House Committee Takes On Proxy Advisors

This week, the Subcommittees of the U.S. House of Representatives Financial Services Committee hosted a series of hearings to examine the role proxy advisory firms play in corporate governance, including use of ESG metrics. In its memo, the House Subcommittee indicated that Glass Lewis and ISS control 97% of the proxy advisory market. “Their dominance raises questions about bias, accountability, and oversight, as these firms have the power to influence institutional investors’ voting decisions.” 

In anticipation of the hearings the House Financial Services GOP staff reached out to the Center to solicit our support and expertise. The Center sent a letter encouraging members of the Committee to vote in support of two legislative bills aimed at reforming the proxy advisory process. In addition, we noted our support for the SEC’s 2020 Final Rule, which we believed added a reasonable and necessary structure to the proxy voting advice business report process. We urged lawmakers to consider the Center’s comments to the SEC in 2021 as they contemplate future legislation to regulate the proxy industry. 

Glass Lewis and ISS, as expected, reiterated their talking points that investors do not rely solely on their research and often create custom voting policies. However, others pointed out that a negative ISS recommendation swings a company’s Say on Pay vote by 25%-30%, and that smaller investors do in fact vote in lockstep with proxy advisors given their limited proxy voting resources.

During the hearings criticisms were targeted at the SEC for failing to provide oversight of the advisory firms, while the regulatory agency itself has acknowledged the firms’ significant influence on the proxy voting system.  Witnesses disagreed as to the level of SEC involvement, and whether regulatory intervention is necessary at all. 

Outlook: The House Financial Services Committee will be considering several legislative proposals this month aimed at reforming the proxy advisor process, which are expected to pass the Committee but the timing for full House consideration is unknown. Even if the full House passes the various proposals, they will likely fail in the Democratic-controlled Senate, where 60 votes will be needed. Essentially, these bills will serve as messaging vehicles heading into next year’s election season.