House Republicans took aim at the “outsized influence and unchecked power” of proxy-advisory firms Institutional Shareholder Services and Glass Lewis and urged reforms in Congress and at the Securities and Exchange Commission during an April 29 hearing.
“Today, ISS and Glass Lewis shape the outcomes of shareholder votes across the market, especially as large index funds often vote in lockstep with their recommendation,” said French Hill, R-Ark., chair of the House Financial Services Committee. “In my view, that not just advice, it’s intimidating de facto control.”
Along those lines, the hearing, held by the House Financial Services Committee’s subcommittee on capital markets, was titled, “Exposing the Proxy Advisory Cartel: How ISS and Glass Lewis Influence Markets.”
Four of the five witnesses who testified before the subcommittee made similar points to Hill, asserting that the two major proxy-advisory firms don’t have proper regulatory oversight and often have conflicts of interest when making recommendations.
Experts, including Elizabeth Ising, a partner at law firm Gibson Dunn & Crutcher, said that the proxy-advisory firms sell advisory services to public companies on the same matters on which they make voting recommendations.
In an emailed statement, a spokesperson for ISS refuted those assertions. The hearing “shows the degree to which critics of proxy-advisory firms misrepresent the nature of our work, the way in which clients use our services, the effective management of potential conflicts, and, in the case of ISS, our long-standing registration with the SEC as an investment adviser under the Investment Advisers Act of 1940.”
Glass Lewis did not respond to a request for comment.
Institutional investors have historically opposed reforms to the proxy-advice industry, noting that proxy firms provide institutional investors with an alternative to the high costs of individually performing the requisite analysis for hundreds of thousands of ballot proposals at thousands of shareholder meetings each proxy season.
Rep. Brad Sherman, D-Calif., the subcommittee’s ranking member, noted that the complaints against proxy firms aren’t coming from institutional investors, they’re coming from members of the business community who don’t want “the owners of corporate America to tell the managers of corporate America what to do.”
But Charles Crain, managing vice president of policy at the National Association of Manufacturers, said reform is needed. He urged the subcommittee to advance several proxy-related bills.
The bills, introduced by Republicans on the subcommittee, include ones to require proxy firms to register with the SEC; require firms disclose material information associated with proxy-voting advice; require investment advisers, asset managers and pension funds relying on the services of a proxy firm to explain how the firm’s recommendations impacted their proxy votes; prohibit institutional investors from using proxy firms' “robo-voting services;” prevent proxy firms from offering proxy-voting advice that is in conflict with their consulting services; and require the SEC to conduct a comprehensive study on the proxy process.
“Policymakers must preserve the SEC’s existing authority of proxy firms while also instituting further guardrails that address the firms’ conflicts, their errors, their robo-voting, their one-size-fits-all agendas and more,” Crain said.
Nell Minow, vice chair of ValueEdge Advisors, which advises institutional investors on corporate governance issues, was the lone witness who defended the proxy-advisory industry, arguing that the current system is the “ultimate example of the free market” and that no investor has to purchase proxy firms’ services or follow their advice.
Minow also recommended that the subcommittee invite the key proxy-advisory firms and institutional investors who utilize them to testify at the next hearing.
