[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
______
THE PROXY ADVISOR DUOPOLY'S ANTICOMPETITIVE CONDUCT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON THE ADMINISTRATIVE STATE, REGULATORY REFORM, AND
ANTITRUST
COMMITTEE ON THE JUDICIARY
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
__________
WEDNESDAY, JUNE 25, 2025
__________
Serial No. 119-27
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Printed for the use of the Committee on the Judiciary
GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT
Available via: http://judiciary.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
60-839 WASHINGTON : 2025
COMMITTEE ON THE JUDICIARY
JIM JORDAN, Ohio, Chair
DARRELL ISSA, California JAMIE RASKIN, Maryland, Ranking
ANDY BIGGS, Arizona Member
TOM McCLINTOCK, California JERROLD NADLER, New York
THOMAS P. TIFFANY, Wisconsin ZOE LOFGREN, California
THOMAS MASSIE, Kentucky STEVE COHEN, Tennessee
CHIP ROY, Texas HENRY C. ``HANK'' JOHNSON, Jr.,
SCOTT FITZGERALD, Wisconsin Georgia
BEN CLINE, Virginia ERIC SWALWELL, California
LANCE GOODEN, Texas TED LIEU, California
JEFFERSON VAN DREW, New Jersey PRAMILA JAYAPAL, Washington
TROY E. NEHLS, Texas J. LUIS CORREA, California
BARRY MOORE, Alabama MARY GAY SCANLON, Pennsylvania
KEVIN KILEY, California JOE NEGUSE, Colorado
HARRIET M. HAGEMAN, Wyoming LUCY McBATH, Georgia
LAUREL M. LEE, Florida DEBORAH K. ROSS, North Carolina
WESLEY HUNT, Texas BECCA BALINT, Vermont
RUSSELL FRY, South Carolina JESUS G. ``CHUY'' GARCIA, Illinois
GLENN GROTHMAN, Wisconsin SYDNEY KAMLAGER-DOVE, California
BRAD KNOTT, North Carolina JARED MOSKOWITZ, Florida
MARK HARRIS, North Carolina DANIEL S. GOLDMAN, New York
ROBERT F. ONDER, Jr., Missouri JASMINE CROCKETT, Texas
DEREK SCHMIDT, Kansas
BRANDON GILL, Texas
MICHAEL BAUMGARTNER, Washington
------
SUBCOMMITTEE ON THE ADMINISTRATIVE STATE,
REGULATORY REFORM, AND ANTITRUST
SCOTT FITZGERALD, Wisconsin, Chair
DARRELL ISSA, California JERROLD NADLER, New York, Ranking
BEN CLINE, Virginia Member
LANCE GOODEN, Texas J. LUIS CORREA, California
HARRIET HAGEMAN, Wyoming BECCA BALINT, Vermont
MARK HARRIS, North Carolina JESUS G. ``CHUY'' GARCIA, Illinois
DEREK SCHMIDT, Kansas ZOE LOFGREN, California
MICHAEL BAUMGARTNER, Washington HENRY C. ``HANK'' JOHNSON, Jr.,
Georgia
CHRISTOPHER HIXON, Majority Staff Director
JULIE TAGEN, Minority Staff Director
C O N T E N T S
----------
Wednesday, June 25, 2025
OPENING STATEMENTS
Page
The Honorable Scott Fitzgerald, Chair of the Subcommittee on the
Administrative State, Regulatory Reform, and Antitrust from the
State of Wisconsin............................................. 1
The Honorable Jerrold Nadler, Ranking Member of the Subcommittee
on the Administrative State, Regulatory Reform, and Antitrust
from the State of New York..................................... 3
The Honorable Jim Jordan, Chair of the Committee on the Judiciary
from the State of Ohio......................................... 5
The Honorable Jamie Raskin, Ranking Member of the Committee on
the Judiciary from the State of Maryland....................... 5
WITNESSES
Sean Egan, Co-Founder, President, Chief Executive Officer, Egan-
Jones Ratings Company
Oral Testimony................................................. 8
Prepared Testimony............................................. 11
Caleb N. Griffin, Associate Professor of Law, University of North
Carolina School of Law
Oral Testimony................................................. 17
Prepared Testimony............................................. 19
Charles Crain, Managing Vice President, Policy, National
Association of Manufacturers
Oral Testimony................................................. 26
Prepared Testimony............................................. 28
Nell Minow, Chair, ValueEdge Advisors
Oral Testimony................................................. 41
Prepared Testimony............................................. 43
LETTERS, STATEMENTS, ETC. SUBMITTED FOR THE HEARING
All materials submitted for the record by the Subcommittee on the
Administrative State, Regulatory Reform, and Antitrust are
listed below................................................... 67
Matrials submitted by the Honorable Jerrold Nadler, Ranking
Member of the Subcommittee on the Administrative State,
Regulatory Reform, and Antitrust from the State of New York,
for the record
An article entitled, ``Proxy advisory rms: What they are &
why you should care,'' Dec. 21, 2023, Diligent
An article entitled, ``Sustainable corporations perform
better financially, report finds,'' Sept. 23, 2014, The
Guardian
An article entitled, ``ESG: Illegal Collusion or Just Good
Business Sense?'' Jul. 31, 2024, Triple Pundit
A report entitled, ``The Conflicted Role of Proxy Advisors,'' May
2018, American Council for Capital Formation, submitted by the
Honorable Harriet Hageman, Member of the Subcommittee on the
Administrative State, Regulatory Reform, and Antitrust from the
State of Wyoming, for the record
THE PROXY ADVISOR DUOPOLY'S ANTICOMPETITIVE CONDUCT
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Wednesday, June 25, 2025
House of Representatives
Subcommittee on the Administrative State,
Regulatory Reform, and Antitrust
Committee on the Judiciary
Washington, DC
The Subcommittee met, pursuant to notice, at 10 a.m., in
Room 2141, Rayburn House Office Building, the Hon. Scott
Fitzgerald [Chair of the Subcommittee] presiding.
Members present: Representatives Fitzgerald, Jordan, Issa,
Cline, Gooden, Hageman, Harris, Nadler, Raskin, Garcia, and
Johnson.
Mr. Fitzgerald. The Subcommittee will come to order.
Without objection, the Chair is authorized to declare a
recess at any time.
We want to welcome everyone to today's hearing on ``The
Proxy Advisor Duopoly's Anticompetitive Conduct.''
I will now recognize myself for an opening statement.
Today, we are here to examine a deeply concerning threat to
our system of free enterprise and competitive markets, the
foreign-owned proxy advisor duopoly. Institutional Shareholder
Services, or ISS, and Glass Lewis control more than 90 percent
of the proxy advisor market and can sway, roughly, one-third of
the vote on any shareholder proposal.
These foreign-owned proxy advisors use their power to act
as de facto regulators of American companies, dictating the
outcome of board elections and major business proposals. They
set their own politically motivated agenda and pressure U.S.
companies to
comply.
ISS and Glass Lewis are not regulatory agencies subject to
APA requirements. They are not fiduciaries that owe a
responsibility to investors, and they are certainly not elected
officials answering to the American voters. Yet, they have
become unsupervised referees for every major corporate decision
in America.
One negative recommendation from this duopoly can erase
millions of dollars in market capitalization overnight. Just
ask America's oil and gas producers, who have seen their boards
reshuffled, or the American manufacturers forced to adopt
costly emissions targets not required by any statute or
regulation.
American companies live in constant fear of a proxy advisor
duopoly that owes no responsibility to anyone. Even more
concerning, both of these gatekeepers are foreign-owned. The
strategic direction of American enterprise is being ghost
written in other countries, then rubberstamped on U.S. proxy
statements. That should concern just about everyone who is here
today who cares about our economic system or America's
competitiveness in the global arena.
Today's hearing will show how ISS and Glass Lewis wield
power in shaping policy entrenched in their duopoly and
stifling all competition.
Consider their involvement in the climate cartel. This
committee has already shown how ISS and Glass Lewis colluded
with climate activists, the world's largest asset managers, and
international nonprofits to impose radical ESG mandates on U.S.
companies.
While this Subcommittee has been encouraged by the progress
made by asset managers to return to its foundational model, the
proxy duopoly remains the largest impediment to ensuring our
capital markets are focused on growing America's retirement
investment accounts.
Through their recommendations, ISS and Glass Lewis pressure
businesses to slash reliable energy production, adopt DEI
quotas, and reroute capital away from lawful, and profitable
endeavors. This is not responsible for corporate governance. It
is policymaking by proxy, and it is putting politics over
profits.
What is the cost of this activism? Higher prices for
consumers, lower returns for retirees, and a distortion of
American capitalism.
If that were not bad enough, ISS and Glass Lewis engage in
a blatant conflict of interest, selling consulting services to
the very companies they issue recommendations against and
punishing the ones that refuse to pay. In a mafia-style
shakedown, companies are forced to pay for the duopoly's
consulting services at the risk of retaliation during the next
proxy season. This is not objectivity or sound corporate
governance. It is a coerced, pay-to-play system that harms
businesses and investors alike.
How do the proxy advisors maintain their market power? They
don't just issue voter recommendations; they control the very
systems that investors use to vote through their voting
platforms, and through those, the ISS and Glass Lewis make sure
most investors never see another advisor's recommendations
before casting their vote.
The rival proxy advisors cannot access these systems, and
public companies cannot reasonably avoid them. This is the
exact kind of gatekeeping that our antitrust laws were written
to prevent.
Because ISS and Glass Lewis have complete control over
these platforms, they can preload each ballot with their own
recommendations. When investors rely on the default settings,
as many do, a massive number of shareholder votes move to
lockstep with the duopoly's ideological agenda. In practice,
that means two private foreign entities can shift approximately
one-third of the shareholder vote on any given proposal, and it
works.
In 2022, when the New York City Pension Fund filed a
shareholder proposal requesting an audit of Starbucks' labor
practices, the duopoly lent its support, and the proposal
passed with 52 percent.
That same year, ISS and Glass Lewis supported a resolution
requesting McDonald's conduct a third-party civil rights audit.
That proposal was adopted as well.
Congress cannot continue to allow foreign-owned proxy
advisors to regulate the practices of American companies. We
certainly cannot allow them to continue strong-arming companies
into purchasing their consulting services.
That is why I have introduced the Stopping Proxy Advisors
Racketeering Act, which would prevent these advisors from
offering consulting services on the very recommendations that
give them power.
I would also encourage our competition authorities at the
DOJ and the FTC to take note of this hearing and consider
focusing their attention and resources on studying the
potential anticom-
petitiveness and the effects of this proxy duopoly.
Congress must make sure that American corporations answer
to shareholders and the U.S. law, not foreign interests.
Today's hearing is the first step toward doing just that.
Our witnesses today have firsthand knowledge of how this
system operates and the effects it has on American businesses.
Mr. Sean Egan is the Co-Founder and President at Egan-Jones
Rating Company. Egan-Jones is one of the few proxy advisor
firms competing against this massive duopoly.
Mr. Charles Crain is the Managing Vice President of policy
at the National Association of Manufacturers. He represents
American manufacturing firms that have experienced the harmful
impacts of the proxy advisor duopoly.
Mr. Caleb Griffin is an Associate Professor of Law at the
University of North Carolina Law School. He has done extensive
scholarly work on the corporate governance, proxy advisors, and
related systematic reforms.
I want to thank each witness for appearing before us today
and look forward to your insights.
I now recognize the Ranking Member, Mr. Nadler, for his
opening statement.
Mr. Nadler. Thank you, Mr. Chair.
Thank you to our witnesses for being here today.
Yet again, our Republican colleagues are pushing baseless
allegations of antitrust violations at the expense of American
consumers. Today's hearing alleges collusion between the two
largest proxy advisors, consulting firms that provide analysis
and recommendations to institutional investors, such as pension
funds and employee benefit plans, on how to vote their shares
at companies' shareholder meetings.
The Republicans' theory: That these two companies,
Institutional Shareholder Services, or ISS, and Glass Lewis,
work together to push ideological goals over financial reform.
They allege that these proxy advisors advance socially liberal
policies at the expense of their investors, their customers'
return on investment, and their own businesses. Like so many of
the flawed antitrust theories the Republicans have brought
before this Committee, it simply does not hold water.
Proxy advisors are a vital tool for investors. While deep-
pocketed companies or clients can do assessments of proxy
materials in-house, retail investors and mutual funds rely on
expert independent advice from large proxy firms like ISS and
Glass Lewis.
Proxy advisors inform their customers about the hundreds,
and sometimes thousands, of complex proposals they may be
called on to consider, helping them to fully exercise their
rights as shareholders of publicly traded companies.
They do this by providing independent assessments of
company proxy materials and shareholder proposals. Anyone in
the financial services industry understands the value of
trusted information. Customers pay ISS and Glass Lewis, and
sometimes both companies, or even a third service, for
independent assessments of company proxy materials and
shareholder proposals.
To be clear, no one is forcing these customers to pay for
their services, and no investor is bound by their subscription
to ISS or Glass Lewis to follow their recommendations. The fact
the companies generally do follow their advice is a reflection
of the hard work proxy advisors do to ensure that their
recommendations are in line with the goals and values of their
clients. They do not leverage their market power over their
clients' independent determinations. If their customers do not
like their information or their advice, they can stop
subscribing to ISS or Glass Lewis at any time. We should
remember that it is the investor, not the proxy advisor, that
casts the ultimate vote at shareholder meetings.
Proxy advisors can be particularly beneficial to pension
funds by allowing them to maximize returns for their
beneficiaries by reallocating resources that would otherwise go
to analyzing the vast quantity of shareholder proposals they
face.
Take New York, for example. As of 2018, it was the third
largest public pension plan in the Nation and held $207.4
billion in assets. These assets are overseen by the New York
State Controller's Office and are held on behalf of more than
one million members of the New York State and local retirement
systems.
The Controller's Office, like its counterparts in other
States, takes advantage of proxy advisory services to be better
informed about the companies to which they have invested public
employees' funds. The majority's baseless attacks on the proxy
advisor market may force New York's, and other pension funds,
to expend unnecessary resources by conducting their own
shareholder analyses, which could undermine their ability to
deliver strong returns for their beneficiaries.
Once again, the Majority has invented a flawed antitrust
theory to justify its attacks on an industry it does not like.
Although the vast majority of investor proposals are
uncontroversial, such as uncontested board elections or the
approval of company-nominated slates of electors, they are a
tiny fraction of issues concerning social governance that the
Majority labels DEI or proposals that, quite reasonably,
consider the risks of climate change in making responsible
investment decisions.
In each case, proxy advisors conduct an independent
analysis and offer their best advice to their clients, who are
free to make their own independent judgment on how to vote.
Republicans do not like some of the recommendations that these
two proxy advisors have made, and therefore, as has become
commonplace in this Committee, they have launched another
unfounded antitrust investigation designed purely to intimidate
and harass their opponents.
During the last Congress, the Republicans a fatally flawed
antitrust investigation targeting investment groups that
consider environmental, social, and governance, or ESG,
strategies. Now, the Majority is following the same playbook
and arguing that ISS and Glass Lewis are conspiring to advance
pro-ESG and pro-DEI recommendations, in spite of a lack of
evidence.
This fact-free investigation is all part of the
Republicans' larger goal of entrenching corporate interests and
conservative political preferences. The Republicans' focus on
alleged collusion between ISS and Glass Lewis not only furthers
their culture war campaign, but also allows them to target and
dilute shareholder rights that would otherwise threaten the
interests of their corporate allies.
The Majority alleges collusion between ISS and Glass Lewis
because they often issue similar recommendations, but this
reflects incredibly shallow analysis. If you go to multiple
doctors and they each diagnose you with cancer, that is not
evidence of collusion.
In this case, fair and impartial analyses of market
conditions and best practices are yielding similar conclusions.
There is nothing nefarious about this.
Proxy advisory firms empower shareholders to exercise their
own judgment and expertise. The market is working as it should.
Yet, Republicans are trying to meddle in it for political
purposes. I urge my colleagues to end this fishing expedition
and to focus on the real issues our constituents face.
I look forward to hearing from the witnesses, and I yield
back.
Mr. Fitzgerald. The gentleman yields back.
I now recognize the Chair of the Full Committee, Mr.
Jordan, for his opening statement.
Chair Jordan. Thank you, Mr. Chair.
I want to thank our witnesses for being here today.
I especially want to thank the Chair for the work he is
doing on exposing this duopoly and what they have been up to.
This is an important hearing and an important subject.
With that, I yield back.
Mr. Fitzgerald. The gentleman yields back.
I now recognize the Ranking Member of the Full Committee,
Mr. Raskin, for his opening statement.
Mr. Raskin. Mr. Chair, thank you very much.
Today's hearing is another installment in what I'm thinking
of as a series of nonantitrust antitrust hearings. Because my
Republican colleagues seem so confused on the subject, I think
a basic primer on what antitrust means may be in order.
The Supreme Court has compared the antitrust laws to the
Magna Carta of free enterprise that is as important to the
preservation of economic freedom in our free enterprise system
as the Bill of Rights is to the protection of fundamental
personal freedom.
Robust antitrust enforcement is vital for everyone in
American society--from consumers to workers, to innovators, and
to citizens. Antitrust is fundamentally about making sure the
marketplace is an open and fair terrain for companies to
innovate and compete.
Now, like Donald Trump, our GOP colleagues seem to think
that antitrust is about Congress and the President picking
business favorites to help and punishing business companies
they disfavor. That has got nothing to do with antitrust, free
markets, or fair competition. That is just gangster-State
economics. That is how a business operates in authoritarian
societies.
Our colleagues accuse two proxy advisors, ISS and Glass
Lewis, of colluding to advance a progressive agenda when they
make recommendations to their clients in advance of shareholder
meetings. Well, of course, on the Antitrust Subcommittee, we
should be concerned about collusion in the market. As Justice
Scalia warned, ``the supreme evil of antitrust is collusion.''
That's Verizon v. Trinko.
Collusion between competitors with the intent to fix
pricing is per se illegal. You would think that, if our
colleagues were going to use their bully pulpit to charge two
companies with the ``supreme evil of antitrust,'' they would
come armed with mountains of compelling, unassailable, and
ironclad evidence. Even their own witnesses are not alleging
collusion.
It reminds me of when the Oversight Committee had an
impeachment hearing against President Biden in the last
Congress, and none of their expert witnesses could identify
evidence of impeachable high crimes and misdemeanors. Instead,
they couldn't find sufficient quantum of evidence.
It is not like my colleagues haven't been warned. The
Supreme Court has gone out of its way to explain, quote, ``An
allegation of parallel conduct and a bare assertion of
conspiracy will not suffice,'' to constitute an antitrust
violation. That is exactly what our colleagues are doing here.
They are making allegations based on the independent market
actors sometimes taking parallel positions, and then, asserting
collusion without any proof. I don't believe that there is even
an assertion of price fixing going on.
Now, you might chalk this up to just confusion about
antitrust law and an innocent mistake, but our colleagues are
using these allegations to intervene in and distort the market,
and to target ideas and actors they simply disfavor; they don't
like.
They did this last Congress by targeting carbon-conscious
investors for daring to use their rights as shareholders to
push oil companies to invest in renewable fuel and position
these companies to be more competitive in the face of the
pervasive threat of climate change--a global emergency that,
obviously, will have a direct effect on the bottom line of
fossil fuel companies.
Now, the majority wields this same empty theory of
antitrust harm against proxy advisors. Why? Simply because
these companies help shareholders, including those committed to
responsible investing, maximize their rights as part owners of
publicly traded companies. Antitrust collusion is now the all-
purpose GOP name for any market activity or commercial or
political speech that they disagree with.
The proxy advisors are plainly responding to a marketplace
demand. If they weren't, they wouldn't be in business. They are
responding to the needs and the requests of their customers.
There is an increased appetite among shareholders to invest
responsibly. Some don't want to invest in businesses
contributing to climate change or to gun violence. Some don't
want to invest in companies doing business with Iran or Russia,
or other repressive countries. These investors, proxy advisors'
clients, want to exercise their rights as shareholders to push
for changes to corporate governance and policy in the companies
where they own shares. They have got every right to do so.
Proxy advisors like ISS and Glass Lewis go through hundreds
of thousands of pages of proxy materials and give their
customers their independent assessment of shareholder
proposals, helping them decide whether to support or oppose
them. Their only role is to provide information for their
clients to enable them to exercise their rights. These
companies have every right to issue their assessment of these
proposals. It is protected as commercial speech, just as their
clients have a shareholder right to propose, consider, and vote
on them.
To be clear, the issues they are called to evaluate are not
just progressive shareholder initiatives. True, my colleagues
seem worked-up about shareholder initiatives that call for
things like an audit of child labor practices in the meat
packing industry or an assessment of working conditions in
commercial warehouses that have an extraordinary rate of
workplace injuries.
The exercise of shareholder rights is not, and has never
been, a one-sided partisan exercise. Over the past several
years, there has been record growth in shareholder proposals
from conservative groups, like the proposal at Disney to demand
that the company sever its ties with the Human Rights Campaign
and with different kinds of gay and lesbian policies. They have
got every right to do that. That proposal failed, just like
many progressive shareholder proposals failed, and even if it
succeeded, let me remind you that these proposals are entirely
nonbinding. They can give expression to shareholder of concerns
of the right to left of the center, but they can't force a
company to do anything at all.
What is the real problem here? Why are we repeating a
hearing that the Financial Services Committee just had at the
end of April? Why are we concerning ourselves with supposed
conflicts of interest, when the SEC has already addressed them
with rules proposed under Trump and kept under Biden?
We are here because it seems the Trump Administration
doesn't seem to believe in allowing voters to be informed.
Instead, they are making it harder for voters to learn about
the issues and tougher for voters to cast their ballots,
especially when they are likely to disagree with them.
Shareholder rights, like citizen rights, are protected by
law. This empty theory of antitrust harm infringes on the free
market, on the rights of shareholders, and on the ability of
shareholders to be informed about what companies are doing.
Antitrust should not be used to censor political or commercial
speech, to distort markets, or to disenfranchise shareholders.
This is censorship masquerading in the language of antitrust
analysis.
I thank my colleagues, and I yield back to you, Mr. Chair.
Mr. Nadler. Mr. Chair?
Mr. Fitzgerald. The gentleman yields back.
Mr. Nadler. I have two unanimous consent requests.
Mr. Fitzgerald. State your requests.
Mr. Nadler. OK. I ask unanimous consent to enter into the
record a summary provided by ESG strategeies Diligent, dated
December 21, 2023, which lists the new competitors expanding
the proxy voting advice industry in the United States: Egan-
Jones Proxy Services, Segal Marco Advisors, and ProxyVote Plus.
I have a second unanimous consent request. I ask unanimous
consent to enter into the record an article from The Guardian
titled, ``Sustaining Corporations Perform Better Financially,
Report Finds,'' which finds that, quote, ``Corporations that
are actively managing and planning for climate change secure an
18 percent higher return on investment than companies that
aren't--and 67 percent higher than companies who refuse to
disclose their emissions.''
This puts to bed the tired and false talking about the
sustain-
ability- and diversity-focused shareholder proposals hurt the
savings of everyday people. Quite the opposite is true.
Mr. Fitzgerald. Without objection. We will now introduce
today's witnesses.
Mr. Sean Egan. Mr. Egan is Co-Founder, President, and CEO
of Egan-Jones Company, a credit-rating and proxy advisor firm.
Prior to founding Egan-Jones, Mr. Egan was a commercial and
investment banker in the financial industry.
Professor Caleb Griffin. Mr. Griffin is an Associate
Professor of Law at the University of North Carolina School of
Law. His research focuses on business organizations, contracts,
corporate law and governance, secured transactions, and
technology and the law.
Mr. Charles Crain. Mr. Crain is the Managing Vice President
of Policy at the National Association of Manufacturers, where
he oversees the association's advocacy efforts on behalf of
manufacturers in America. He previously was the Vice President
of Domestic Policy at NAM, working at the Biotechnological
Innovation Organization, and as a House and Senate staff
member.
Ms. Nell Minow. Ms. Minow is the Chair of ValueEdge
Advisors, an institutional investor advisory firm. She
previously was the Co-Founder and Director of GMI Ratings, and
was editor and co-founder of its predecessor firm, The
Corporate Library.
We welcome our witnesses and thank them for appearing
today.
We will begin by swearing you in. Would you please rise and
raise your right hand?
Do you swear or affirm under penalty of perjury that the
testimony you are about to give is true and correct to the best
of your knowledge, information, and belief, so help you God?
Let the record reflect that the witnesses have answered in
the affirmative.
Thank you. You can please be seated.
Please know that your written testimony will be entered
into record in its entirety. Accordingly, we ask that you
summarize your testimony in five minutes.
Mr. Egan, you may begin.
STATEMENT OF SEAN EGAN
Mr. Egan. Chair Fitzgerald, Ranking Member Nadler, and the
Members of the Subcommittee, thank you for the opportunity to
testify today.
I'm Sean Egan, Co-Founder and Managing Director of Egan-
Jones. Egan-Jones has two primary businesses, a credit-rating
agency registered with the SEC and a proxy advisory business.
I'm testifying today on behalf of the proxy advisory business.
The Egan-Jones Proxy Services was established in 2002 and
has become the leading independent proxy advisor. Unlike the
other two major proxy advisory firms, Egan-Jones does not offer
corporate consulting services, which creates an unmanageable
conflict of interest. In our opinion, disclosures and perceived
firewalls do not sufficiently mitigate the inherent conflicts
of interest. Additionally, unlike our foreign-owned
competitors, Egan-Jones Proxy Services is owned and operated in
the United States. U.S. capital markets are not well-served by
the duopoly of ISS and Glass Lewis, whose combined market share
exceeds 90 percent.
Our clients rely on our recommendations for voting on
corporate matters, such as director elections, compensation,
M&A, and other events. While we offer several methodologies,
our fastest-growing one is our wealth-focused approach. That is
because Egan-Jones believes the vast majority of investors are
investing in savings and retirement. The policy is not board-
aligned because directors with poor impact on shareholder
returns will be opposed. Policymakers should focus on
legislative and regulatory proposals that bring competition to
the marketplace by focusing on the following recommendations,
which can be summarized as the 4Ps:
(1) LPlatforms. Make them neutral. Currently, ISS provides
a voting platform that is used by the bulk of institutional
investors. For years, Egan-Jones has tried to be included
widely in the platform--with little success. The platform
carries Egan-Jones' recommendations, but only if a client
explicitly requests those recommendations. For all other
potential customers, ISS hides Egan-Jones as an option.
Further, ISS refuses to provide critical information such as
voting deadlines, making it difficult for us to service
clients.
(2) LPurse. No one can serve two masters. Proxy advisory
firms should not provide corporations with governance,
executive compensation, DEI, and ESG ratings, thereby creating
an unmanageable conflict of interest. A wall between the
businesses does not address the underlying conflict, as ratings
or assessments from the consulting side are, typically, used by
the proxy advisory side. Companies feel obligated to purchase
consulting services from ISS and Glass Lewis, so that they will
receive better outcomes at the ballot box. Others view this as
a shakedown.
(3) LPolicies. Expand access to alternative proxy advisory
methodologies via voting choice platforms. Policymakers should
continue encouraging these reforms, so investors have great
choices.
(4) LPractices. End robo-voting and other dubious
practices. Shareholders' votes are critical to the proper
functioning of the economy. Abdicating that responsibility
should be disallowed. Examples of dubious practices including:
(a) Always voting with management, or (b) voting in a manner
that replicates the voting of other investors, which is also
known as mirror voting.
I commend Representative Fitzgerald's draft legislation,
the Stopping Proxy Advisors Racketeering Act. The legislation
would prohibit proxy advisory firms from offering consulting
services.
In conclusion, the 4Ps make this market dysfunctional and
impede competition.
(1) LPlatform. ISS's platform is pervasive, and access is
restricted. Additionally, information needed for competing
proxy advisors should be readily available.
(2) LPurse. Charging corporations for consulting services
creates an unmanageable conflict of interest.
(3) LPolicies. Expand access to alternative proxy advisors'
methodologies via voting choice programs.
(4) LPractices. End robo-voting and other dubious
practices.
These factors impede the market and make it more difficult
for Americans to save for a meaningful retirement.
Thank you again for inviting me to testify.
[The prepared statement of Mr. Egan follows:]
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Mr. Fitzgerald. Thank you, Mr. Egan. Professor Griffin, you
may begin.
STATEMENT OF CALEB N. GRIFFIN
Mr. Griffin. Chair Fitzgerald, Ranking Member Nadler, Chair
Jordan, Ranking Member Raskin, and distinguished Members of the
Subcommittee, thank you very much for inviting me to testify
this morning.
Proxy advisory firms wield substantial influence over
corporate governance, acting as pivotal intermediaries between
publicly traded corporations and institutional investors. In
our classic archetype of the corporation, shareholders possess
both economic and voting rights. Today, however, investors
often provide monetary investment, while firm-level voting
rights reside with another party. This introduces additional
complexity into the governance process. How can intermediaries
vote for such a large number of shares? How do we ensure that
they possess strong incentives to vote them well?
Proxy advisors have become the de facto answer to the
former question, and I would suggest that we have yet to
adequately solve the latter. Owners have strong incentives to
care about the governance impact of various policies because it
is their own money on the line, but this simply isn't true for
many intermediaries. Proxy advisors, in particular, do not
capture any of the gains or suffer any of the losses from share
price movements. They are effectively insulated from the
consequences of their governance decisions, either good or bad.
This insulation weakens the responsiveness to investor
concerns, generates potentially significant conflicts of
interest, and may lead to misalignment with investor
priorities.
In my view, the key issues in the proxy advisor industry
can be consolidated into three broad categories: Concentration,
competition, and conflicts.
First, concentration. As others have noted, just two firms,
Institutional Shareholder Services and Glass Lewis control
roughly 90 percent of the market for proxy advisory services.
This, essentially, duopolistic structure significantly limits
the range of governance opinions available to investors, and it
may generate biases or amplify inaccuracies, potentially
diminishing the health of our capital markets.
Moreover, the concentrated nature of the proxy advisor
industry enhances the influence of the major proxy advisory
firms over firm-level voting outcomes. Research has suggested
that ISS and Glass Lewis hold considerable sway over
institutional investors' voting behavior. For instance, equity
plan proposals, uncontested director elections, and proxy
contests receive 17 percent, 18 percent, and 73 percent more
votes in favor, respectively, when supported by ISS. Likewise,
a favorable recommendation from Glass Lewis generates 16
percent more support for say-on-pay votes, 12 percent more for
equity plan proposals, and 64 percent more for proxy contest
ballot items.
Second, the proxy advisory industry would significantly
benefit from enhanced competition. A key point here is that it
is not only the number of meaningful competitors that may be
deficient, but also the nature of that competition. Currently,
proxy advisors often cater to the needs and preferences of
intermediary agents rather than those of the actual investors
and beneficiaries whose retirements are at stake.
Third, and perhaps most critically, proxy advisors suffer
from important conflicts of interest. For instance, both ISS
and Glass Lewis offer certain consulting services, whereby
these advise clients on governance issues, and subsequently,
influence voting outcomes on those very issues. Thus, major
proxy advisors may occupy multiple roles, playing the part of
advisor and arbiter.
For example, consider governance decisions related to
executive compensation. ISS issues voting recommendations on
thousands of say-on-pay votes that occur every year. Research
suggests that a negative recommendation from ISS on say-on-pay
proposals is associated with a 25 percent lower rate of support
overall--an impact that, in the words of one scholar, is
indicative of ``strong influence of overshielded votes.''
Companies seeking to garner a favorable recommendation from
ISS may be motivated to purchase a service that it calls
``executive compensation solutions.'' For an undisclosed fee,
companies can consult with a compensation expert to design,
monitor, and communicate executive pay programs. The fact that
ISS is judging the merits of the same executive compensation
packages it was paid to advise heightens the risk of
problematic conflicts of interest. Companies and investors may
perceive, accurately or not, that paying a proxy advisor for
governance consulting will influence their voting
recommendations. Although the dominant proxy advisors may take
internal measures to help ameliorate this challenge to the
objectivity of the recommendations, there is, to my knowledge,
no clear regulatory protection.
Much as Sarbanes-Oxley addressed similar conflicts of
interest in the context of accounting firms, some of the draft
legislation in Congress today, such as the bill by Congressman
Fitzgerald, aims to provide analogous protection in the proxy
advisory context.
In my view, the disclosure and prevention of conflicts of
interest in our financial markets is not a partisan issue, but
rather an important protection for investors, companies, and
the American capital markets.
Thank you very much for inviting me to testify and I look
forward to your questions.
[The prepared statement of Mr. Griffin follows:]
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Mr. Fitzgerald. Thank you, Professor Griffin. Mr. Crain,
you may begin.
STATEMENT OF CHARLES CRAIN
Mr. Crain. Good morning, Chair Fitzgerald, Ranking Member
Nadler, Ranking Member Raskin, and the Members of the
Subcommittee.
My name is Charles Crain, and I'm the Managing Vice
President of policy at the National Association of
Manufacturers.
Manufacturers have long understood that the proxy firm
duopoly of ISS and Glass Lewis has a significant and damaging
impact on their businesses. Proxy firms' outsized influence
dictates corporate decisions and it distracts from the long-
term best interests of Main Street shareholders. Yet, these
firms remain stubbornly unregulated.
ISS and Glass Lewis have cornered the market on proxy
voting advice and they have not been shy about using their
market position to create a feedback loop of power and
influence--at the expense of investors saving for a new home, a
child's education, or a secure retirement.
Let's start with the facts of this duopoly. ISS and Glass
Lewis together control 97 percent of the proxy advice market.
This dominant position insulates the firms from
accountability--to the point where the two market players, as
has been discussed, have significant conflicts of interest and
are widely recognized as offering error-filled, opaque, and
one-size-fits-all advice, and yet, they still enjoy market
dominance. In other words, when two entities run the show, they
can run it however they please, and everyday people are the
ones who pay the price.
Bolstering this power are the firms' voting platforms. Now,
these platforms do provide a legitimately useful service. They
connect institutional investors to the back-end of the proxy
voting system. ISS and Glass Lewis use their proxy voting
platforms to push their clients toward their proxy voting
research and recommendations. They will even prefill the
platform with their preferred votes, and then, robo-vote an
investor's shares on their behalf. This system, which would be
virtually impossible for a new market entrant to replicate,
leverages the utility of these platforms to push clients toward
their voting recommendations.
Now, let's turn to those voting recommendations themselves.
First and foremost, these recommendations are powerful. ISS
and Glass Lewis can swing the outcome of shareholder votes--
meaning they, effectively, set corporate governance standards
for the entire market. This usurps the authority of corporate
boards and of the SEC, and it ensures that investors need to
hire proxy firms and that companies need to pay them.
Further, proxy firms' recommendations are both complicated
and opaque. This effectively forces companies to purchase those
consulting services to understand the firms' complex
methodologies. The proxy firms' standards appear designed to
increase their own market power, often at the expense of
companies and shareholders.
Take, for example, proxy firms' insistence on annual say-
on-pay votes, when Congress has made explicitly clear that
annual votes are not required. Who benefits from forcing annual
votes more than ISS and Glass Lewis, who will be paid to
provide voting recommendations for each and every one of these
votes across thousands of public companies every single year?
Similarly, on some issues, the proxy firms require
companies to meet a supermajority vote threshold to avoid a
future negative recommendation. The easiest way to fail to meet
that threshold, of course, is to have ISS or Glass Lewis
recommend against the company. A negative vote recommendation
can depress shareholder support, which, in turn, leads to more
negative vote recommendation, which further depresses
shareholder support on more issues and more nominees, and on
and on and on--and all the while, the company, manufacturers
across the country are being pitched by proxy firms' consulting
services to just pay up and avoid this costly and self-
perpetuating cycle.
These complicated fact patterns keep emerging because proxy
firms operate with conflicts of interest baked into their
business models. One-half of a proxy firm operating a
consulting service to help companies avoid a negative
recommendation from the other half of the some proxy firm is a
per se risk to investors--raising the specter which we have
seen time and time again of recommendations that are designed
to enrich the firms rather than benefit investors.
That is why manufacturers support Chair Fitzgerald's
legislation to prevent proxy firms from offering supposedly
neutral proxy voting advice if they have a conflict of interest
poisoning their objectivity. Manufacturers understand the
stakes of getting this right, and we stand ready to help
Congress rein in the proxy firm duopoly and institute much-
needed guardrails that address proxy firms' conflicts of
interest, their errors, their robo-voting, their one-size-fits-
all standards, their ESG agendas, and more.
Thank you.
[The prepared statement of Mr. Crain follows:]
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Mr. Fitzgerald. The gentleman yields back. Ms. Minow, you
are not recognized for five minutes.
STATEMENT OF NELL MINOW
Ms. Minow. Thank you very much, and thanks to the Committee
for including me.
When I worked in the Reagan Administration, one of the
things that I was proudest of was our commitment to free
markets and to reducing nanny-state-type regulations. I feel
like I'm a little bit through the looking glass here today
because it is very disappointing to me to hear the Republicans
on this Committee want to interfere with the most robust free
market evolution of a product that I could possibly imagine.
It meets every one of the criteria that I learned at the
University of Chicago. The proxy advisory firms rose to meet a
need that began in the 1980s. In fact, I was there at the
beginning of ISS. We intended to have a different product
entirely, and everybody we talked to said, ``What we want is
proxy voting recommendations.''
Nobody has to buy it. Nobody has to follow their
recommendations. They are purchased by the most sophisticated
financial professionals on the planet. What I'm hearing here is
a lot of vague allegations that are not supported.
If ISS and Glass Lewis are too powerful, corporate America
should be popping champagne corks. They recommend votes with
management 96 percent of the time. I would love to hear from
America's corporations why four percent of the time a
suggestion that perhaps they might disagree with management is
too much. It is very disappointing to me to hear corporations
say they don't want to hear from their shareholders and they
don't want independent advice to be available to them.
If there are more votes against pay packages because of
proxy advisor recommendations, that is because those pay
packages have been determined by market forces to be too much.
I suggest you look at Mr. Zaslav's pay package, which did get a
majority against. Remember, though, those votes, as Mr. Raskin
pointed out, are nonbinding. Even a 100 percent vote in favor
of whatever shareholder proposal that you don't like, if it is
about the environment or ESG, a company doesn't have to follow
it and companies do ignore these votes, even a 52 percent vote,
all the time. Why they wouldn't want this very low-pressure
mechanism for delivering the comments about shareholder
concerns, I do not understand.
I hear terms like ``dictates'' and ``stubbornly
unregulated.'' The last people who need the nanny State
stepping in are these financial professionals, the largest
investors. Proxy advisor services are not sold to individual
households. There are new entrants all the time. I personally
use one that is nonprofit and free for my accounts. We have
ones that are more pro-ESG. We have ones that are explicitly
anti-woke, anti-ESG.
Public corporations are currently devoting enormous amounts
of money and effort--and I might say creativity--to coming up
with ways to cutoff shareholder oversight and including
restricting the sole sources of independent research on matters
presented to them for their approval. Really, the worst you can
come up with is that they want to review pay annually instead
of every three years. Congress gave shareholders the right to
choose whether they wanted to look at say-on-pay annually or
every three years. They choose annually. ISS doesn't get paid
by the vote. It is more work for them for the same pay. That is
just completely wrong.
I strongly urge this Committee to allow the free market to
operate.
Thank you very much.
[The prepared statement of Ms. Minow follows:]
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Mr. Fitzgerald. Thank you very much.
I will now proceed under the five-minute rule with
questions.
The gentlewoman from Wyoming--
Mr. Nadler. Mr. Chair, I have a unanimous consent request.
Mr. Fitzgerald. The gentleman is recognized. Can we hold
some of these until the end, I guess?
Mr. Nadler. OK, after this one.
Mr. Fitzgerald. OK, go ahead.
Mr. Nadler. I ask unanimous consent to enter into the
record an article dated July 31, 2024, entitled, ``ESG: Illegal
Conclusion or Just Good Business Sense?'' which explains how,
quote,
Limiting investors' ability to assess risk and reducing
competition for financial services is detrimental to investors'
returns in these, and the people who are paying the price for
this are the constituents--the firefighters, the police
officers, and the teachers.
Mr. Fitzgerald. Without objection. The gentlewoman from
Wyoming is now recognized for five minutes.
Ms. Hageman. I'm sorry, but this sounds like a racket. I
can just hear, ``That's a nice company you have there. It would
be a tragedy if something happened to it.''
Wow, about 70 percent of publicly traded equity shares are
held by institutional investors rather than individuals. ISS
and Glass Lewis control at least 90 percent of the proxy
advisor market, exerting influence over $20 trillion in
investor assets. Glass Lewis is owned by two Canadian financial
institutions and ISS by a German corporation. Yet, together,
they dictate votes for most of America's publicly traded
companies.
Mr. Egan, should foreign-owned businesses hold that kind of
power and control over U.S. companies?
Mr. Egan. Thank you very much for the question.
In our opinion, for capital markets to work properly, you
need a diversity of views. Perhaps the biggest concern that
exists in the market is that it is dysfunctional in the sense
that the two dominant proxy advisory firms are not independent;
that they are using the recommendations and the scores and the
ratings on the consulting side to drive their proxy advisory
votes. If they charged nothing for their proxy advisory
services, and basically, using a monopoly on one area--that is,
with the platforms--to extend to the other area, they would be
just fine.
There is relatively little competition because there is
blockage, and those four items that I had mentioned really
should be examined to keep the markets competitive.
Ms. Hageman. Well, do you think that most Americans know
about this foreign ownership or what these companies actually
do?
Mr. Egan. I highly doubt it.
Ms. Hageman. OK. Mr. Crain, with this much control, there
must be an understanding of whether proxy advice actually
aligns with investor preferences, as these firms grow in power
and influence. In your experience in working with U.S.
manufacturers, have these ideology-driven directives, based in
climate change policies, the DEI agenda, ESG policy, and more,
strengthened their competitiveness or added unnecessary costs
and constraints?
Mr. Crain. Thank you for that question, Congressman--
Congresswoman. Excuse me.
I think that the key thing to remember here is that the
proxy advisor firms don't have a fiduciary duty to the
underlying Main Street investors who are saving for a secure
retirement via these larger institutional investors. When they
are making these voting recommendations and casting investors'
votes through their robo-voting services on their behalf, they
have no underlying obligation to those everyday Americans.
Whether that is on everyday corporate governance topics or on
some of the ESG matters that you have described, they have
their own set of beliefs about how corporate America should be
run and they don't have any obligation to align those beliefs
with the financial needs of everyday Americans saving for
retirement in the public market.
Ms. Hageman. Well, listening to the testimony from the four
of you, that is the thing that struck me the most; is that this
seems to be a fundamental violation of these companies'
fiduciary responsibilities to maximize profits for their
shareholders. Do you agree with that, Mr. Crain?
Mr. Crain. I do, and that is a question that has been
raised at the SEC, in fact, of whether and to what extent the
institutional investors who blindly follow these proxy firm
recommendations, or, indeed, allow votes to be robo-vote
without even reviewing what the proxy firms are suggesting,
whether and to what extent they are complying with their
fiduciary obligations, as managing assets on behalf of everyday
Americans saving for retirement.
Ms. Hageman. Mr. Griffin, I would like to turn to you. If
proxy advisors are making recommendations to asset managers who
vote with other people's money, and these recommendations are
politically driven, then is the system actually protecting the
interests of the real owners, such as the retirees and savers,
or is it really furthering the agenda of these other
organizations?
Mr. Griffin. Thank you for the question.
There is a risk that we prioritize different interests than
those of the true investors, those individuals who are working
people, teachers, firefighters saving for their retirement, and
those interests may diverge from the intermediaries who hire
the proxy advisory firms. I think that is a risk.
Ms. Hageman. Has the market share of ISS and Glass Lewis
allowed for this shift from protection of real investor
interest to what seems to be a more politically driven agenda,
Mr. Griffin?
Mr. Griffin. That is certainly possible. That the market
concentration and market power that they have has created--
essentially, put them in a quasiregulatory role, in some ways
allowing them to determine things like influence from
materiality standards, standards for director independence, and
effective voting thresholds for board response to shareholder
proposals and--
Ms. Hageman. Well, thank you, gentlemen and Ms. Minow, for
being here today.
I ask unanimous consent to introduce into the record a
document entitled, ``The Conflicted Role of Proxy Advisors,''
from May 2018.
Mr. Fitzgerald. Without objection.
Mr. Fitzgerald. The gentlewoman yields back.
Ms. Hageman. Thank you.
Mr. Fitzgerald. The Ranking Member is now recognized for
five minutes.
Mr. Nadler. Thank you, Mr. Chair.
Ms. Minow, you worked in the DOJ's Antitrust Division. Is
there any evidence that ISS and Glass Lewis are colluding?
Ms. Minow. There is none.
Mr. Nadler. Is there any evidence that they are fixing
prices?
Ms. Minow. There is no evidence of that.
Mr. Nadler. Is there any evidence that they are blocking
new entrants?
Ms. Minow. No. There are new entrants all the time, as I
mentioned, including two nonprofits and two--one started by
Vivek Ramaswamy--that are explicitly anti-woke.
Mr. Nadler. Typically, when competitors collude, they do so
to raise prices. The majority, however, is alleging that ISS
and Glass Lewis are colluding to push ESG and DEI agendas. At
the same time, the Majority is arguing that ESG and DEI issues
are detrimental to the companies that their clients are
investing in. If both things are true, wouldn't this collusion
mean that investors are getting bad advice from proxy advisors,
and that, therefore, the investors would be incentivized to
change providers?
Ms. Minow. Absolutely. Let's remember that the clients of
the proxy advisor services are enormous, multimillion-dollar
financial firms who are very sophisticated and who are
completely driven by shareholder returns. Furthermore, ISS and
Glass Lewis--and I presume all the other proxy advisory firms--
are constantly in touch with their clients saying, ``Do we need
to change our policies to better reflect your priorities?'' The
people who purchase those services are market-driven, and the
people who provide those services are market-driven to meet
their needs.
Mr. Nadler. Thank you.
Are there competitors that these investors could turn to?
We are not seeing a retreat from these firms, isn't that
correct?
Ms. Minow. That's right. If Sean's firm wants to compete
with ISS and Glass Lewis, he should probably try to produce a
better product.
What I really don't understand is why he thinks he has a
right to the platform that they built with their time, with
their energy, and with their expertise. It would be like me
saying, ``I'd like to send my packages through Amazon trucks
because they have got this great infrastructure.'' If he wants
to compete with that, let him build his own; make it better.
Mr. Nadler. Assuming that the Majority is right, these
actions would, presumably, undermine ISS and Glass Lewis' own
bottom lines and revenue, and therefore, would hurt these firms
and damage their position in the market. There is no evidence
of that, is there?
Ms. Minow. There is no evidence of that.
Mr. Nadler. Ms. Minow, the Majority also claims that ISS
and Glass Lewis prevent new market entrants because they
control voting platforms, as well as provide advisory services.
Is this true?
Ms. Minow. No. They developed their own platforms, just as
if you want to log into your account on the bank at a bank or a
brokerage house. They have created their own platforms, and
anyone else can create theirs as well.
Mr. Nadler. Investors are not forced to use the voting
platforms, and thus, they could get advice from ISS and Glass
Lewis, and then, use a separate entity's voting platform, is
that correct?
Ms. Minow. That is correct. ISS told me that, if enough of
their clients asked to have Sean's firm on their platform, they
would add it, but nobody is asking for it.
Mr. Nadler. Thank you.
This hearing is yet another example of my colleagues across
the aisle weaponizing an empty theory of antitrust harm to come
after free speech and the exercise of shareholders' right,
simply because they disagree with the content of that speech
and the exercise of those rights. It is a dangerous use of this
Committee's power, and I urge my colleagues to reconsider.
I yield to the Ranking Member of the Full Committee.
Mr. Raskin. Thank you very much, Mr. Nadler.
Mr. Egan, does your firm--you are, essentially, a
competitor to the two big firms we are talking about, is that
right?
Mr. Egan. Thank you for your question, and the answer is
yet.
Mr. Raskin. OK. Does your firm collude with other proxy
advisors?
Mr. Egan. No.
Mr. Raskin. Do you have an ESG policy for the people you
advise?
Mr. Egan. We do.
Mr. Raskin. Do you have a non-ESG policy for the people you
advise?
Mr. Egan. We don't label it as non-ESG. We have a wealth-
focused policy we--
Mr. Raskin. OK. If I want ESG, I could come to you? If I
don't want ESG, I could come to you? I have got alternatives,
options?
Mr. Egan. That is accurate.
Mr. Raskin. Why do you set up as an array of options like
that?
Mr. Egan. To provide investors with a choice.
Mr. Raskin. You are meeting the needs and desires of your
clients and meeting market demand?
Mr. Egan. That's accurate.
Mr. Raskin. OK. It seems to me that is exactly what your
competitors are doing. I understand you are a new entrant
there, but everybody is responding to a market demand. I
appreciate your candor in answering.
I would yield back. Thank you, Mr. Nadler.
Mr. Nadler. I yield back.
Mr. Fitzgerald. The gentleman yields back.
The gentleman from Texas is now recognized for five
minutes.
Mr. Gooden. Hi, Mr. Griffin. Can you explain what
guardrails, whether legal or regulatory, exist to ensure that
ISS and Glass Lewis provide voting recommendations in the best
financial interest of shareholders, and that they are not
giving conflicting recommendations to clients about the proxy
and shareholder proposals, if those exist?
Mr. Griffin. Thank you for your question, Congressman.
There are very limited legal and regulatory guardrails in
place right now. Currently, there are no direct fiduciary
duties to the ultimate investors, the clients of these
institutional investors, who, in turn, hire the proxy advisors.
When we look at market demand and we use the term
``investor'' to refer not to the people who invested their
money, but to the financial intermediaries who control it, it
can generate incorrect policy insights. In my view, firms like
BlackRock should be considered intermediaries rather than true
investors, essentially, custodians of the true investors'
money.
Mr. Gooden. If I understand this correctly, kind of moving
on down the road of some things I heard earlier, is it accurate
to say that ISS is able to offer advisory services to boards of
directors while also offering recommendations for how
shareholders vote? Is that a thing?
Mr. Griffin. That's correct.
Mr. Gooden. Do you know of any other industry where such an
inherent conflict of interest might exist?
Mr. Griffin. I'm not aware of any. I know that some
analogous conflicts existed in the auditing and accounting firm
context, but Congress took action with respect to those.
Mr. Gooden. The board of directors could be paying for them
for services, and then, also, they are getting paid to
recommend to the proxy advisors. Does that seem right?
Mr. Griffin. It does generate a potential conflict of
interest, yes.
Mr. Gooden. Do you think, Ms. Minow, that there is a
potential conflict of interest there?
Ms. Minow. Yes, I do. That's why I don't buy ISS services,
and I do believe that anybody who does want to buy them should
be able to buy them, understanding what the conflict of
interest is.
Mr. Gooden. Interesting.
Mr. Egan, I think I am hearing that Egan-Jones is taking on
two duopolistic actors, and in doing so, creating a more
competitive marketplace. One of those areas that has been a
particular concern for this Subcommittee has been the ESG
issues, which are inherently politically charged. Do you know
how often ISS and Glass Lewis are voting against the boards of
directors on ESG issues?
Mr. Egan. I do not.
Mr. Gooden. OK. I would like to hear more from you, Mr.
Griffin. This idea of these conflicts of interest, is this a
thing with a business like Mr. Egan's or is this a problem with
just the two big ones?
Mr. Griffin. The specific conflict of interest you're
referring to arises from the provision of consulting services
rather than the proxy advisory service itself. My understanding
is that his firm does not offer those type of services, and the
two largest proxy advisors do.
Mr. Gooden. What do you recommend that Congress should do
to fix that?
Mr. Griffin. Well, there are a number of potential
solutions. Congressman Fitzgerald's bill providing for, again,
disclosure of and regulation of conflicts of interest, Could be
very beneficial in a number of ways, and something analogous to
what we did in the accounting firm context for Sarbanes-Oxley
may be beneficial here.
Mr. Gooden. Thank you. I would yield my extra time to the
Chair, if he has anything.
Mr. Fitzgerald. The Chair is recognized.
Chair Jordan. No.
Mr. Fitzgerald. Yes, well, I will recognize the Ranking
Member for five minutes.
Mr. Raskin. OK. Thank you very much, Mr. Chair.
I'm very new to this whole field, but one thing I have
learned about the proxy service community is that it is one
that favors alliteration. We have platforms, purses, proxies,
and practices; concentration, competition, and conflicts of
interest. Even though they are both ``P'' and ``C'' words, I
didn't really hear anything about collusion or price fixing.
Which leads me to believe that the fact that we are in the
Antitrust Subcommittee today, and we are talking about
antitrust, it is really the use of a metaphor here. I don't
know--perhaps, Ms. Minow, you can correct me. Did you hear any
allegations of an actual antitrust violation from any of your
fellow witnesses?
Ms. Minow. I did not.
Mr. Raskin. OK. Well, I heard a lot about conflicts of
interest. Just to be clear about this, is a conflict of
interest an antitrust collusion?
Ms. Minow. No.
Mr. Raskin. OK. A conflict of interest is not an antitrust
violation. I understand that the whole question of conflict of
interest within this proxy service community is something that
is heavily discussed and contested within the Securities and
Exchange Commission and within our colleagues in the Financial
Services Committee. Am I right about that? Do you know about
that, the conflict of interest?
Well, perhaps I can come to you, Mr. Crain. You are using
antitrust here as a metaphor, the way sometimes people say,
``The Democrats and the Republicans are a duopoly. They control
90 percent or 95 percent of the votes. They control the House
and the Senate.''
Sometimes, actually, that duopoly engages in
unconstitutional practices. In Maryland, if I want to run for
office, I just need one signature. If I want to run as an
Independent, not as a Democrat or a Republican, I need 87,000
signatures.
Although it is not an antitrust violation, strictly
speaking, that metaphor helps to understand why there is a
First Amendment problem there or an equal protection one.
You are just using antitrust as a metaphor? Am I right?
Just help me understand. It is not a ``gotcha'' question. I'm
trying to figure out what we are doing here.
Mr. Crain. Yes, I think it is a fair question from
manufacturers' perspectives. They certainly feel the effects of
this duopoly. I obviously defer to the distinguished Members of
the Subcommittee about whether and to what extent it is
officially an antitrust violation, but certainly manufacturers
have experienced the effects of the market power that these
firms yield.
Mr. Raskin. All right, well, let's talk about conflicts of
interest, then.
Mr. Egan, your firm was actually charged with
misrepresentations by the SEC. It was in 2008 or 2009, is that
right?
Mr. Egan. We have been in NRSO (phonetic) for a number of
years. We have been in the business as a rating firm for over
30 years. There have been a number of regulatory actions.
Mr. Raskin. Let me just speed ahead because I have got so
little time. In 2022, you were charged with a conflict of
interest, is that right?
Mr. Egan. Egan-Jones and I personally reached a settlement
order on the rating side with our regulator in 2022.
Mr. Raskin. In 2022, OK. You were not charged with
antitrust violations then. You were just charged with a
conflict of interest, and you settled that with SEC, is that
right?
Mr. Egan. We reached a settlement in 2022 with our
regulator.
Mr. Raskin. All right. Ms. Minow, do you know whether ISF
has been charged with a conflict of interest by the SEC?
Ms. Minow. They have not.
Mr. Raskin. What about the other one, Glass Lewis?
Ms. Minow. I don't believe they have. I certainly haven't
read anything about it. I know that there have been discussions
about it, but as I said, that is really for their customers to
judge whether that affects their ability to provide independent
research or not.
Mr. Raskin. OK, look, if proxy advisors or the duopolies
that claim them are so omnipotent and they are allegedly
colluding to advance so-called progressive proposals against
corporations, why do the vast majority of the recommendations
actually align with the management view? I would think that
this duopoly is much more in service of the corporate State
viewed from the Right or the Left. Isn't that right?
Ms. Minow. Ninety-six percent of the recommendations are to
vote with management on matters like unopposed board members--
Mr. Raskin. OK. We are having an antitrust hearing about
whether two firms out of many firms that are operating for-
profit and not for-profit that advise companies voluntarily who
want to come and become their customers about how to vote in
shareholder proposals that are nonbinding are engaged in an
antitrust conspiracy. This just blows my mind.
You mentioned one though where I don't know where the
companies were on this, but Zaslav's salary was rejected. It
was a $51.9 million salary, and the shareholders voted that
there was too much money in Disney and the board dropped the
salary by $16 million. What is wrong with that?
Ms. Minow. That is exactly how markets are supposed to
work. I would just say that--
Mr. Raskin. How did the proxy advisors go on that one?
Mr. Fitzgerald. The gentleman's--
Ms. Minow. They recommended a vote against as all the
financial press. It is objectively too much money for that and
yet the companies still can ignore it if they want.
Mr. Fitzgerald. The gentleman's time has expired. The
gentleman from North Carolina is now recognized for five
minutes.
Mr. Harris. Thank you, Mr. Chair, and I thank all of you on
the panel for your testimony today.
Mr. Crain, from my understanding of your testimony, your
organizations argued the proxy advisors should give companies
an opportunity to provide feedback on voting recommendations
and to let shareholders see the dialog prior to a vote. There
was a 2020 rule from the Securities and Exchange Commission
that did expand transparency in this way, although such
requirements were later revised and also struck down by the
courts.
In your view, was this rule effective at all in improving
the proxy advisor ecosystem?
Mr. Crain. Thank you for that question, Congressman. We
certainly believe that that rule would have been effective at
enhancing the degree of transparency and reliable, accurate
information that investors could rely on. As you indicated,
unfortunately, under the previous administration, Chair Gensler
rescinded critical parts to that rule, including the provision
of recommendations to companies so that they could respond
appropriately and it has been tied up in litigation since then.
The NAM is actually a party in that litigation and we are
hopeful that we can defend the SEC's authority, but ISS has
been steadfast in not wanting to be regulated, so we certainly
think that there is more work to be done both by Congress and
by the SEC to ensure that there is an appropriate degree of
oversight of these powerful actors.
Mr. Harris. Well, let me just follow that up then. Now that
this rule is no longer in place, what would you say in your
opinion should be done to increase proxy advisor transparency?
Mr. Crain. Thank you for that question again. I think we
start with the conflicts of interest. Certainly, the Chair's
legislation about outright banning those conflicts is something
that we support. From the SEC side, we have long supported
transparency around those conflicts. Then, the issue that you
raise at the beginning of your line of questioning of allowing
the proxy firms to provide to companies draft recommendations
that they can respond to spot errors and misunderstandings and
most importantly to convey to investors here are the two sides
of this issue and then that way they can make an informed
decision. That is something that we move the ball forward in
the right direction in the 2020 rule, but there is much more
work to be done depending on how the outcome of these court
cases go.
Mr. Harris. Well proxy advisors exist, obviously, because
shareholders don't have time to research the company's policies
before they are called on to help make decisions, so how do you
think having access to more information would be helpful
essentially if shareholders don't look at that information, how
would it improve the proxy advisor's work product?
Mr. Crain. It is critically important that shareholders
have access to all the information they need to make an
informed decision. Unfortunately, under the status quo, we
often see that proxy advisors robo-vote investors' shares
before even reading the proxy firm's recommendation to say
nothing of a potential corporate response to that
recommendation. We really are starting behind the eight ball
here in terms of investor understanding of these issues and
transparency into them. There is much more work that needs to
be done to ensure that investors have the information that they
need to make an informed decision.
Mr. Harris. OK. Thank you very much. Mr. Griffin, when
Americans invest in funds and companies, these entities have a
fiduciary responsibility to act in the best interest of their
investors. Unfortunately, ISS and Glass Lewis have worked
together to push companies to implement ESG agendas. Does
pushing recommendations, Mr. Griffin, favor ESG reflect the
preferences of everyday Americans who are affected by these
decisions?
Mr. Griffin. Thank you, Congressman. That the system is set
up to serve the interests of these intermediaries rather than
the investors to whom they owe fiduciary obligations. When we
speak about it being market driven, I think that there are
important limits on that and to the extent these large
intermediaries favor the current system, favor the status quo,
I find that unsurprising because it is designed to serve their
interests.
Mr. Harris. In your opinion, what would be the most
effective way to help insure proxy advisors are serving the
interests of the American investors and consumers?
Mr. Griffin. Yhere are a number of excellent proposals
throughout some of the bills in Congress today. Conflicts of
interest are particularly a ripe area for looking at just to
ensure the objectivity and neutrality of the recommendations
that proxy advisors provide.
Mr. Harris. Thank you. Thank you very much. Mr. Egan, you
mentioned in your written testimony that unlike your foreign-
owned competitors, Egan-Jones Proxy Services is owned and
operated in the United States. We know ISS is owned by a German
corporation. Glass Lewis is owned by two Canadian financial
institutions. What are the concerns surrounding the fact that
the two leading providers of proxy vote guidance in the United
States are based abroad? Could you expand on that?
Mr. Egan. Yes, and thank you for the question. In my
opinion, the structure of this industry needs attention. The
reason why I say that is because it is very easy for regulators
to push on regulated entities without anybody knowing about it,
without any rules, and without any regulation.
In the case of one of our competitors, ISS is owned by
Deutsche Boerse. My presumption is that on a regular basis,
they are meeting with the regulators because there are so many
issues connected with the stock exchange. Therefore, those
regulators, they might have a completely different view than
what is in the United States for what constitutes something of
value.
Mr. Fitzgerald. Thank you. The gentleman's time has
expired. The gentleman from Illinois is now recognized for five
minutes.
Mr. Garcia. Thank you, Chair Fitzgerald. I heard some very
interesting descriptive language at the beginning of the
hearing, and I want to ask Ms. Minow three quick yes or no
questions, hopefully.
Are you part of a climate cartel?
Ms. Minow. No.
Mr. Garcia. Are you engaged in any racketeering?
Ms. Minow. No.
Mr. Garcia. Have you participated in any Mafia-style
shakedowns?
Ms. Minow. No.
Mr. Garcia. OK. Today's hearing is supposedly about
antitrust issues involving proxy advisors, but what is really
going on here is we are seeing culture war and procorporate
policies being advanced. Republicans argue that Glass Lewis and
ISS have too much power and collude to advance so-called woke
corporate governance. I would agree that any market that is 90
percent controlled by two entities should be scrutinized and
proposals to foster more competition should be considered.
Let's be clear. There is no evidence of collusion between Glass
Lewis and ISS and what are some of the examples of woke
corporate governance where these proxy advisors have
recommended against the company's board's position hasn't been
made.
Reporting on the use of child labor in supply chains for
meat-packing corporations, auditing working conditions at
Amazon, adopting living wage principles at Walmart, reporting
by tech companies on the risk posed by generative AI, deriding
labor rights as woke, gives away the game. Republicans are
always siding with the bosses over workers, and the irony is
that these examples of wokeness are outliers.
Ms. Minow, thank you for being here. Isn't it true that in
2024, ISS recommended voting with management on 96 percent of
management proposals?
Ms. Minow. It is.
Mr. Garcia. Thank you. In your experience including as
President of ISS, have you seen any evidence that ISS and Glass
Lewis are using the recommendations to push a progressive
agenda?
Ms. Minow. No.
Mr. Garcia. You studied at the University of Chicago, did I
hear you correctly?
Ms. Minow. I did. I am from Illinois.
Mr. Garcia. Very well. Thank you. Republicans are trying to
crush shareholder rights to benefit the corporate executives
who disproportionately fund their party, and they continue to
push the narrative about ESG and woke corporate governance to
distract us from the truth. The truth is we are nowhere close
to achieving and economic democracy that would empower workers,
including the worker representation on corporate boards by any
stretch.
The truth is as ridiculous as Republican attacks are
against ESG, we must not allow wealthy corporations to exploit
ESG as cover for their predatory practices, including union
busting, worker exploitation, and consumer fraud. The truth is
that we are living in an oligarchy where increasingly dominant
corporations and billionaires control most of our government
and public policy. The fundamental problem is not proxy
advisors or ESG. It is a government that has been captured by
the wealthy and serves their interest above those of working
people.
I represent a district of working people. If Republicans
had any interest other than protecting billionaires and wealthy
corporations, this Subcommittee would be focusing on policies
that tangibly improve the lives of our constituents. They
don't. To me that is a betrayal of the real working class in
America. Thank you, and I yield back.
Mr. Fitzgerald. The gentleman yields back. I now recognize
the Chair of the Full Committee, Mr. Jordan, for five minutes.
Chair Jordan. Thank you, Mr. Chair. Mr. Crain, what
percentage of publicly traded equity shares are held by
institutional investors and pension funds?
Mr. Crain. It is a very large percentage. I forgot the
exact number. It is North of 80 percent, I believe.
Chair Jordan. Eighty percent. Because of that, most
shareholder votes are cast through proxy voting because the
shareholder can, is that right?
Mr. Crain. That is exactly correct.
Chair Jordan. OK, and proxy advisors advise or recommend to
the institutional investors and the pension funds how they are
supposed to vote. Is that right?
Mr. Crain. That is correct.
Chair Jordan. Is their advice followed?
Mr. Crain. Pardon?
Chair Jordan. Is their advice followed? Is the proxy
advisors' advice typically followed by the institutional
investors and the pension funds?
Mr. Crain. It is absolutely followed and in many cases
their shares are automatically cast by the proxy firms in line
with those recommendations.
Chair Jordan. The institutional investors are doing exactly
what the proxy advisors are told?
Mr. Crain. That is exactly correct, yes.
Chair Jordan. Who are the two largest again, who we have
been talking about?
Mr. Crain. ISS and Glass Lewis.
Chair Jordan. ISS and Glass Lewis. How much of the market
do they control?
Mr. Crain. Ninety-seven percent.
Mr. Johnson. Ninety-seven percent of the market, 80 percent
of the shareholders' equity shares are with institutional and
pension investors. Their advice is followed 95 percent of the
time?
Mr. Crain. That is essentially correct.
Chair Jordan. Wow. That is pretty big. That is pretty big.
How much money are we talking about?
Mr. Crain. Trillions of dollars of equity throughout the
market.
Mr. Johnson. Five trillion, 20 trillion, and 30 trillion?
How much are we talking?
Mr. Crain. I don't know the size of the market, but it is a
large number of the equity markets in the United States.
Chair Jordan. My understanding is it is at least $20
trillion, and the other side says nothing to look at here.
Nothing to look at here. Really? That seems like there is a lot
to look at there and that is why we are having this hearing.
Now, what kind of advice--so their advice is followed 95
percent of the time, 70 percent of the market, over $20
trillion, what kind of advice are they giving?
Mr. Crain. It is advice on everything that comes before
shareholders. It is how the company is run, how the executives
are paid, the shareholder proposals that have been discussed,
everything that comes before the shareholder base for a vote.
Chair Jordan. What kind of advice are they given in a
political context?
Mr. Crain. We know that ISS, for example, recommended in
favor of more than 80 percent of ESG shareholder proposals in
2023.
Chair Jordan. Pro-ESG, pro-DEI?
Mr. Crain. As a general rule, yes. Not 100 percent of the
time, but, yes, as a general rule.
Chair Jordan. Vast majority of the time?
Mr. Crain. I would say yes.
Chair Jordan. OK, so kind of leaning to the Left, right?
Mr. Crain. I think that is probably a fair
characterization.
Chair Jordan. Their advice is followed 95 percent of the
time, and they have 90 percent of the market, 70 percent of
these they are giving advice to, and it is always, almost
always Left wing?
Mr. Crain. I think that is a fair characterization, yes.
Chair Jordan. Is that how you see it, Mr. Egan?
Mr. Egan. I have no reason for disagreeing with that.
Chair Jordan. What about you, Mr. Griffin?
Mr. Griffin. That while it varies by year and we have seen
sort of swings with somewhat mirroring the political election
cycle, that is--
Chair Jordan. Is that an accurate picture? Is that an
accurate framework?
Mr. Griffin. Overall.
Chair Jordan. OK, now that is not the end of it, is it?
Because it is even worse because this duopoly not only offers
proxy advisor services, but consulting services as well.
Mr. Griffin. That is exactly right.
Chair Jordan. You can go consult with them before they give
you the recommendations that are always followed, and if you
don't consult with them, they might give you recommendations
that in many ways harm the company and therefore harm the
shareholders, is that right, Mr. Crain?
Mr. Crain. It is and we have seen that when companies get
negative recommendations from the advice side, they will
immediately get a solicitation from the consulting side saying
hey, wouldn't you really like to have us help you out next year
to avoid those?
Chair Jordan. Yes.
Mr. Crain. That is a pretty concerning fact pattern.
Chair Jordan. Will you pay the protection money? Will you
pay the shake down?
Mr. Crain. Exactly.
Chair Jordan. Holy cow, such a deal. Such a deal. Ms. Minow
was part of it all when she worked at ISS, is that right? The
question wasn't for you; it is for Mr. Crain.
Ms. Minow. I understand that, but he doesn't know the
answer and I do.
Chair Jordan. I wasn't asking you a question.
Ms. Minow. It is wrong. I did not allow--
Chair Jordan. You might be able to do the consulting
services and the recommendations--
Ms. Minow. I did not allow ISS to do consulting when I
was--
Chair Jordan. Does ISS do consulting now?
Ms. Minow. ISS does consulting now and--
Chair Jordan. There you have it. There you have it. My
question--the way it works is the members get to ask the
questions to the people they want to give the answers. My
question was to Mr. Crain.
I appreciate you jumping in, Ms. Minow, and telling us that
ISS does now offer consulting services in addition to the proxy
advisor thing, which is the problem, which is--well, not the
full problem, but certainly part of the problem.
Is that right, Mr. Crain?
Mr. Crain. I would agree with that, yes, sir.
Chair Jordan. Then, you can even go even maybe one step
further and say on the platform no competition is allowed which
I sort of get Ms. Minow's argument on the Amazon issue, I sort
of get. It is almost like they have got this thing rigged from
start to finish and it is two companies. The other side says
nothing to look at here.
Well, that is kind of ridiculous and I appreciate the Chair
and his work on this important issue. With that, I yield back.
Mr. Fitzgerald. The Chair yields back. The gentleman from
Georgia is now recognized for five minutes.
Mr. Johnson. Thank you, Mr. Chair, and I would like to
offer Ms. Minow the opportunity to fully respond to Mr. Jordan.
Ms. Minow. Thank you very much, I appreciate it. Yes, when
I was at ISS, I was President. I did not allow us to do
consulting services and yet, we were spending a ton of time
trying to walk corporations through who would call us and say
we want to understand your system. I understand why they do it
now. The large institutional investors who choose to use their
services bake that in.
Mr. Jordan mentioned the four-percent--
Chair Jordan. Do you agree with ISS, the decision to--
Mr. Johnson. It is my time. It is my time.
Ms. Minow. He mentioned the four-percent where they
disagree. Interestingly, whenever ISS recommends a vote or
Glass Lewis recommends a vote contrary to management, what we
find there, if you look at the numbers, is that the clients
make up their own minds. That, for example, ISS recommended a
vote against Elon Musk's ridiculous $58 billion pay package and
yet, the shareholders voted overwhelmingly in favor of it.
Mr. Johnson. Great example. Do you believe Milton Friedman,
since you are a graduate of the University of Chicago, would he
be turning over in his grave listening to this attack on the
free-market system that this hearing represents?
Ms. Minow. He would be spinning like a top.
Mr. Johnson. Yes. Thank you. Mr. Egan, since 2002, have you
been involved in the business of proxy advisor services,
correct?
Mr. Egan. Since 2002.
Mr. Johnson. Since 2002, your primary competitors in this
proxy advisor service industry has been Glass Lewis and ISS,
correct?
Mr. Egan. That is correct.
Mr. Johnson. You have fought your way up to the top. Now,
you are now the third largest proxy advisory firm operating in
the Nation, correct?
Mr. Egan. We have been the third largest for a number of
years, yes.
Mr. Johnson. I commend you for that. This hearing gives you
an opportunity to promote the fact that your company is an
anti-woke proxy advisor firm, correct?
Mr. Egan. I would not characterize our firm as an anti-ESG
firm. We offer ESG--
Mr. Johnson. Well, I tell you your testimony, your
testimony reads and looks like a promotional brochure for your
company. I have never seen anything like it. You are here today
to basically get some government help in positioning your
business to become a larger player in this industry. Isn't that
correct?
Mr. Egan. In my opinion, no.
Mr. Johnson. Well, let me ask you this--
Mr. Egan. If I may answer the question--
Mr. Johnson. No, let me ask you--
Mr. Egan. I would be happy to answer.
Mr. Johnson. I am moving on. I want to ask you about that
2012 SEC complaint that was filed against you that charged you
with, among other things, having conflicts of interest. You
hired the attorney, the same attorney that represents Donald
Trump, Jr., Mr. Alan Futerfas. Isn't that correct?
Mr. Egan. Mr. Futerfas is not representing--
Mr. Johnson. He was your lawyer.
Mr. Egan. He hasn't represented the firm for over 10 years.
Mr. Johnson. He was your lawyer though, right?
Mr. Egan. Probably about 15 years ago, yes.
Mr. Johnson. The same lawyer that now represents Donald
Trump, Jr. Are you one of the folks who contributed to Trump's
inauguration campaign?
Mr. Egan. We are not.
Mr. Johnson. Or his campaign?
Mr. Egan. No.
Mr. Johnson. OK. You sure are seeking some exposure today
on this anti-woke tip.
Mr. Egan. I am here today to provide insight into our
expediences in--
Mr. Johnson. You are trying to create a competitive
advantage. This is like crony capitalism, and I am sure that--
Mr. Egan. There are some real problems in this industry.
Mr. Johnson. I am sure that Milton Friedman would not be
approving of this kind of conduct complicit with a Congress
that is a rubber stamp to everything that Donald Trump is
trying to do to put his finger on the free-market system and
make it such that it works for him and his interests and
everything else is secondary. With that, I am going to yield
back.
Mr. Fitzgerald. The gentleman yields back. The gentleman
from Virginia is now recognized for five minutes.
Mr. Cline. Thank you, Mr. Chair. I am going to yield as
much time to the Chair.
Chair Jordan. I thank the gentleman. Just a quick question
for Ms. Minow. Is ISS wrong now that they offer consulting
services to their clients?
Ms. Minow. I disagree with it, but I am all in favor of
every possible option be offered to the market and letting the
market decide.
Chair Jordan. Is it wrong?
Ms. Minow. I don't use those services.
Chair Jordan. OK. Thank you.
Mr. Cline. Thank you. I want to restate what the gentlelady
from Wyoming started with her questioning. Sounds like a racket
to me.
Mr. Griffin, ISS and Glass Lewis' 90 percent plus market
share clearly suggests a violation of Section 1 or Section 2 of
the Sherman Act. Would you agree?
Mr. Griffin. Thank you for your question. I am more of a
corporate governance expert. I am here to talk about that. It
potentially does, but I am not able to opine on that.
Mr. Cline. Would DOJ or FTC scrutiny be justified based on
historical--
Mr. Griffin. The situation certainly warrants further study
and more broadly, I would take issue with the characterization
of this as a market-driven phenomenon and a response to market
pressure. It is a response to regulatory pressure to vote by
these asset managers. Also, there are very weak financial
incentives to respond to the concerns of the actual
shareholders.
Mr. Cline. It is pretty clear. The absence of fiduciary
responsibility paired with high-market concentration supports a
case for closer antitrust scrutiny or regulatory intervention.
The opposition seems to believe that these practices are immune
somehow from antitrust scrutiny simply because they occur in
the context of shareholder voting. Firms apparently, firms with
effective monopoly power should be allowed to self-police their
own competitive and ethical boundaries.
Mr. Griffin, are ideologically aligned ESG recommendations
that mirror each other grounds for a Section 1 Sherman Act
claim due to collusion?
Mr. Griffin. It may merit investigation. Broadly that
investment managers are not incentivized to serve interest
beyond those of the intermediary clients that they possess and,
in particular, there are very weak ties to the actual
investors.
Mr. Cline. Does offering consulting services to the same
firms you issue proxy recommendations for meet the legal
threshold for monopoly leveraging?
Mr. Griffin. It may be an important example of the market
power they wield and there may be a cross-subsidy essentially
between the consulting services and their advisory business.
Mr. Cline. Mr. Crain, how have ESG-driven voting
recommendations affected your members' costs and operation?
Mr. Crain. Manufacturers are focused on growing their
business, delivering return for shareholders, creating jobs for
American people in every State and every Congressional
district. To the extent that they are distracted from that
critically important mission to support the U.S. economy, to
respond to activists' proposals on the proxy ballot, or to the
agenda of the proxy advisory firms, that is a distraction from
the ultimate goal that we would all want to support which is
that of driving the American economy and creating manufacturing
jobs.
Mr. Cline. Have your members reported feeling pressure to
purchase consulting services from these proxy firms?
Mr. Crain. They absolutely have. It is a relatively common
fact pattern that you will receive a negative vote
recommendation and then soon thereafter receive solicitations
from the consulting service side of the business, asking if you
would like to subscribe to avoid negative recommendations in
the future and just structure your policies in line with what I
assess and/or Glass Lewis want so that you avoid negative
recommendations in the future. There is absolutely that degree
of pressure.
Mr. Cline. If this type of dual role conflict is done by
credit rating agencies or financial auditors, wouldn't it be
just as unacceptable for it to be happening in those areas as
well?
Mr. Crain. Congress has stepped in for those regards and
the SEC did in this case, and unfortunately, that rule has been
held up in court for the last five years and not been allowed
to take effect.
Mr. Cline. Mr. Crain--I am sorry, Mr. Egan, have you ever
lost business to ISS class loads due to bundled consulting
services?
Mr. Egan. Would you mind repeating the question?
Mr. Cline. Have you ever lost business to ISS and Glass
Lewis due to bundled consulting services?
Mr. Egan. Yes.
Mr. Cline. Wouldn't you say that--can you cite specific
shareholder proposals or climate-related screens that seem
ideologically driven rather than industrial oriented?
Mr. Egan. We see those regularly, but regarding losing
business, bear in mind that they can charge nothing on the
proxy advisory business and pick up in compensation on the
other side of the business and maintain their preferential
position which is crazy when you think about it.
Mr. Cline. Yes, that sounds like a scam to me. I yield
back.
Mr. Fitzgerald. The gentleman yields back. The gentleman
from California is now recognized for five minutes.
Mr. Issa. Thank you, Mr. Chair. Many good questions have
been asked and I am going to try and close some of them
together for a moment. Antitrust is complicated and you always
have to ask things like what is the relevant market and so on,
but per se when you have just two that control 90 percent in
general, assuming it is a relevant market, that is monopolistic
power, correct? Nobody on any side disagrees that we have the
potential for monopolistic behavior because you have such
concentration.
Now, in monopolies, the most common thing that we look at
is tie-ins, one product being leveraged by another. Is there
anybody here that doesn't see that at least in the abstract,
there appears to be a tie-in when the two companies controlling
90 percent of the market also have a product that is, in fact,
could be independent, could be spun off, but it isn't because
it is a tied-in product? OK.
After all this time of not necessarily all agreeing, we
have got agreement on those two which means that we have per se
monopolistic power. We have a tie-in and now what we are trying
to discover is have they used that tie-in?
Mr. Egan, I am going to push the envelope of this body by
reminding people of Godfather 1. In ``The Godfather,'' when the
Corleones' representative goes out to California and he is
talking about the things that could go bad like union problems
and so on, and that the Godfather would be very appreciative if
he just gives this man a part in his movie and then those
problems wouldn't exist. He gets thrown out. Then there wasn't
the union strike, but there was a response.
In your experience, have you seen that this is essentially
what is happening. You are being told by others, hey, if you
hire these guys, things will go better. When you don't, you end
up with an adverse proxy situation. Isn't that sort of what
happens? It isn't quite ``The Godfather.'' There is not
actually a horse in your bed, but in fact, you do see bad
things happen when you don't hire them and less bad things when
you do.
Mr. Egan. I can't disagree with that. In fact, I--
Mr. Issa. No one disagrees with ``The Godfather.'' It is
just one of my favorite movies.
OK, I will open this up at some risk and say if that is the
case, then shouldn't we and agencies in the Federal Government,
in general, be looking at a breakup of that power to create a
tie? Isn't that we are really here on both sides of the aisle,
hopefully, looking and thinking we should consider? Each of
you.
Mr. Egan?
Mr. Egan. Absolutely. This market has become dysfunctional,
OK, from our perspective, that you have two companies,
particularly one company, ISS, controlling the platform with
consulting. Then, also the proxy advisory one. When we have
been hired by a major institutional investor and are relying on
ISS to get information so we can conduct our business, we are
not getting that information. That information, as I mentioned,
in my testimony, was when the proxy due date is. If we don't
have that, it is very, very difficult. They said, hey, listen,
we are a distributor here. We are not going to give you that
information. We have been impeded. OK?
As I said before, they can charge nothing on their proxy
advisory service and more than make it up on their consulting
service.
Mr. Issa. That is why we call it a tie-in.
Mr. Egan. Absolutely, and this notion of just because it is
a free market everything is fine, well, with almost every
single monopoly or duopoly situation, it started off as a free
market and then it became dysfunctional.
Mr. Issa. Mr. Crain, you represent so many manufacturers
who are just trying to compete. They seldom, if ever, have a 90
percent or a 45 2 market share. Isn't it true that
one of the biggest impediments to their being competitive is
when the sources that they want to buy their products'
subcomponents from have, if you will, a lock on the market of
90 percent between two vendors. Isn't that the most--isn't that
by definition what makes the people you represent unable to
deliver a product is even if they are a diverse group, if they
are buying from one of two vendors, they get to pay a lot more,
correct?
Mr. Crain. That is correct.
Mr. Issa. Thank you, I yield back.
Mr. Fitzgerald. The gentleman yields back. This concludes
today's hearing. We thank our witnesses for appearing before
the Committee today. Without objection, all Members will have
legislative days to submit additional written questions for the
witnesses or additional materials for the record. Without
objection, the hearing is adjourned.
[Whereupon, at 11:41 a.m., the Subcommittee was adjourned.]
All materials submitted for the record by Members of the
Subcommittee on the Administrative State, Regulatory Reform,
and Antitrust can be found at: https://docs.house.gov/
Committee/
Calendar/ByEvent.aspx?EventID=118422.