
people do subscribe to both.
Despite proxy advisory firm recommendations, the clients
often vote in favor or vote against. The shareholders of Tesla
also voted in favor of the move from Delaware to Texas, which I
thought was wrong. ISS supported it, and it got enormous
majority.
This is a kill the messenger approach. You have the
absolute ultimate example of the free market here. The reason
the proxy advisory services started--and I was there when they
did, and I helped to start one--is that there was documentation
that investment managers were voting incorrectly when it came
to shareholder votes. They were voting ``yes'' when they should
have voted ``no'' because the companies were clients or were
prospective clients. Jack Bogle, the founder of Vanguard, wrote
several books about that subject. The independent proxy
advisors were invented, were asked for, and became a part of
the market, to avoid those inherent conflicts of interest.
I am sure that advocates who are paid by corporate insiders
have valuable comments, but I think it would be useful for this
committee to hear from the institutional investors that use
these services so that you can understand why they buy them,
how they use them, and when they vote with and against them.
[The prepared statement of Ms. Minow follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairwoman Wagner. I thank you, Ms. Minow.
Before turning to member questions, I want to remind
everyone involved in this hearing, both members and witnesses,
to adhere to proper decorum in every way, shape, and manner and
I will impose that.
I now recognize myself for 5 minutes for questions.
Mr. Washington, as a former corporate secretary of a public
company, you played a key role in navigating the firm
throughout the shareholder proposal process during proxy
season. Can you discuss the impact that a proxy advisory firm's
recommendations have on a shareholder's proposal?
Mr. Washington. Certainly. It has a quite significant
impact. This is more recent, but the Society for Corporate
Governance, as put forth in the written testimony, found that
in the last proxy season, there is a 36-point difference in
shareholder support for a proposal that is endorsed by ISS and
Glass Lewis versus when it is not. That is 42.4 percent in
favor versus 6.6 percent. So a dramatic impact when the
advisory firms are in favor of a shareholder proposal.
That has a knock-on effect within the boardroom. It affects
corporate decision making as to whether you will take a
particular action or not because it factors into the calculus
of, what would this do for the company's reputation, what might
it do for the associated controversy if you did not follow the
shareholder proposal?
Chairwoman Wagner. Then you would say that the impact on
these proxy advisory firms' recommendations, what, does it
carry a large amount of weight?
Mr. Washington. A very significant amount of weight, yes.
Chairwoman Wagner. Ms. Ising and Mr. Washington, how have
proxy advisors materially impacted corporate behavior over the
last 10 years? Please, Ms. Ising.
Ms. Ising. I think there are three key impacts that I would
highlight. The first is the increase in costs, which are
definitely passed on to shareholders. Companies are obviously
operating, running their businesses and trying to maximize
shareholder value, but they also have to spend significant
resources rethinking what they have determined is in the best
interests of the company and shareholders, given the proxy
advisory firm's expectations and the consulting fees that need
to be paid for the advisory services.
It also takes management and board time to address these
issues. Frankly, the proxy advisory firms have contributed to
the number of shareholder proposals that we see in proxy
statements, and that--fueling that rise has also led to the use
of more corporate resources to address them.
Chairwoman Wagner. Mr. Washington, how has it impacted
corporate behavior, the proxy advisors, over the last 10 years.
Mr. Washington. It affects the way it would if you had a
major shareholder who actually did not actually have a stake in
your company. That is essentially what we are dealing with. It
is not like having an extra director in your boardroom who
would have to abide by fiduciary duties, nor is it like having
a regular shareholder who cares about the long-term financial
well-being of the organization. It is like having a major
shareholder or a couple of major shareholders who may have
other interests at play here.
Chairwoman Wagner [continuing]. and other conflicts.
Mr. Washington. Including some conflicts.
Chairwoman Wagner. Professor Rose, there has been
widespread criticism of proxy recommendations that lack a basis
in fact or prioritization activist agendas over shareholders'
interests. How can we ensure that proxy advisors are acting in
the best interest, the best interest of shareholders.
Mr. Rose. I think that the legislation, the draft
legislation that we have seen, especially Congressman Steil's
bill, would really go to the heart of that issue. It would
impose greater transparency into methodologies. It would
provide disclosure of conflicts of interest, and it would
impose liability for misleading statements. I think all of
those----
Chairwoman Wagner. Liability. Good.
Mr. Rose. Yes. I think all of those things could help
ensure that they are acting in the best interest----
Chairwoman Wagner. Mr. Crain, NAM challenged the Biden
SEC's decision to suspend enforcement of the 2020 proxy rule--
you mentioned it briefly--and its latter recission of parts of
the rule. Can you describe how the SEC, under former Chair
Gensler, created more uncertainty surrounding the proxy
advisory industry.
Mr. Crain. Absolutely. The 2020 rule, as has been
mentioned, was developed over the course of a decade, and it
really included many bipartisan ideas. Unfortunately, under
Chairman Gensler's leadership, they suspended--unlawfully, as
the court held--and then rescinded--again, unlawfully, as the
court held--that rule, creating a significant pendulum effect
that the market is currently feeling, and we are still
litigating this issue. There are oral arguments on Friday about
whether the SEC has the authority to regulate these firms at
all. Manufacturers say that they do. ISS says that they do not.
Chairwoman Wagner. Thank you very much.
The chair now recognizes the ranking member of the
subcommittee, Mr. Sherman, for 5 minutes for questions.
Mr. Sherman. The loudest and most persuasive testimony is
the testimony that has not been spoken. California Public
Employees' Retirement System (CalPERS) is not here complaining.
The institutional investors are not here complaining. The
owners of capital in our society are not complaining. The
complaints are coming from those who represent corporate
America who do not want the owners of corporate America to tell
the managers of corporate America what to do because they are
just the owners.
Now, low-cost investing is the rage now. You want to
minimize your costs, and these proxy advisors cost money. Would
it be illegal, Ms. Minow, to just have a mutual fund that says,
we always vote with management? Makes it simple. We spend 0.0
pennies figuring out what to do. Is that legal?
Ms. Minow. It is legal.
Mr. Sherman. Or, we always vote against management. Is that
legal too?
Ms. Minow. That is also legal.
Mr. Sherman. Okay. You do not have to pay for this advice
if you do not want it. In fact, you could offer investors a
lower administrative cost if you just--or you could also--you
could also have a proxy--a mutual fund, its policy was, we just
never vote, or we always just count our votes toward a quorum
but otherwise do not vote.
Ms. Minow. They would have to make a case that was
consistent with their obligation as fiduciaries, but if they
are small enough, I think they could do it.
Mr. Sherman. You would have to be small to do that, whereas
always voting with management, a big one could do that?
Ms. Minow. If they disclosed it so that people could
decide----
Mr. Sherman. We save money by not thinking----
Ms. Minow. Yes, that people could decide----
Mr. Sherman [continuing]. is the----
Ms. Minow [continuing]. that is what they wanted.
Mr. Sherman. Index investing, that is the slogan: We save
money by not thinking. Why not carry it one step further and
apply that to this?
Ms. Minow. Sure.
Mr. Sherman. I mean, if you are not going to spend a penny
figuring out what stock to buy, why should you spend a penny
figuring out how to vote on the damn proxy statement?
So we are being told that there are errors. Now, the SEC
Investor Advisory Committee reported proxy advice contained
errors at the rate of 0.3 percent of the--and none of those
errors were shown to be material. Proxy advisors, of course--
private companies. Their clients expect them to be accurate.
Ms. Minow, what is the argument for supporting more Federal
regulation of advisors to promote accuracy when the review
shows no material misstatements of fact?
Ms. Minow. Proxy advisors are publishers of reports. Just
like newspapers, they give----
Mr. Sherman. If I could sue my newspaper in my town for an
error rate of greater than 0.3 percent, I could afford to
retire from Congress.
Ms. Minow. Absolutely. There is no possible justification
for that regulation.
Mr. Sherman. Okay. Is there any organization that is--can
we close the door back there? It is creating--and I would ask
to suspend the clock.
Chairwoman Wagner. Yes. Suspend the clock, please.
Apologies, ladies and gentlemen. It was at a minute-thirty
left in his time.
Mr. Sherman. Thank you. Thank you.
Chairwoman Wagner. He may resume.
Mr. Sherman. Let's see. If an investor wanted to invest in
a mutual fund that was dedicated to moving us away from fossil
fuel, how could that fund vote those values without getting any
advice? Could that work?
Ms. Minow. Exactly. As I said, the proxy advisors came of
age in the 1980s to prevent the conflicts of interest that the
investment managers were facing.
Mr. Sherman. Okay. What if you wanted a fund that invested
in traditional values, now and then, as I posited the idea that
there might be a question before a corporation as to whether to
get involved in the pornography business, they say that you can
make money in that. If we had investment advisor--if the proxy
advisors were required to give advice consistent with
maximizing profits, would they then have to advise a
traditional values funds to vote ``yes'' to pornography?
Ms. Minow. They are happy to do it. They are in business,
Ranking Member Sherman. If you come to them and say, I would
like you to vote proxy voting policies or vote my proxies for
me----
Mr. Sherman. Right.
Ms. Minow [continuing]. according to whatever policy you
want, they would provide----
Mr. Sherman. So, if you pay them to tell you how to vote
traditional values, they will.
Ms. Minow. Yes.
Mr. Sherman. Unless Congress prohibits such advice, as has
been proposed by some of my Republican colleagues.
I yield back.
Chairwoman Wagner. The chair now recognizes the gentleman
from Arkansas, the Chair of the full Committee on Financial
Services, Mr. Hill, for 5 minutes.
Chairman Hill. I thank the chair.
Mr. Crain, good to have you with us. I was thinking about
your members and, just curious, when they designed their
corporate policies and compensation programs, do the views and
the policies and the likely recommendations of the proxy
advisory firms influence that?
Mr. Crain. They absolutely do. If you are putting together
one of these policies, you absolutely need to take into account
the very powerful fact. If you, quote/unquote, get it wrong,
then ISS and Glass Lewis might recommend against you.
The best way to avoid, quote/unquote, getting it wrong is
by paying for their consulting service. They will tell you what
is in the secret sauce to help you structure the policy in a
way that aligns with their view of corporate governance. Then
you avoid the negative vote recommendation at the end of the
day. That is absolutely part of the calculus for publicly
traded manufacturers.
Chairman Hill. That is amazing. Is that--that seems like
that is just way outside the scope of the business judgment
rule and the fact that we have all these rules and State law
about having independent boards of directors that are
responsible for all that, but you are saying there is--this
is--would you describe this as an outsized influence over the
board?
Mr. Crain. I absolutely would. I think----
Chairman Hill. Why is it more outsized than some successful
money manager--CalPERS? Does CalPERS--it is a powerful money
manager out there in California. Do they rely on ISS or
somebody to tell them what to do even though they are one of
the biggest in the country?
Mr. Crain. My understanding--I am not an expert on their
specific relationships, but I do believe they rely on the proxy
firms to some extent.
I think your point is well taken, though, that proxy firms
uniquely are unregulated in this space. If you think about the
large institutional investors, if you think about the
exchanges, if you think about the publicly traded companies who
are operating in America's capital markets, everybody is a
participant in the capital markets, and they have some
appropriate degree of regulation. We can all agree or disagree
with exactly what that appropriate degree is but proxy firms do
not. They are unregulated, and that is an issue, despite their
influence.
Chairman Hill. Yes. I appreciate what my friend, Nell
Minow, said about when she started her company was in the dark
ages, though. Right?
Ms. Minow. Yes, sir.
Chairman Hill. Back in 1992, you are reflecting on the
1980s LBO craze, leverage buyout craze, two classes have
stopped, staggered directors----
Ms. Minow. Greenmail.
Chairman Hill. No independent directors, no independent
compensation committee, no separate chairman from a CEO. Right?
Those were the top issues then. Would you agree? Among many
others, but those were top issues.
Ms. Minow. Those were definitely the top issues at that
time, yes.
Chairman Hill. Okay. Since 2000, the implementation of
Sarbanes-Oxley, where we have all this micromanagement of
influence between investment bankers, investment research,
owners, owner disclosure, it is a different world, would not
you say, that today's capital markets are different than 1992s?
Ms. Minow. I have kind of a Dickensian best of times, worst
of times assessment of that. We certainly are doing much better
with regard to independent directors and the number of boards
that they serve on. There are a lot of big improvements, and
Sarbanes-Oxley--it was a huge impact on that. However, some
things are worse. To the extent that they are better,
legislation played an important role, but so did the
shareholder feedback.
Chairman Hill. Yes. I am for shareholder feedback. I was in
1992 when you and I met each other, and I am for it now. The
problem is we have, like, fewer public companies now. Public
companies are not going public because of the cost and
litigation around this kind of stuff.
I credit the success of this industry to Harvey Pitt and
the no-action letter in 2003. This is a self-created, self-
fulfilling prophesy set of organizations due to that no-action
letter, which basically said, If you use one of these folks,
you are off the hook, to Brad Sherman's comments that he just
made about----
Ms. Minow. Excuse me, but that has been rescinded.
Chairman Hill. Yes, but it was still the origin of how this
business grew, in my opinion. Do you agree with that?
Ms. Minow. I would think that my origin story goes back to
the Labor Department and their letter----
Chairman Hill. Right.
Ms. Minow [continuing]. in 1988 for--for ERISA fiduciaries.
Chairman Hill. Right. Yes, I think we have taken care of
that. We are doing a good job of that.
Ms. Minow. Yes.
Chairman Hill. I want to turn and ask Ms. Ising, from your
experience, how influential are the proxy advisory firms in
voting outcomes?
Ms. Ising. They are very influential. It obviously depends
on the specific company at issue, but we have seen studies that
show, for example, on say-on-pay votes, it can be upwards of a
40 percent difference. The way we often will also see that
influence show up, is not just in the vote totals but also in
the dramatic impact that happens once the left hand issues the
voting recommendations, and the right hand casts the votes.
Chairman Hill. Thank you.
Ms. Ising. So you can swiftly see it.
Chairman Hill. I appreciate that.
I yield back to the chair.
Chairwoman Wagner. The gentleman yields back.
The chair recognizes the gentlewoman from California, the
Ranking Member of the full Committee on Financial Services, Ms.
Waters, for 5 minutes.
Ms. Waters. Thank you very much, Madam Chair.
As I stated in my opening remarks, I firmly believe that
President Trump's ongoing efforts to align his and his family
and his friends' pockets is an illegal and despicable attempt
to use the Office of the President for personal gain. I think
it is deserving of this committee's immediate attention.
Nevertheless, I will indulge the witnesses with a few questions
about the proxy advisory industry.
For those listening at home, proxy advisors are independent
research firms that have asset managers and ordinary investors
alike to better understand the numerous proposals they must
vote upon at the annual meetings of the companies they are
invested in.
Critics of proxy advisors often claim they have too much
power over corporate governance and often accuse them of
recommending votes that are contrary to what corporate
management wants.
I want to ask the question of you, Ms. Minow. As you put
out in your testimony, however, ISS recommended a vote with
management on a whopping 96 percent of proxy proposals in 2024,
and those proposals went on to receive 90 percent--96 percent
of the vote. Almost all of those proposals were recommendations
to vote in favor of unopposed board candidates, auditor
approvals, and other routine matters. Sounds to me like
management words of an all-powerful proxy advisory cartel are
overblown. Might go so far as to say that proxy advisors are
too aligned with corporate management.
Can you talk a little bit more about the role of proxy
advisors and whether silencing them, as some of the bills
posted for this hearing would do, would benefit the advisor? I
would like to hear from you.
I will tell you the truth. If you were talking about
tariffs, if you were talking about Social Security, if you were
talking about Medicaid, if you were talking about the issues
that are really confronting us at this time with a President
who is leading this country in a terrible direction, I would be
more interested, but this is my duty.
I am going to sit here and listen to all about these
powerful proxy advisors. Please, go right ahead.
Ms. Minow. Thank you, Representative Waters, and I hope we
can have that other conversation sometime too.
Yes. Proxy advisors, as I said, they are in business. If
you come to them and say, I would like you to vote proxies for
me, and here are my policies, I--for example, there are a
number of extremist right-wing proposals that are appearing
this year on proxies--say we are going to vote all in favor of
those and against all of the ones that are coming from the nuns
and the public interest groups. They will be happy to vote your
proxies exactly as you say but what they do is provide a lot of
research.
If you will permit me, I would like to give--to add to the
record two examples of ISS proxy advisory reports, which I
think should be a part of the record, because you will see,
quite honestly, they go into great quantitative detail in their
evaluation. They say, and this is what management says, and
this is what we say, and this is what somebody else says. I
think they would really enhance the record of this hearing.
Ms. Waters. I ask permission to enter into the record a
recent report from ICCR, the Sustainable Investment Forum, and
the Shareholder Rights Group on shareholder proposals.
Chairwoman Wagner. Without objection, so ordered.
[The information referred to was not submitted prior to
printing.]
Ms. Waters. Thank you. We have a little bit more time left.
You know anything about tariffs? Wall Street is telling us
that there is so much uncertainty. They do not know what this
President is going to do from day to day. He really does not
know anything about tariffs.
Anyhow, I think he was trying to improve or--the tariffs on
a little island called Lesotho in Africa. I think you have no--
people on the island would have you but to tell you the truth,
I just wish that this committee would take up some serious
issues. We are going to have a markup on Wednesday. I want
everybody to pay attention. I got something for them. Okay?
Ms. Minow. Okay.
Ms. Waters. You sure you do not know anything about
tariffs? Oh, that is okay. These big old important proxy
advisors, that is what we are here about today. They have so
much power. Got to do something about them. Cannot let the--
what are they doing? Telling the wrong people the right thing
or the right people the wrong thing. We do not know. Frankly, I
do not care but I got to do this.
Ms. Waters. As the Ranking Member, I have to pretend, but I
tell you, sit in with us tomorrow, listen to us, what is going
to happen on the markup, okay?
Ms. Minow. Yes, ma'am.
Ms. Waters. I yield back my time, and I am glad to do it.
Thank you.
Chairwoman Wagner. The chair now recognizes the gentleman
from Oklahoma, the Chair of the Task Force on Monetary Policy,
Treasury Market Resilience, and Economic Prosperity, Mr. Lucas,
for 5 minutes.
Mr. Lucas. Thank you, Chair, and thank you to our witnesses
for testifying today. I too look forward to hours and hours and
hours and hours and hours of good insights tomorrow.
For the moment, let us turn to the prospective. Last week,
Paul Atkins was sworn in as the 34th Chairman of the SEC. This
is certainly a welcome change as the previous Chairman had
pursued an aggressive rulemaking agenda, undoing much of the
progress made under the first Trump Administration.
For example, many of their forms implemented under Chair
Clayton intended to increase transparency, and proxy advisory
industry were rolled back or went unenforced under Chairman
Gensler.
Ms. Ising, what would you suggest to the new chairman as
the first order of business in improving the misguided
regulations of the past? First order of business, what would
you tell the new chairman?
Ms. Ising. I think the first order of business with respect
to proxy advisories is restoring the common--well, first,
making sure and continuing the grounded view that proxy
supervisors are engaged in solicitations, bringing back the
2020 rules, which as Charles mentioned, are very much a
reasonable approach, and continuing to focus on the need for
transparency, for fairness, and predictability in how these
firms operate.
Mr. Lucas. Mr. Crain, as Ms. Ising just detailed, there are
a number of positive steps that the SEC could take with its
existing authority. Now turning to Congress, what statutory
changes should this committee be looking at so that public
companies are not burdened by regulatory whiplash that you talk
about in your written testimony?
Mr. Crain. The first place that I would look at is the
Exchange Act's clear directive that the SEC has the authority
to regulate solicitation and that proxy advisors are, in fact,
engaged in solicitation. Hopefully, the NAM is successful this
Friday in protecting that authority in Federal court. I am
going to say, unlikely event that we are not--knock on wood--it
would be incredibly impactful if Congress were to weigh in and
remake clear that the Exchange Act does have that authority.
Putting the authorities aside, though, there are plenty of
specific reforms that Congress could institute that would
ensure that there is not a pendulum swing when there is a
change in administration. Things like companies' ability to
review draft recommendations to identify errors, companies'
ability to respond to the proxy firm's recommendations and
ensure that investors have access to those responses, things
like regulating conflicts of interest and increasing
transparency. There is a lot of work that you all can do
separately and apart from whatever happens at the SEC or in
court.
Mr. Lucas. Mr. Washington, my bill, the Public Company
Advisory Committee Act, would provide public companies the
opportunity to engage with the SEC on a range of regulatory
issues, including the ones discussed today. Can you speak more
to why the SEC would benefit from establishing a public company
advisory committee?
Mr. Washington. Delighted to do so. Thank you for this
palate-cleansing bipartisan moment, because we think this is an
issue that both sides of the aisle can embrace.
The SEC has a number of advisory committees, including one
for investors. They do not have one for issuers. We think that
having a group of issuers, large comp---small and mid-cap
companies who can get together and advise the SEC in advance of
proposing rules or sending rules, revising rules, will
dramatically streamline the regulatory process, improve
decision making, and reduce the burdens on investors, issuers,
and the government alike.
So we really hope that this is a--your legislation--and we
appreciate your leadership on it--is something that can be
embraced on both sides of the aisle and can move forward.
Mr. Lucas. Madam Chair, before I yield back, I would note,
I am looking forward to quality bonding time with all my
friends tomorrow. With that, I yield back.
Chairwoman Wagner. It will be a spectacle, that is for
sure. The gentleman yields back.
The chair now recognizes the gentleman from California, Mr.
Vargas, for 5 minutes.
Mr. Vargas. Thank you very much, Madam Chair. Thank you for
holding this hearing and there is nothing like bonding. Looking
forward to it. Nothing like bonding around here. Fabulous.
Now, I tried to research your backgrounds, and you have
stellar backgrounds obviously, and I believe that four of the
five of you are attorneys.
Mr. Crain, I do not believe you are an attorney. Is that
correct?
Mr. Crain. That is correct, I am not.
Mr. Vargas. I believe the four of you are. Is that correct?
Or am I incorrect about that?
Mr. Washington. Guilty as charged.
Mr. Vargas. You are?
Great. Okay. Mr. Washington, you have mentioned conflict of
interest a couple times here, and I think that is very
important.
So we have been reading about the President's
cryptocurrency and his memes. Is there potential here for a
conflict of interest, and would not an investor want to know
some information?
You are an attorney first. Could you tell me, is there a
possibility for a conflict of interest here?
We heard from The New York Times that in American history
we have never seen so much intertwining between public policy
and a President's personal fortune. Is there a potential here
for conflict?
I would advise you before that, remember what Lisa
Murkowski said.
Mr. Washington. Yes. No, I think----
Mr. Vargas. She said that they fear retribution from the
President if they speak freely. Go ahead.
Mr. Washington. Yes. There are different rules that apply
in determining where there is a conflict of interest in the
political sphere, in the legal sphere, and in the corporate
sphere. I feel qualified to talk about the conflicts of
interest that exist in the legal sphere and the corporate
sphere but not in the political sphere, respectfully.
Mr. Vargas. Would anyone else like to try? Ms. Minow?
Ms. Minow. Thank you very much. Before I went into ISS, I
was in the government, and for a while, I was an ethics
counselor in the government, and I can tell you it is a per se
conflict of interest.
Mr. Vargas. Why is it a per se conflict of interest?
Ms. Minow. Because the President, like the other people in
government, is supposed to have one interest, and that is what
he swore to, the benefit--to uphold the Constitution and to
benefit all Americans. When he sells access to have dinner with
him, when he sells products and gives better attention to the
people who buy those products, that is not just a perceived
conflict but an actual conflict of interest.
Mr. Vargas. Who is going to police it, then, from the
Federal Government?
Ms. Minow. I think it is probably Congress, sir--
Mr. Vargas. Congress? Not the Consumer Financial Protection
Bureau (CFPB), not any other institution that we have?
Ms. Minow. [continuing]. and the press.
Mr. Vargas. It would not be anybody else? I mean, do not
you want--now, if you are an individual investor, retail
investor or an institutional investor, would not you want
information on this? Would not you want to have some advice?
Ms. Minow. The President only once tried to have a public
company with outside shareholders, and he learned very quickly
that he was not happy about that. I do not know who his other
shareholders are, but they are probably just members of his
family.
Mr. Vargas. I bring this up for two reasons. One, obviously
you want advice. I mean, if you are going to invest in a
company, you are the investor, you are the owner of that
company, ultimately you want advice. That is why I think proxy
advisors are so important. You want advice. Whether it is the
nuns or whether it is Opus Dei, it does not matter. They have
two very--I am Catholic, I can tell you they have very
different views--but they want advice.
You also want to make sure there is not a conflict here,
and this is where I think it gets very important that we look
at this as an institution. I mean, it is fascinating that we
are not talking about that today.
You see this incredible opportunity for corruption, and yet
there is silence. No one's talking on the other side. The
people in power do not want to talk about it. Again, I think
Senator Murkowski kind of let the cat out of the bag when she
said there is retaliation, there is repercussions, we fear the
President because of political actions that he may take.
So, again, I thank all of you for being here. I do not see
how you get over the fact that investors are the owners of the
company and they can get any advice they want. Again, whether
they want advice on climate or whether they want advice against
pornography or whether they want any kind of advice, they
should get it and they should invest the way they want.
Last, just on a personal note, if you could say hello to
your sister, she was my professor at Harvard. We can say
Harvard these days, we are very proud of it today. Thank you.
Ms. Minow. Thank you, sir.
Chairwoman Wagner. The chair now recognizes the gentleman
from Ohio, the Chairman of the Subcommittee on National
Security, Illicit Finance, and International Financial
Institutions, Mr. Davidson, for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman. I really
appreciate you having this hearing. I cannot believe it really
took us this long to get this hearing. It is a commonsense
solution to a problem.
There are very few things where you have 97 percent market
share by two firms and there are not people that are concerned.
I have people here that--at least one person here seems not
concerned. We have colleagues who think that the right way to
run capital markets is to just check with CalPERS, and whatever
they say is probably what we should do for the agenda for the
hearing.
Thankfully, Mr. Sherman is not running the agenda for the
hearing, and may we never see that day.
The space that we are talking about really, Chairman Hill
highlighted it, but, ISS, the incumbent in the proxy voting
advisory space, was founded in 1985. ISS was a pioneer,
providing proxy voting recommendations to institutional
investors, and they were capitalizing on growing governance
expertise. As I understand it, other firms existed, but none
had ISS' early scale or influence. Then the SEC issued their
2003 rule requiring mutual funds to disclose voting policies.
Mr. Washington, do you agree with the timeline in the
industry's development? Why exactly is it that a duopoly,
consisting of ISS, operated 18 years before Glass Lewis
existed, has now emerged?
Mr. Washington. Look, in almost any market there are
different economies of scale, and so there will be markets
where there will be naturally one player, two players, multiple
players.
I would say, as a society we are interested in encouraging
more players to enter into this market. That is why we believe
in light touch regulation, because we actually want the
environment to be conducive to more players coming into the
market. At the same time, we want to make sure that the players
who come into the market are providing accurate, reliable
information to their clients. We are hopeful that legislation
will proceed--that it will provide those market conditions to
increase competition while ensuring accuracy.
Mr. Davidson. Thank you.
Mr. Rose, what would it take to get some market share
beyond the 3 percent that is not gobbled up by the two big
incumbents? What would it take to get that to happen?
Mr. Rose. I think that it is quite challenging. If you look
at markets like this where you have a sort of certification
function provided by market players--look at credit rating
agencies, you look at auditing--they tend to be dominated by a
small number of folks.
Again, I guess I would reiterate Mr. Washington's point.
That is why light touch regulation would be helpful here. I do
think regulation is necessary, but a light touch so that it
would not create barriers.
Mr. Davidson. It is safe to say that they, just the two
firms, exert quite a lot of influence over our capital markets,
right? Does anyone disagree with that?
Mr. Rose. Absolutely. Absolutely.
Mr. Davidson. Okay. So is it also a concern that they are
both foreign-owned? I mean, my understanding is ISS is owned by
Deutsche Borse, and Glass Lewis has been owned by various
Canadian firms but, currently, Peloton Capital Management, a
private equity firm based out of Toronto. Should we be
concerned about that?
Mr. Rose. In my view, it creates an additional layer of
risk. Those firms are a little bit less, I suppose, a little
bit less regulated by either U.S. investors directly as
shareholders or by U.S. regulators.
Mr. Davidson. Then we have talked a little bit about it in
terms of--Mr. Crain, you mentioned a potential conflict of
interest inherent when proxy advisory firms are aligned there.
They want to serve their clients. They want to serve people
maybe better by giving favorable or unfavorable referrals on
proxies.
So as the National Association for Manufacturers, NAM,
notes, 59 percent of manufacturers cited unfavorable business
climate as primary concern. We often hear about the Tax Code
barriers. However, is any part of the unfavorable climate for
manufacturers connected to corporate governance guidance?
Mr. Crain. I think absolutely. When you think about an
unfavorable business climate, you think about burdensome
regulations, you think about uncompetitive tax policies, as you
mentioned, and you think about access to capital.
One way to access capital is by going public. One thing
that makes going public more difficult is the influence and the
power that these proxy firms have. I think it is absolutely
fair.
Mr. Davidson. Thank you for your testimony today. My time
has expired, and I yield back.
Chairwoman Wagner. The gentleman yields back.
The chair now recognizes the gentleman from Illinois, Mr.
Casten, for 5 minutes.
Mr. Casten. Thank you. There is a certain irony hearing
concerns about capital flying from the United States without
mention of the last hundred days when it is running away from
equities and treasuries, but I guess we are not going to talk
about that today.
Mr. Crain, I want to just give you a hypothetical. Let's
suppose that I am looking for a sole investor in my business.
Setting aside what this business does, I need 250 grand from
you. You are going to be my sole investor. You can ask me any
question you want about cash-flow management, my compensation,
hiring strategy, but I reserve the right to tell you that your
questions are immaterial and not answer them.
Setting aside what my business does, are you on board?
Mr. Crain. I think my first question would be, why are you
approaching someone who does not have 250 grand to give you?
Mr. Casten. Would you invest in a company on those terms,
that I take your money and then I get to tell you whether your
judgments are material?
Mr. Crain. I think certainly investors in a company,
especially if I am the sole investor in your business, would
certainly have some questions about what you are using that
money for.
Mr. Casten. I say that as a--as a guy who built some
companies with private equity. Never took a company public, but
I always--it always struck me that there is this disconnect
where, if you are starting a company and you find an investor,
it is understood that as the entrepreneur, as the CEO, you are
the custodian of someone else's capital and you work for them.
Yet, once you get a large, diffuse investor base, there is
this idea that somehow, well, now their questions are kind of a
nuisance, they are not as sophisticated as I am, they are not
asking the kind of questions that I would have.
Since you--I guess since you do not have the $250,000, let
me reframe the question. I got my money. I want you to work for
my company now and as a condition of working for this company,
you have to join a labor union, and you have to pay dues to the
labor union.
The labor union is going to negotiate for compensation and
benefits and all that, but they have to present their proposals
to me first as the CEO, and I will roll them back to you for
consideration after I have had a chance to vet them. Would you
want to work for that company?
Mr. Crain. I will admit to being a little lost in the
hypothetical, but I think the answer you are looking for is no.
Mr. Casten. I ask that because, like, number one, like, we
have a proposal right now that would permit companies to say
that shareholders are going to actually pay for these proxy
advisory services, but then the company gets to review them
before the people who actually paid for it can review them. We
have another bill that would allow the companies just to ignore
certain proposals outright because in their judgment this is
not material.
I guess, Ms. Minow, like, I am sympathetic to the argument
that you cannot possibly have every investor in every company,
someone who owns one share of a company with 20 million shares
outstanding, to ask you every question. Is not this just a
collective action problem in the same ways that we have--labor
unions help negotiate so that people can speak with one voice.
Are not these proxy advisory firms just providing--solving a
collective action problem?
Ms. Minow. Thank you very much. I am very, very happy with
that question because that is exactly how I describe it. When
you are making the buy-sell decision, that is something that--
where there is a premium on exclusivity, and you just want to
have information that nobody else has, as long as it is legal.
When you are talking about proxy voting, I can vote the
best proxy policies in the world, but if I cannot get other
people to vote with me, there is an awful economic term called
rational apathy, and it means that it is more expensive for me
to learn what is on the proxy than it could possibly benefit
me, and that is why proxy advisors perform such an essential
role.
I really appreciate that question.
Mr. Casten. No, and I am guilty of being in that 96 percent
probably that just says, yes, just vote what they recommend.
Easier, right?
Ms. Minow. I will vote your proxies.
Mr. Casten. I guess I just want to leave a question for all
of you. Dan Savage, the love/sex advice columnist and very
funny philosopher of all things, in my view, had this great
comment, and it was in the context of people saying some fairly
homophobic things to him. He said, when somebody accuses you of
something you have never thought of, they are telling you what
they are capable of.
There is something that is very strange to me, that we are
sitting here saying we should never allow outside groups to
tell a management team that their wisdom, their judgment about
how to run a company is sufficiently--like, we cannot--we have
to challenge them because they might do something foolish
otherwise. Yet, I do not hear a peep about the State Financial
Officers Foundation who is going out and telling pension funds
we are going to change laws in your States because we do not
want your pension fund to invest in companies that prioritize
ESG, prioritize Diversity, Equity and Inclusion (DEI),
prioritize climate change.
That is a real thing. That is really a group that is
actually doing the thing that we are theorizing some, I do not
know, some combination of George Soros and Dan Savage might be
doing on the other side, but that is actually happening from
the right.
I yield back.
Chairwoman Wagner. The gentleman's time is expired.
The chair now recognizes the gentleman from Wisconsin, the
Chair of the Subcommittee on Digital Assets, Financial
Technology, and Artificial Intelligence, Mr. Steil, for 5
minutes.
Mr. Steil. Thank you very much, Madam Chairwoman. Always
good to have the last name pronounced like a true Luxembourger.
We have a huge opportunity today to talk about a duopoly
that most Americans have never heard of--ISS and Glass Lewis--
but two companies have a huge impact on their lives, their
ability to save for retirement, and their own financial
security. I think a lot of Americans would be surprised to know
that both of these companies are foreign-owned.
Mr. Crain, are either ISS or Glass Lewis at least American
companies if they are having such a big say on American
retirement accounts?
Mr. Crain. I do not know the exact structure of their
ownership, but, no, I do not believe so.
Mr. Steil. Mr. Rose, do you know their ownership structure?
Mr. Rose. I believe that they are both foreign-owned
currently. I think that they are----
Mr. Steil. Germany and Canada.
Mr. Rose. Germany and Canada.
Mr. Steil. They are foreign-owned enterprises----
Mr. Rose. Yes.
Mr. Steil [continuing]. and they are opining on U.S.
retirees' accounts. This should be concerning out of the gates
for people.
Then we might want to know, how do they make their money?
Sure, they provide advisory services and people pay for that,
but, Mr. Rose, do they make money elsewhere?
Mr. Rose. They can make money through consulting services.
Mr. Steil. Consulting services. Why would somebody want to
pay ISS and Glass Lewis, a German company and a Canadian
company, a whole bunch of money for consulting services? There
is are lot of consulting companies here.
Mr. Rose. So they could help convince your shareholders to
vote for whatever proposal they want.
Mr. Steil. Oh, so you are saying that conflict of interest
might go right over the so-called Chinese wall to the other
side because they are making money on this side and they are
making money on this side, all on the backs of American
retirees. Is that correct?
Mr. Rose. That is the danger, yes.
Mr. Steil. So wait a minute, we should probably disclose
these conflicts of interest, do you think?
Mr. Rose. I agree.
Mr. Steil. Does anybody on this panel think that we should
not disclose conflict of interest for proxy advisors?
The record will reflect all of our witnesses think we
should disclose them.
Mr. Crain, are they, of course, then required to disclose
these conflicts of interest under current securities law?
Mr. Crain. Unfortunately, they are not, Congressman.
Mr. Steil. Holy cow. It sounds like Democrats and
Republicans at least agree on the point that we should know if
there is a conflict of interest for foreign companies that are
advising a whole host of voting on American retirement
accounts. This is egregious.
Of course, there was a period of time when the SEC came
forward and said, maybe we should regulate these entities, and
they wrote forward a law--or they wrote forward a rule and
regulation.
Then what happened to that rule and regulation, Mr. Crain?
Mr. Crain. They suspended it, and then they rescinded it.
Mr. Steil. Were they legally allowed to do that, Mr. Rose?
Mr. Rose. Sorry. Repeat the question.
Mr. Steil. They suspended the proxy advisor rule. Were they
legally allowed to do that?
Mr. Rose. They were.
Mr. Steil. Away we go, and now we do not have any rules or
requirements of substance, with meat and potatoes on the bones,
protecting American retirement accounts, because Gary Gensler
went and gutted a well thought-through, well-structured rule
that, in my opinion, did not even go far enough, he guts it
out.
What we are doing is, we are allowing these foreign-owned
companies to be making money on the consulting side, not
telling anyone what their conflicts of interest are, and then
advising places like, I think CalPERS was referenced earlier by
one of my colleagues on the other side of the aisle who
receives this advice and counsel.
That seems like a heck of a problem. Do you agree, Mr.
Crain?
Mr. Crain. I absolutely would.
Mr. Steil. What should the SEC do? I think we should pass
my legislation. We brought forward a healthy chunk of it to the
House floor last Congress. We passed it across the House floor.
The Senate did absolutely nothing.
I will comment on the Senate later, but I think we now have
a real opportunity to bring this forward, because American
retirement accounts are at stake because of this--these two
companies that are making money, not sharing their conflict of
interest, not letting the American people know why their
shares, that are held in all sorts of retirement accounts,
pension funds, how or why they are being voted on.
Let me hit another quick point with you if I can, Mr.
Crain. What happens--of course it would not be the conflict of
interest, I do not want to accuse anybody of any wrongdoing--
but what would happen if they gave terrible advice?
Let's say there was a proxy advisor that recommended a
``yes'' vote in favor of a resolution that was illegal. Has
that ever happened, Mr. Crain?
Mr. Crain. If that happened, they would probably be robo-
voted in the favor of that resolution, if that is the
recommendation they made.
Mr. Steil. When we had the general counsel of ISS and the
general counsel of Glass Lewis and I asked them--they sat right
where you sat--and I said, Mr. General Counsels, do you review
for legality? What was their answer to me? No.
In my opinion, they have advised, in a case of Travelers--
and we can look it up, we can spend more time on this
sometime--to actually recommend in favor of an illegal action.
Do you agree with that, Mr. Washington?
Mr. Washington. Yes, that has occurred.
Mr. Steil. This is horrific. They are not--and are they
liable for that, do you know, Mr. Washington?
Mr. Washington. Not under the current regulatory regime.
Mr. Steil. In my bill, they would at least be liable for
that. We have massive reform that needs to be done on this
proxy advisor duopoly. I am excited we are here talking about
it.
Thank you, Madam Chair, for holding today's hearing. I
yield back.
Chairwoman Wagner. The gentleman yields back.
The chair now recognizes the gentlewoman from Michigan,
Mrs. McClain----
Mr. Sherman. I request 10 seconds.
Chairwoman Wagner. No.
Mr. Sherman. Thank you.
Chairwoman Wagner. The chair now recognizes the gentlewoman
from Michigan, Mrs. McClain, for 5 minutes.
Mrs. McClain. Thank you, Madam Chair, and thank you, Mr.
Steil, for bringing forth this wonderful piece of legislation.
I think it is well noted.
I do have to take one moment and just notice the hypocrisy.
We think conflict of interest is a bad thing, right? Except
when it is, like, from our party's conflict of interest or it
has something to do with me.
So what I would just ask all the witnesses up there is,
could we just keep our context the same no matter what context
it is?
I mean, I think it is very interesting that my friends
across the aisle want to talk about influence peddling, and
they accuse our President of having a conflict of interest and
maybe having some influence peddling when we had hearing after
hearing about the past President, Biden, and his son, Hunter
Biden, clearly doing influence peddling, but I think they had a
different view on that.
However, Madam Chair, I am extremely excited to know that
this is a bipartisan piece of legislation--or a bipartisan
hearing that we actually agree on, and that is, transparency is
good, right?
I mean, Mr. Crain, Congress has mandated that investment
firms must be fiduciaries, correct?
Mr. Crain. That is exactly right.
Mrs. McClain. However, the firms they are hiring, the proxy
firms, do they have the same responsibilities and goals, like
fiduciary, as the firms do?
Mr. Crain. They do not. Proxy advisory firms do not have a
fiduciary duty to the ultimate Main Street investors who are
investing with the asset managers----
Mrs. McClain. Is it safe to say their goals do not align?
Mr. Crain. Yes.
Mrs. McClain. Do you think that is a problem?
Mr. Crain. I do.
Mrs. McClain. I think so too. I think the American people
would say that is a problem as well.
Mr. Crain, these proxy advisors are claiming that despite
their tremendous influence over how investors cast their vote,
they should not be subject to SEC oversight. Can you--which is
very interesting to me. Can you discuss the history of the
SEC's authority to regulate proxy advisors?
Mr. Crain. Absolutely. This goes back to 1934, the Exchange
Act. Congress, in your wisdom, your predecessors, gave the SEC
the authority to regulate solicitation and soliciting entities.
What the proxy firms are doing in the present day is
soliciting. They are soliciting proxies and casting them on
investors' behalf, and yet they are arguing in court this week
that they are not soliciting, that they should not be subject
to SEC regulation.
Mrs. McClain. It is different, kind of like our conflict of
interest opinions, right?
Mr. Crain, can you also describe how the Biden
Administration created more uncertainty surrounding this proxy
advisory industry?
Mr. Crain. Under the first Trump Administration, the SEC,
under Chairman Clayton, had finalized a commonsense compromise
rule that had been in process for a decade at that point. Under
Chairman Gensler, under the Biden Administration, they
suspended and then ultimately rescinded that rule.
Both of those decisions were found to be unlawful in
Federal court. The effect that they have on the market is that
it is the pendulum effect that you just mentioned where
companies do not know what the rules of the road are.
Mrs. McClain. Interesting. Maybe there is a conflict of
interest there we should look at, but let us not let facts get
in the way of a good story, right?
Ms. Ising, ISS described ESG policies as being no longer
optional but rather a necessary part of investment and asset
management. Part of this strategy involves committing to the
1.5 degrees Celsius of the Paris Agreement.
Companies have a fiduciary responsibility to their
shareholders, yet, are being held hostage by the agenda of
staff at foreign-owned proxy advisory firms.
Can you discuss reasonable commonsense regulation that
would protect shareholders from the ideological preferences of
rogue staffers?
Ms. Ising. I think the key here is that we do not have
sunshine on what the proxy advisors are doing. We constantly
see errors in their reports. Whether it is on pro-ESG
proposals, it is counter-ESG proposals, the issue is, who are
the people making the decisions, and why is it that we need to
pay for consulting services to be able to have the
understanding of the underpinnings and the ultimate decisions
that ultimately dramatically impact the proxy voting decisions
being made?
Mrs. McClain. Thank you. With that, I yield back, Madam
Chair.
Chairwoman Wagner. The gentlelady yields back.
The chair now recognizes the gentleman from Florida, Mr.
Haridopolos, for 5 minutes.
Mr. Haridopolos. Thank you, Madam Chair.
I also let the folks know that the Florida attorney general
has actually launched an investigation of ISS and Glass Lewis
and on the impacts that they have had on Florida businesses, et
cetera, and I am glad to see our attorney general in Florida
making that maneuver.
Mr. Crain, I want to ask you a question if I could, please.
What would be the consequence for our markets if ISS prevails
in its litigation against NAM, in your opinion?
Mr. Crain. Essentially, they would be entirely unregulated.
All of the consequences that we have been talking about today--
the conflicts of interest, the errors, the one-size-fits-all
policies, the robo-voting--they would be left entirely
unchecked from a regulatory perspective, and that is incredibly
problematic for public companies and probably more importantly
for their investors who are the ultimate owners of those
companies.
Mr. Haridopolos. Just to kind of build on that, I really
appreciate Congressman Steil's points that were made and I want
to emphasize Gensler actions, the last 4 years, have been a
little bit challenging for this committee on multiple fronts.
What is your--what do you think the consequence of Mr.
Gensler has been in giving the SEC guidance on this issue?
Mr. Crain. What the Gensler SEC did is essentially rescind
all the efforts previous that had been made to bring proxy
firms under reasonable oversight, and then they even went
further and stopped defending their authority to write any type
of rule at all.
So if ISS is successful in this case, the SEC used to be in
that case, and they walked back from that opinion that they
even have any authority in this space at all, trying to tie the
hands, not just of the Gensler SEC, but any future SEC under a
different administration. It is incredibly problematic,
specifically in this proxy firm space.
Mr. Haridopolos. My last question, Mr. Crain, please
describe to me maybe some examples of the most egregious
current conflicts of interest among proxy advisors and some of
the adverse impacts it has had on investors, if you could.
Mr. Crain. The clearest conflict of interest is ISS'
consulting service. We know, as publicly traded companies, as
publicly traded manufacturers, that the business consulting
service will wait for a negative recommendation from the proxy
voting service. Then, as soon as that negative recommendation
comes in, that is when they send out their ask for businesses
to buy their services, because the best way to avoid a negative
vote--a negative vote recommendation, I should say--is to just
hire ISS, but it is not just ISS.
Glass Lewis has recently launched a stewardship service
where they are advising activist investors and institutions on
how to best pressure and influence companies, whether it is by
shareholder proposals, by vote-no campaigns, et cetera. Who is
going to ultimately be recommending whether shareholders should
vote for those campaigns? It is Glass Lewis.
So the conflicts are baked into their business models, and
that has a real impact on the recommendations they make, and on
the companies that they are making recommendations about, and
ultimately on the investors who have holdings in those
companies.
Mr. Haridopolos. Madam Chair, just to close, I want to
applaud you for bringing this to our attention. As a new member
of the committee, it is important that we understand some of
these moving parts, and it is really eye-opening to say the
least, some of the things that Chairman Steil, as well as Mrs.
McClain and others have brought up today. We appreciate the
candid information.
I am so glad that our attorney general in Florida is also
looking at these type of measures because, again, this is the
future of so many folks who have made investments, and to see
that this type of unique behavior to be generous takes place. I
am glad that we are having this public disclosure, so we can
put the appropriate legislation in place to stop some of the
shenanigans that have happened.
So thank you so much, Madam Chair, and I yield back.
Chairwoman Wagner. I thank the gentleman, and he yields
back.
The chair now recognizes the gentleman from Montana, Mr.
Downing.
Mr. Downing. Thank you, Madam Chair. Before I begin, I
would like to request unanimous consent to submit this comment
letter from Egan-Jones Proxy Services for the record.
Chairwoman Wagner. Without objection, so ordered.
[The information referred to can be found in the appendix.]
Mr. Downing. Thank you.
I am going to start out with Ms. Ising. Institutional
investors are required to act in the interest of their clients
to maximize their returns. Yet ISS and Glass Lewis have been
criticized for routinely endorsing left-leaning proposals at
shareholder meetings.
ISS and Glass Lewis control 90 percent of the proxy
advisory industry and can sway up to 30 percent of votes in
shareholder meetings.
Can you give some specific examples of when ISS and Glass
Lewis endorsed proposals that were not focused on maximizing
the returns or resulted in diminished returns for investors?
Ms. Ising. I am happy to do so. I would note that even the
voting percentages that were given recently are particularly
notable because last year ISS recommended for more than half of
all shareholder proposals that were voted on just in 2024.
We see that, relevant to your question, of how they are not
focused--they do not do a cost-benefit analysis. Our companies'
boards of directors have fiduciary duties to act in the best
interest of the company and the shareholders, to maximize
shareholder returns. Those--they are not always--the proxy
advisory firms are not taking that into account in doing their
analysis.
For example, there was recently a proposal, a shareholder
proposal that ISS supported on the use of pig gestation crates
in a company's supply chain. The company noted that it did not
breed, process, transport, own, or raise animals, and it had
already announced a move away from sourcing pork raised in
gestation crates. Yet, ISS said, no, this is something this
company should be spending its time on.
Mr. Downing. Is there any reason to believe that ESG-
related proposals are generally more aligned with shareholder
value than right-leaning proposals? If not, how do you explain
the discrepancy in the proxy advisors' recommendations?
Ms. Ising. I cannot explain the discrepancy. What I will
say is, is that this is a symptom, A, of--on a related note,
there is just--there is a need for meaningful reform on
shareholder proposals, right? That needs to happen. The fact
that the proxy advisory firms are so focused on supporting many
of these proposals, they should not even be getting to the
ballot.
Mr. Downing. Thank you.
Let me move to Mr. Crain. Does the way the proxy advisory
industry operates in the United States discourage companies
from going or staying public?
Mr. Crain. It absolutely does. America has the deepest and
most liquid capital markets in the world, and if you are a
company looking to grow, then going public is a critical way to
access capital, which is obviously important for that company.
It is also important for everyday investors who largely cannot
invest in privately held companies but when a business goes
public, they have that investment opportunity, and they can
take advantage of the growth opportunities as that investment
grows, as that company grows.
If you are considering going public, and you are looking at
burdensome costly regulations, and you are looking at having to
be held accountable by these firms who are themselves
unregulated, meanwhile, you are making a whole bunch of SEC
disclosures, but the proxy firms are not--they are effectively
unregulated--and yet they are exerting influence on the
corporate decisions that you are making. That is a real
disincentive from going public, and that has a significant
impact on both companies and investors
Mr. Downing. I appreciate that. I have had some experience
that has led me to some conclusions about the weaponization of
these proxy programs. I was a former securities and insurance
regulator, and I had some public reinsurance companies coming
to me, saying, we know we are making decisions that are not in
the interest of the business.
A lot of it was about not--not putting risk money out for
oil and gas because they did not want to be involved in that,
and they said, but their backs were against the wall because of
these proxy votes.
So I have seen that as a regulator, and it has really,
really bothered me.
I am going to move on to Professor Rose. Do you have any
more suggestions that have not been mentioned today to increase
competition in the proxy advisory space?
Mr. Rose. As I mentioned, I think it is a real challenge,
and I am quite hopeful that maybe technological innovations can
help provide some benefits here. Maybe there are ways to get
around some of the work that the proxy advisors do, perform
those functions but without the political leanings that might
accompany that.
It is a real challenge. I do think the proposed legislation
could help, again, so long as those regulations are not overly
burdensome----
Mr. Downing. Thank you.
Mr. Rose [continuing]. and the barriers to entry are not
too significant.
Mr. Downing. Yes, thank you, sir.
Finally, Mr. Washington, how does your advice to members
defer based on whether the proxy advisors are likely to
recommend a, quote, vote for or a vote against a particular
shareholder proposal?
Mr. Washington. In all cases, the board needs to consider
what is in the best interest of the corporation. The issue is
that the proxy advisory firms can tilt the balance of those
considerations because it can increase controversy, reputation
risk, and so forth, that can affect the board's decision
making.
I would just--if I might, there is no doubt that our
members truly value the conversations that they have with their
real investors. There is no question of that. The question is
here, the proxy advisory firms are not in the same position as
the investors, and yet they yield greater----
Chairwoman Wagner. The gentleman's time is expired.
Mr. Downing. Thank you, Madam Chair. I yield my time.
Chairwoman Wagner. I thank all of our members for
participating. I would like to thank all of our witnesses for
their testimony today in this long overdue hearing on cleaning
up the proxy advisory atmosphere, I will say. We have some good
legislation that I think is going to do that, and I think we
have grand support for.
So without objection, all members will have 5 legislative
days to submit additional written questions for the witnesses
to the chair. The questions will be forwarded to the witnesses
for their response. Witnesses, please respond no later than
June 4, 2025.
[The information referred to can be found in the appendix.]
This hearing stands adjourned.
[Whereupon, at 4:13 p.m., the subcommittee was adjourned.]
APPENDIX
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