House Judiciary Committee Puts Proxy Advisory Firms Under the Microscope

In the latest Congressional salvo against proxy advisory firms, the House Judiciary Committee recently sent letters to Glass Lewis and ISS demanding documents pertaining to their agreements with other proxy firms, asset managers, stockholder engagement services, and climate-related initiatives. The letter accused these firms of collaborating with institutional investors to push corporations toward adopting ESG objectives like reducing emissions and achieving net-zero status. The letter states that proxy firms appear “to have colluded with institutional investors to force American corporations to ‘decarbonize’ their assets and reduce their emissions to net zero.”

The Judiciary Committee's focus extends to possible antitrust implications. Both Glass Lewis and ISS suggest voting against directors at companies targeted by the "Climate Action 100+" investor alliance, unless these companies divulge the effects of a low-carbon future (Glass Lewis) or align with net-zero goals by 2050 (ISS). The committee questions whether this collaboration could be seen as a collusive agreement that violates competition and consumer interests and potentially breaches the Sherman Act. Legal history indicates that "social justifications" don't validate trade restraints.

Before Congress adjourned for the month-long August recess, the House Financial Services Committee passed legislation to reform the proxy advisory process.  The Protecting Americans’ Retirement Savings from Politics Act (H.R. 4767) mandates that proxy advisers register with the SEC, offer advice solely aligned with shareholders' economic interests, and disclose their voting recommendation methodologies. Under this legislation, firms would be held accountable for misrepresentations and the omission of crucial operational information, similar to the obligations of public companies under securities laws. Additionally, proxy advisers would be prohibited from providing services that create unresolved business conflicts. The Center sent a letter to the Committee in support of the legislative proposal and urged lawmakers to consider our comments to the SEC in 2021, as they consider legislation to regulate the proxy industry.

This situation highlights the growing significance of ESG considerations in shaping corporate actions, alongside the potential conflicts of interest and ethical questions they entail. The evolving discourse and regulatory deliberations surrounding ESG initiatives, proxy advisory services, and the dynamics between investors and corporations, will likely drive substantial changes in the corporate landscape.