Lawmakers and a slew of experts with varying viewpoints on Thursday examined the merits of shareholder proposals and the influence of proxy advisory firms at public company annual meetings.
The proxy voting process has been a contentious topic in Washington in recent years with new regulations and guidance from both the Trump and Biden administrations and the heightened politicization of environmental, social and governance issues.
Over the course of two hearings Thursday hosted by House Financial Service Committee subcommittees, Republicans and Democrats highlighted the vast differences in their proxy-related perspectives.
"Unfortunately, unrestricted shareholder activism is diverting attention and limited resources from core issues, undermining the attractiveness of U.S. markets and discouraging companies from going public," said Rep. Ann Wagner, R-Mo., chairwoman of the subcommittee on capital markets.
She, her Republican colleagues on the subcommittee and witnesses from the business community said companies are spending too much time and money responding to shareholder proposals on ESG topics that are immaterial.
"Turning the proxy ballot into a debate club diverts time and resources away from shareholder value creation and forces companies to wade into controversial topics of over which they have no control," testified Christopher Netram, managing vice president of policy at the National Association of Manufacturers.
NAM is challenging the Securities and Exchange Commission's authority to approve or disapprove whether a given shareholder resolution must appear on a public company's proxy statement.
Rep. Brad Sherman, D-Calif., the subcommittee's ranking member, said if shareholders contend that an issue is material to a respective company, then it is material. "This hearing is being held for those who think these resolutions might win and they don't want to give the shareholders a chance."
Shareholder proposals are a modest way to raise concerns at low cost to investors and to companies, Nell Minow, vice chairwoman of ValueEdge Advisors, which advises institutional investors on corporate governance issues, testified. Such proposals are submitted to a small fraction of companies but play an essential role in signaling concerns, she added.
"Limiting shareholder proposals is killing the messenger, one of the very few ways insulated insiders get honest feedback," Ms. Minow said.
In September 2020, the SEC under the Trump administration raised the requirements for investors who wish to submit a shareholder proposal and approved higher thresholds for resubmitting shareholder proposals in subsequent years.
Shareholders can file proposals before a company's annual meeting. If a company thinks a proposal is out of bounds or has already been addressed, it can file a no-action letter with the SEC, requesting permission not to include the proposal in its proxy statement.
Also under the Trump administration, the SEC issued legal bulletins that included language that made it more likely for the SEC to rule in favor of companies seeking no-action relief.
But in November 2021, the SEC's division of corporation finance rescinded those bulletins.
And in July 2022, the SEC rescinded two Trump-era amendments to its rules concerning proxy-voting advice that increased restrictions on proxy advisory firms.
Specifically, the agency rescinded amendments adopted in 2020 that allow companies that are the subject of voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients, and another requiring proxy advisory firms to provide clients with access to any response the company provides on voting advice before those clients vote.
In a separate hearing Thursday hosted by the subcommittee on oversight and investigations, Republicans said Glass Lewis and Institutional Shareholder Services, the nation's two major proxy advisory firms, have too much influence over board votes and operate without sufficient transparency.
"Proxy advisory firms have hijacked the shareholder process, becoming the de-facto standard setters for corporate governance policies in the United States," said Rep. Bill Huizenga, R-Mich., the subcommittee's chairman.
Representatives from Glass Lewis and ISS who testified before the subcommittee defended their firms' policies and practices.
In his testimony, Steven Friedman, general counsel at ISS, said his firm has an important but narrow role in the proxy voting process. It is the institutional investor client that "creates or selects the proxy voting policies and guidelines that reflect their own fiduciary obligations and investment strategies," he said. "Our job is to synthesize data, analyze proxy statements and formulate vote recommendations that flow from the client's chosen policies and guidelines."
Eric Shostal, senior vice president for research and engagement at Glass Lewis, said his firm is not a political organization and does not determine its clients' proxy voting policies or their votes.
Glass Lewis' benchmark policy evaluates all environmental and social issues through the lens of long-term shareholder value, Ms. Shostal said. "Not politics, not wokeness, but shareholder value," he said.
