▶ 0:44:41The subcommittee on capital markets will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time, but will not. This hearing is uh titled Exposing the Proxy Advisory Cartel. how ISS and Glass Lewis influence markets. Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record.
▶ 0:45:09I now recognize myself for four minutes for an opening statement. Good afternoon everyone and I want to thank our witnesses uh and all those in attendance for joining us for today's hearing on a critical yet underexamined issue in our capital markets. the outsized influence and unchecked power of proxy advisory form firms particularly institutional shareholders services ISS and glass lewis.
▶ 0:45:39This hearing is part of an ongoing effort by this subcommittee to shine a light on how the proxy process is functioning and in many ways failing today's markets. The purpose of this hearing is to examine the role, practices, and market influence of proxy advisory firms on corporate governance practices, investor returns, and broader market outcomes.
▶ 0:46:06We will also use today's hearing to assess transparency, accountability, potential conflicts of interest, and the overall impact of proxy advisory firms on the functioning uh and fairness of capital markets. Two firms, ISS and Glass Lewis, control 97% of the proxy advisory market. That concentration alone would warrant scrutiny.
▶ 0:46:36But more troubling is how their influence goes far beyond research. They now routinely dictate outcomes of shareholder votes. When ISS or Glass Lewis recommends voting against a director, their clients are over 30% more likely to follow suit than non-clients.
▶ 0:46:59Their platforms even prepopulate voting recommendations contributing to what has become known as robo voting, a troubling abdication of fiduciary responsibility. These firms are not neutral observers.
▶ 0:47:19They are forprofit businesses that often sell consulting services to the very companies they evaluate, sometimes with clear clear conflicts of interest. ISS, for instance, simultaneously rates and advises companies on its own ESG metrics.
▶ 0:47:39Last year, after Exxon Mobile sought judicial relief from an activist campaign that included Glass Lewis as a member, Glass Lewis then recommended that his clients vote against one of the Exxon Mobile's directors. Let's be clear, this is not about silencing shareholders.
▶ 0:48:03It's about ensuring that the proxy process advances long-term investor value, not narrow political agendas. We've seen a surge in shareholder proposals that are ideological in nature but marginal in economic relevance.
▶ 0:48:23Costs associated with responding to these proposals with both direct and indirect are climbing into the hundreds of millions of dollars annually and ultimately fall on ordinary investors. The SEC must reassert its role in ensuring this system is fair, is transparent, and is accountable.
▶ 0:48:47That is why last month, Chairman Hill and I sent a letter to then acting chairman UIDA, commending the commission for rescending staff legal bulletin number 14L, but also urging the SEC to go further by restoring the original intent of rule 14A-8, eliminating the significant policy exception and enhancing oversight of proxy advisory firms.
▶ 0:49:14These reforms are critical to safeguarding retail investors, refocusing the proxy process on long-term value creation, and restoring trust in our capital markets. Our capital markets work best when participants are guided by economic rationale, not political pressure. And I look forward to a robust and thoughtful discussion today on how we can bring greater accountability to proxy adviserss and strengthen the integrity of the shareholder voting process.
▶ 0:49:44Chair now recognizes the ranking member of the subcommittee, the gentleman from California, Mr. Sherman, for four minutes for his opening statement. These firms have clients who pay them. Those are the investors, the capitalists who make our capitalism work. The question is whether we're going to deprive them of the invest of the advice that they want and that they pay for.
▶ 0:50:12There is no barrier to entry to third, fourth or fifth companies getting into this. And as a matter of fact, Vivbec Ramaswami has entered this market and I can be confident that uh when he does, he will not be providing woke advice. The argument here is between Ronald Reagan and Leon Trosky.
▶ 0:50:37There are those who think that the commanding heights of the economy should be controlled by the party line. And there are others who believe that investors, because it's their money, should actually control what the companies that they own do.
▶ 0:50:54And so we have before us uh bills that would require that investment advisory firms that that proxy advisory firms only give advice on what maximizes profit and to tell the eco investors go to hell. Well, what does that mean?
▶ 0:51:16That means that if there is a proposal on the ballot that the company get involved in the pornography industry, investment advisors will be required by law passed by the Republicans to say yes, go into that business cuz it's profitable.
▶ 0:51:33If you deny the rights of liberals to get advice on how they can invest in companies that don't engage in slave labor, in companies that don't ruin the environment, then your own voters must be deprived of investment advice on how to avoid investing in pornography. Now, since I represent the San Frernando Valley, maybe that's a good district issue for me, but it isn't for you.
▶ 0:52:01Um, investors ought to get the advice they want from the people they select to get that advice. They should be able to invest in mutual funds that seek to maximize profit or to maximize profit but no fossil fuels or maximize profit no pornographic movies.
▶ 0:52:23uh instead the most powerful people in the country, those who control the thousand or so giants on Wall Street, uh they don't want the investors to control the company. They think a small click of managers should control the company.
▶ 0:52:41And how dare anybody who's just a mere owner suggest a change in company policy, let alone demand a vote on it, let alone let people get advice on how to vote. This is not a war on the in the proxy advisors. This is a war on the idea that the people who whose money it is get to make the decision.
▶ 0:53:08What religious tradition teaches us that anyone with money must exclusively make all their decisions on how to make more money? I think there are some religious traditions that would say invest your money to help the poor. Invest your money to help the planet. Maybe even invest your money to promote traditional family values. and to instead say no, let management do what they want.
▶ 0:53:38Don't and do not allow this is a country with a first amendment. Do not allow a uh uh anyone to advise you to do the contrary. Um I I don't know why we're having this hearing. I don't know why we're opposing the idea that those with the capital get to control the companies they own.
▶ 0:54:01And I certainly don't know why because I know none of you represent the San Frernando Valley why you have a prop pornography agenda here. I yield back. I wish I could use the chairman's minute, but I shall not. The chair recognizes the chairman of the full committee, Mr. Hill, for one minute. Thank you, Chair Wagner. Thank you for our panel today.
▶ 0:54:24I want to appreciate Chair Wagner's consistent leadership over many years on examining the proxy advisory firms and their outsized influence uh over our public markets. Today, ISS and Glass Lewis shape the outcomes of shareholder votes across the market, especially as large index funds often vote in lock step with their recommendations. In my view, that's not just advice.
▶ 0:54:52its intimidating de facto control. Even more troubling, companies are frequently reporting factual errors errors in proxy reports and are rarely given a chance to correct them before votes are cast. We need greater transparency, due process, and oversight to ensure that proxy voting remains accountable to the shareholders, not outsourced to this largely unregulated duopoly. I look forward to our discussion today, and I yield back.
▶ 0:55:22Chairman yields back. The chair recognizes the ranking member of the full committee, Miss Waters, for one Thank you very much. Well, uh, this hearing is, uh, titled Exposing the Proxy Advisory Cartel, but there is a very real cartel happening right in front of our faces. Donald J. Trump and associates.
▶ 0:55:46The president and his family have made millions off the Trump meme coin to date and they just even made more with his announcement of a private dinner for top owners of the coin. And that's not all. The president has pumped the stock of his media company, promoted Elon Musk's failing car company on the White House lawn, and is providing his billionaire friends with insider tips to take advantage of the chaos he is causing in the stock market.
▶ 0:56:17Our committee should be focused on this blatant financial corruption. With that, we ignore it at our peril. And I yield back the balance of my time. Gentle lady yields back. Today we welcome the testimony of Charles Crane. Mr. Crane is the managing vice president of policy at the National Association of Manufacturers, NAM. Elizabeth Izing.
▶ 0:56:44Izzing is a partner at Gibson Dunn and Cretcher LLP. She serves as the firm's co-chair of securities regulation and corporate governance practice. Paul Professor Rose is a dean and a professor of law at Case Western Reserve University School of Law. Paul Washington. Mr. Washington is the president and CEO of the Society for Corporate Governance.
▶ 0:57:10He is former deputy general counsel and corporate secretary of Time Warner Inc. Nell Mow. Miss Mow is a vice chair of Value Edge Advisors and she is the former president of ISS. We thank each of you for taking your time to be uh here today.
▶ 0:57:32Each of you will be recognized for five minutes to give an oral presentation of your testimony and without objection, your written statements will be made part of the record. Mr. Crane, you are now recognized for five minutes for your oral presentation. Thank you, Chair Wagner, Ranking Member Sherman, as well as Chairman Hill and Ranking Member Waters. My name is Charles Crane, as the chair said, and I'm the managing vice president of policy for the National Association of Manufacturers.
▶ 0:58:01Proxy advisory firms have had a significant and damaging impact on manufacturers, manufacturing workers, and main street investors. These firms outsize influence and their problematic business practices dictate corporate decisions and they endanger shareholder returns. First and foremost, proxy firms operate with glaring and often undisclosed conflicts of interest.
▶ 0:58:25For example, ISS's consulting service has been known to use the negative vote recommendations from its proxy voting service as a way to drum up business. Proxy firms are also unwilling to allow companies to review their draft reports and they're resistant to conduct the to correcting, excuse me, the mistakes and misunderstandings that imbue their final recommendations. And those recommendations are often based on a one-sizefits-all view of how public companies should be run.
▶ 0:58:55In other words, proxy firms benchmark policies enforce their beliefs about corporate governance, executive compensation, and increasingly environmental and social topics. Now, despite these obvious flaws, proxy firms still control a significant share of investors proxy votes. That means they have significant sway over important corporate decisions.
▶ 0:59:18The SEC under both parties has investigated these issues over the course of more than a decade, finally adopting a proxy firm rule back in 2020. This subcommittee has played a critically important role as well with hearings and legislation designed to shine a light and ultimately to reign in proxy firms.
▶ 0:59:37But despite this clear momentum for reform from both Congress and the SEC, proxy firms remain unregulated to the detriment of public companies and their investors. The SEC's 2020 rule has spent 5 years hung up in court. The NAM has had to defend that rule across three separate court cases, one of which in fact has oral arguments scheduled for this coming Friday.
▶ 1:00:02This delay is despite the fact that that 2020 rule was a significant compromise as compared to the SEC's 2019 proposal and in fact manufacturers continue to believe that critical provisions from that 2019 proposal such as draft review would be important reforms to adopt today. Proxy firms of course would prefer zero SEC or congressional oversight. ISS is now claiming in court that the SEC lacks the statutory authority to regulate proxy voting advice at all.
▶ 1:00:33Now, the Exchange Act is actually quite clear that the SEC does have the authority to regulate proxy voting advice, but there may come a time for Congress to reiterate that directive, either to remind a court of Congress's unambiguous statutory intent or to reverse an errant court decision. Even assuming though that the NAM is successful in defending the SEC's authority, there is more work still to be done.
▶ 1:00:58That's why we appreciate that Congress and members of this committee have offered common sense reforms that would institute much needed guard rails for the proxy firms. These six bills would prioritize Main Street investors retirement security over the proxy firms agendas. First, Congressman Styles bill, which would create a comprehensive registration regime for proxy firms. It would increase SEC oversight, company engagement, and transparency while minimizing conflicts of interest and errors. Mr.
▶ 1:01:28Style also has a separate bill that would ensure that the proxy firms remain subject to any fraud, liability. Congressman Fitzgerald has introduced legislation to ban certain conflicts of interest. Congressman Nun has a bill that would target robo voting, which is a common practice that disenfranchises main street investors as well as institutional investors. And Congressman Louderdermilk has a bill that would focus on the fiduciary duties of those institutional investors.
▶ 1:01:55Finally, Chair Wagner's legislation would direct the SEC to conduct a comprehensive study of the proxy process, including the damaging role that proxy firms can play. The time to act on these bills is now. Awareness of the risks that proxy firms pose is far more widespread than it was back in 2010 when the SEC started looking into this issue. And both Congress and the SEC now have a clear understanding of what must be done.
▶ 1:02:23Policymakers must preserve the SEC's existing authority over proxy firms while also instituting further guard rails that address the firm's conflicts, their errors, their robo voting, their one-sizefits-all standards, their ESG agendas, and more. Manufacturers and Main Street investors are counting on it. Thank you. Thank you, Mr. Crane. Miss uh Izzing, you are now recognized for five minutes for your oral presentation.
▶ 1:02:54Button, thank you for the invitation to testify today. I appreciate the opportunity to share with you my observations on the significant influence of proxy advisory firms and the need to regulate them. My observations are based on 25 years of practicing as a securities and corporate governance lawyer. Proxy advisers play an important role and have considerable influence in the US proxy system.
▶ 1:03:15Shareholders rely on the US proxy system to exercise their corporate voting rights and public companies rely on it to obtain approval of important corporate governance matters, many of which facilitate capital formation and foster long-term shareholder value. The US proxy system and many of its participants are regulated. The key exception is proxy advisory firms.
▶ 1:03:36Yet institutional shareholder services and glass lewis, the two major firms, exercise significant influence over voting on thousands of proxy proposals every year and lack fiduciary duties to consider what is in the best interest of companies and their shareholders. I want to highlight several concerns that demonstrate the need to subject proxy adviserss to reasonable common sense regulation.
▶ 1:03:58First, the consulting services offered by the proxy advisory firms call into question the objectivity and reliability of their ISS and Glass Lewis sell advisory service to public companies regarding the very same matters in which they make voting recommendations using opaque voting policies and analytical tools that are available only to their consultants. Notably, before it even began offering consulting services to companies, even Glass Lewis publicly stated that these uh services create conflicts.
▶ 1:04:28Proxy advisers also benefit from other conflicts. The number of proxy proposals has increased 730% at Russell 3000 companies since 2000. More proposals mean that investors with large portfolios need more support from proxy adviserss. Yet, it is these firms that are encouraging additional proposals for by example encouraging annual say on pay votes even though the DoddFrank Act requires those votes only every three years.
▶ 1:04:56Next, there are significant concerns about errors in proxy advisory reports and often the burden is on public companies to scramble to correct the record since they cannot preview preview these firms analyses. For example, one company's glass lewis report stated that the board did not oversee cyber security risk. The company pointed glass to their SEC filing with a section titled oversight of cyber security. Uh but Glass Lewis did not revise its report.
▶ 1:05:22For these reasons, proxy advisers should face potential liability for making materially false or misleading statements. Proxy advisory firms also encourage robo voting, which is when an investor follows a firm's voting recommendations without independently assessing it. Proxy adviserss may say that they are just implementing their clients voting guidelines, but that does not explain certain investors repeatedly voting lock step with the firms or saying that they cannot override those recommendations.
▶ 1:05:50In additions, the firm's voting guidelines include numerous case-bycase policies where voting recommendations are not b based on objective standards, making it important for the firm's clients to understand the underlying rationale of those recommendations. And yet, there's often a flood of votes that mirror each firm's recommendations that come in ominous immediately after their release. Another concern is that proxy advisory firms voting policies are based on unfounded biases and presumptions.
▶ 1:06:17For example, both proxy adviserss generally oppose supermajority voting requirements because, in the words of Glass Lewis, they quote can enable a small group of shareholders to overrule the will of majority shareholders. And yet, each proxy advisory firm has so-called board accountability policies that expect companies to achieve supermajority approval on SAM pay um proposals.
▶ 1:06:41and Glass Lewis expects board responsiveness unless a company receives a supermajority vote against the shareholder proposal. These policies enable small groups of shareholders to drive major changes at public companies even though a majority of shares voted in support of existing practices. As a result, ISS and Glass Lewis pushed public companies to expend resource resources to support actions not supported by the majority. ISS and Glass Lewis also essentially act as regulators.
▶ 1:07:10By way of example, unlike the New York Stock Exchange and NASDAQs and who have developed director independent standards, ISS considers a director to not be independent if a director of an employee is an employee of an organization that provides the company just over $10,000 in consulting services. Interestingly, ISS would fail its very own independence test at companies where it provides both consulting services and issues voting recommendations.
▶ 1:07:37Finally, proxy adviserss make materiality determinations without a costbenefit analysis and often without considering the company's circumstances. For example, Glass Lewis recently stated that measures related to human capital management are financially material for all companies. Under the SEC's well-developed legal standards for materiality, that is not accurate. In conclusion, proxy advisory firms directly impact proxy voting decisions and voting outcomes.
▶ 1:08:05And thus, Congress and the SEC should adopt common sense regulation of these firms to protect the integrity of US proxy system and capital markets. Thank you for inviting me to testify. Thank you, Miss ING. Now, Mr. or Professor, I should say, Rose, you are now recognized for five minutes for your oral presentation.
▶ 1:08:25Thanks, uh, Chair Wagner and members of the committee for the opportunity to testify on an issue that I have been studying for over 20 years, the concentrated and largely unregulated power of proxy advisory firms in US markets. Proxy advisor recommendations can swing vote outcomes and shape corporate governance. Yet they operate without fiduciary obligations with limited transparency and minimal accountability. Today, two firms ISS and Glass Lewis dominate over 90% of the proxy advisor market.
▶ 1:08:55Importantly, this dominance is not a natural result of investor demand. It is in large part a byproduct of regulatory design, specifically the SEC's adoption of rule 20646 under the investor in investment advisors act of 1940. This rule adopted in 2003 required investment adviserss to adopt proxy voting policies and procedures and to vote client securities in their best interest.
▶ 1:09:22The SEC then issued no action letters suggesting that advisers could fulfill these duties by relying on independent third-party proxy adviserss. By the time the SEC withdrew these letters in 2018, the proxy advisory industry had grown significantly. Rule 20646 transformed an internal fiduciary duty into an inter an external compliance function fueling the growth of ISS and Glass Lewis into de facto gatekeepers.
▶ 1:09:49Many institutional investors now outsource their voting decisions to these firms. Some of these investors now engage in robo voting mechanically following proxy advisors recommendations without independent In 2020, over 100 institutional investors managing a combined 5 trillion voted in near total alignment with ISS or Glass Lewis. Robo voting may be attractive from a cost efficiency standpoint, but it compromises fiduciary responsibilities.
▶ 1:10:19It removes independent judgment from governance decisions and reduces diversity and shareholder viewpoints. Structural conflicts of interest further complicate the role of proxy adviserss. ISS not only provides recommendations but sells governance consulting services to the very companies it evaluates. This dual role represents a fundamental conflict. How can a firm offer objective assessments while advising those same issuers? We typically do not allow such conflicts in financial services.
▶ 1:10:49Auditors for example have long been prohibited from conflicting activities under Sarbain Market concentration exacerbates the problem. With only two dominant firms, companies have little recourse if they disagree with recommendations. The market lacks meaningful competition, making transparency all the more essential. Proxy advisers often promote uniform governance practices across industries, ignoring the unique needs of individual firms.
▶ 1:11:16A one-sizefits-all approach may penalize innovative or long-term strategies and very little evidence supports the idea that proxy advisor specific governance recommendations improve returns or help companies avoid scandal. In 2020, the SEC adopted reforms requiring proxy advisers to disclose conflicts of interest, allow issuers to review proxy advice before meetings, and reaffirm that proxy advice constitutes a solicitation under federal securities laws.
▶ 1:11:44These reforms were carefully developed over a decade across two administrations to promote transparency and fairness. Yet in 2021, the SEC suspended enforcement and announced plans to revise the rule before full implementation. In my view, this regulatory whiplash creates uncertainty.
▶ 1:12:04It signals that public input can be ignored and it erodess trust in the Again, I wish to stress that the modern proxy advisory industry has not grown out of market innovation, but instead out of regulatory incentives. Even if proxy advisers perform a useful function, why should we not hold them to fiduciary standards and protect investors against conflicts of interest as we do for other major market actors?
▶ 1:12:31By imposing accountability and oversight, Congress can ensure proxy advisers serve as responsible facilitators of informed shareholder participation rather than unregulated gatekeepers of corporate governance. Thank you. Thank you, Professor Rose. Uh, Mr. Washington, you're now recognized for five minutes for your oral presentation. Good afternoon, Chair Wagner, Ranking Member Sherman, members of the subcommittee. My name is Paul Washington.
▶ 1:13:01I'm president and CEO of the Society for Corporate Governance. The Society is a nonpartisan nonprofit organization of governance professionals who serve approximately 1,000 public and private companies of almost every size and industry across our country. We advocate for policies that promote effective governance, appropriate disclosure, and capital formation. And we appreciate the opportunity to present our views on proxy advisory firms today.
▶ 1:13:29Proxy advisory firms play an influential role in capital markets by advising investors on how they should vote as indicated in numerous studies submitted in our written testimony. The firm's impact is twofold. First, they can determine the outcome of votes where shareholders have decision-making power.
▶ 1:13:48Second, even when shareholder votes are merely advisory, as is the case with companies, say on pay proposals or many shareholder proposals, they often affect decisionmaking. In addition to providing voting recommendations to investors, the proxy advisory firms also own and control software platforms that send votes by investors to the tabulators for shareholder meetings.
▶ 1:14:11In some cases, the advisory firms decide how to vote and submit the balance for their clients and they offer, as has been mentioned, other services to investors and corporate clients. Importantly, the influence of proxy advisory firms is likely only to increase. A number of large US asset managers are implementing programs that will allow their upstream clients to decide how to vote their shares rather than having the asset manager make that determination.
▶ 1:14:40In some cases, the voting options provided to those upstream clients are based on the proxy advisory firm's own policies or recommendations, thereby effectively increasing the influence of these firms. The society supports what we term light touch regulation of the proxy advisory firms.
▶ 1:14:59Institutional investors cast votes on tens of thousands of items each year and the society fully supports investors ability to enlist outside assistance in deciding how to vote and in casting votes. At the same time, we believe regulation can first help ensure that shareholders are provided with accurate information by the proxy advisory firms before casting votes and second increase transparency regarding proxy advisory firms thereby enhancing confidence in the system.
▶ 1:15:29Let me address four areas of reform. First, as a threshold matter, legislation may be needed to address the SEC's jurisdiction. For many years, as you know, the SEC has considered the activities of proxy advisory firms to be within the scope of proxy solicitation and therefore subject to the commission's rules. As you know, ISS has challenged the SEC's interpretation and a lawsuit in the federal district court, which is on appeal to the DC circuit.
▶ 1:15:57If ISS prevails and it is determined that the SEC lacks authority to regulate proxy advisory firms, Congress should move quickly to enact legislation to confirm the SEC's authority. Second, and quite importantly, the society supports requiring proxy advisory firms to provide advanced copies of their reports to companies on a complimentary basis with a reasonable amount of time for companies to identify any factual, analytical, or other errors.
▶ 1:16:26In addition, proxy advisor should provide clients with a hyperlink to the company's response to the advisory firm's analysis and recommendations. Given the more than 25,000 ballot items on Russell 3000 companies each year, it is inevitable that proxy advisory firms will have some factual errors. Numerous studies confirm that these errors occur. An advanced review and comment process would permit a company to review and correct any factual inaccurate information.
▶ 1:16:55This practice would also be consistent with ISS's prior practice in the US, its current practice outside the US, and the SEC's 2019 proposed rule. Next, we support increased disclosure of the empirical basis for proxy advisory firms voting policies. This is critical because institutional investors with fiduciary duties to their shareholder clients rely to varying degrees on proxy advisory recommendations.
▶ 1:17:22And second, as more retail investors participate in client-directed voting programs in which their votes follow proxy advisor recommendations, those retail investors should know whether and to what extent the recommendations have an solid empirical foundation. We also believe that proxy advisor firms should at a minimum provide increased information regarding actual or potential conflicts of interest that arise from their multiple roles.
▶ 1:17:47And finally, the society also supports the regulation of automated voting, sometimes called robo voting. This automated voting outsourcing is a particular concern because, as noted above, the proxy advisory voting policies may not have an empirical basis. We appreciate the legislation that the subcommittee is considering and we stand ready to work with you as you refine the legislation. Thank you very much for the opportunity to appear before you this afternoon. Thank you, Mr. Washington.
▶ 1:18:16Miss Mow, you are now recognized for five minutes for your oral presentation. Thank you, Madam Chairman, and members of the committee. Uh, I'm a graduate of the University of Chicago, which taught me a lot about free markets, and I'm the founder or co-founder of five startups, three which have been sold, and we've created hundreds of jobs. I'm here on behalf of the people capitalism is named after, the capitalists, the providers of capital, and on behalf of the shareholders.
▶ 1:18:46Um, I worked in the antitrust division of the Justice Department during the Reagan administration. So, I'm aware that the elements of a cartel are collusion on pricing and imposing barriers to entry uh on the market for competitors. Neither of those are present here and that is why I'm using the word cartel in quote marks because it just doesn't apply at all.
▶ 1:19:12Uh as for entering the market, there have been some that have tr that have tried and failed. Uh there was a really good one started by a former SEC commissioner, but nobody bought the product because it was funded by the business roundt and they were suspicious of it. Uh there have been a couple in the last couple of years as uh Mr. Sherman said that sell themselves as the anti-woke.
▶ 1:19:35There are also uh proxy advisors outside the United States that cover US companies and make their services available. I could start a new one tomorrow. But if you impose new rules, if you impose new restrictions, you are making it harder for new people to enter this business and compete with ISS and Glass Lewis. uh proxy advisory services are purchased exclusively and voluntarily by the most sophisticated financial professionals in the world.
▶ 1:20:05Almost all of them also fiduciaries and subject to the strictest legal standard uh that has ever been developed. No one has to purchase their services and no one has to follow their advice. If indeed they are as influential as the snowflakes over here are saying, then they should be popping champagne corks because over 90% of the recommendations of the proxy advisory services are to vote as management recommends.
▶ 1:20:32I don't know anybody who understands voting better than the members of this committee and the members of this house. You would be overjoyed to get 96% of the vote, which is what the unopposed directors get when ISS recommends a vote in favor.
▶ 1:20:49On the 4% where ISS parts from the recommendations of management, the data show very clearly that the fiduciary financial professionals read the analysis and make their own decisions. In my opinion, the single most outrageous item that has ever been on a proxy is the 58 billion dollar pay package for Elon Musk at Tesla.
▶ 1:21:18ISS recommended a vote against it. Got a strong majority vote in favor. I have a lot of data in my uh submission about the number of votes that go contrary that cast by clients of the proxy advisors that go contrary to their recommendations as well as data about the different recommendations that ISS and glass lewis have showing again that there's no collusion um and many people do
▶ 1:21:48uh subscribe to both despite proxy uh advisory firm recommend recommendations. Uh uh the clients often vote in favor or vote against. Um the uh shareholders of Tesla also voted in favor of the move from Delaware to Texas which I thought was wrong. ISS supported it and it got uh an enormous majority.
▶ 1:22:17This is a kill the messenger approach. You have got the absolute ultimate example of the free market here. The reason the proxy advisory services started and I was there when they did and I helped to start one is that there was documentation that investment managers were voting incorrectly when it came to shareholder votes.
▶ 1:22:41They were voting yes when they should have voted no because the companies were clients or were prospective clients. And um Jack Bogle, the founder of Vanguard, wrote several books about that subject. The independent proxy advisors were invented, were asked for, became a part of the market to avoid those inherent conflicts of interest.
▶ 1:23:06I'm sure that advocates who are paid by corporate insiders have valuable comments, but I think it would be useful for this committee to hear from the institutional investors that use these services so that you can understand why they buy them, how they use them, and when they vote with and against them. And thank you, Miss Mow.
▶ 1:23:30Before returning to member questions, I want to remind everyone involved in this hearing, both members and witnesses to adhere to proper decorum in every way, shape and manner. And I will impose that. I now recognize myself for five minutes for questions. Mr. Washington.
▶ 1:23:53As a former corporate secretary of a public company, you played a key role in navigating the firm throughout the shareholder proposal process during proxy season. Can you discuss the impact that a proxy advisory firm's recommendations has on a shareholders proposal? Certainly, it has a quite significant impact.
▶ 1:24:16Um this is more recent but the Society for Corporate Governance has put forth in the written testimony um found that in the last proxy season there's a 36 point difference in shareholder support for a proposal that is endorsed by is Glass Lewis versus when it's not. That's 42.4% in favor versus 6.6%.
▶ 1:24:42So a dramatic impact when the advisory firms are in favor of a shareholder proposal that has a knock-on effect within the boardroom. It affects corporate decisionmaking as to whether you will take a particular action or not because it factors into the calculus of what would this do for the company's reputation? What might it do for um the uh associated controversy if you did not follow the shareholder proposal?
▶ 1:25:08Then you would say that that the the impact on these proxy advisory firms recommendations uh what car does it carry a large amount of weight? A very significant amount of weight. Yes. Uh Miss Izzing and and Mr. Washington, how have proxy advisors materially impacted corporate behavior over the last 10 years? Please, Miss Izzy. Again, I think there are three key impacts that I would highlight.
▶ 1:25:37Um the first is and is the the increase in costs which are definitely passed on to shareholders. Um, companies are are obviously operating, running their business and and trying to maximize shareholder value, but they also have to spend significant resources um rethinking what they've determined is in the best interests of the company and shareholders given um the proxy advisory firm's expectations and the consulting fees that need to be paid uh for the advisory services.
▶ 1:26:06Um, it also takes management and board time to address these issues. And frankly, the proxy advisory firms have contributed to the number of shareholder proposals that we see in proxy statements and that's that fueling that rise has also read led to um the use of more corporate resources to address them. Quickly, Mr. Washington, how has it impacted corporate behavior, the proxy advisors over the last 10 years?
▶ 1:26:32it affects it the way it would if you had a major shareholder um who actually didn't actually have a stake in your company. That's essentially what we're dealing with. It's not like having an extra director in your boardroom who would have to abide by fiduciary duties. Nor is it like having a regular shareholder who cares about the long-term financial well-being of the organization.
▶ 1:26:54It's like having a major shareholder or a couple major shareholders who may have other interests at play here and other conflicts including some conflicts. Professor Rose, there has been widespread criticism of proxy recommendations that lack a basis in fact or prioritization um uh activist agendas over shareholders interests.
▶ 1:27:18How can we ensure that proxy advisors are acting in the best interest the best interest of shareholders? I think that the uh the legislation, the draft legislation that we've seen, especially uh Congressman Styles bill would really go to the heart of that issue. It would impose greater transparency into methodologies.
▶ 1:27:42It would provide disclosure of conflicts of interest and it would impose liability for misleading statements and I think all of those liability. Good. Yeah. And I think all of those things could help ensure that they are acting in the best interest. Mr. Crane N challenged the Biden SEC's decision to suspend enforcement of the 2020 proxy rule. You mentioned it briefly and its latter recision of parts of the rule.
▶ 1:28:10Can you describe how the SEC under former chair Gendler created more uncertainty surrounding the proxy advisory and industry? Absolutely. So the 2020 rule, as it's been mentioned, was developed over the course of a decade and it really included many bipartisan ideas. Unfortunately, under Chairman Gensler's leadership, they suspended unlawfully as a court held and then rescended again unlawfully as a court held that rule, creating a significant pendulum effect um that the market is currently feeling.
▶ 1:28:39And we're still litigating this issue. There are oral arguments on Friday about whether the SEC has the authority to regulate these firms at all. Manufacturers say that they do. ISS says that they don't. Thank you very much. Pardon me. The chair now recognizes the ranking member of the subcommittee, Mr. Sherman, for five minutes for questions. The loudest and most persuasive testimony is the testimony that has not been spoken. Kalpers is not here complaining.
▶ 1:29:07The institutional investors are not here complaining. The owners of capital in our society are not complaining. The complaints are coming by those who represent corporate America who do not want the owners of corporate America to tell the managers of corporate America what to do because they're just the Um, now lowcost
▶ 1:29:37investing is the rage now. You want to minimize your costs and these these proxy advisors cost money. Uh, would it be legal, Ms. Mow, to just have a mutual fund that says, "We always vote with management. Makes it simple. We spend 0.0 pennies figuring out what to do." Is that legal? It is legal. Or, "We always vote against management." That's legal, too. that is also legal. Okay.
▶ 1:30:05Uh so you don't have to pay for this advice if you don't want it. And in fact, you could offer investors a a lower administrative cost if if you just or you could also you could also have a um a proxy uh a mutual fund that's policy was uh we just never vote or we always just count our votes toward a quorum, but otherwise don't vote.
▶ 1:30:29They would have to make a case that that was consistent with their obligation as fiduciaries, but if they were small enough, I think they could do it. So you'd have to be small to do that. Whereas always voting with management, a big a big one could do that. They Well, if they disclosed it so that people We save money by not thinking. Yeah. That people could decide that that's what they wanted. Index investing. That's the slogan. We save money by not thinking. Yeah. So, why not carry it one step further and apply that to this?
▶ 1:31:00Sure. I mean, if you're not going to spend a penny figuring out what stock to buy, why should you spend a penny figuring out how to vote on the damn proxy statement? Um, so uh we're being told that uh there are errors.
▶ 1:31:16Uh now the SEC investor advisory committee reported the proxy advice contained errors at the rate of 0.3% of the and none of those errors were shown to be material. Proxy advisors are of course uh private companies their clients expect them to be accurate.
▶ 1:31:36Miss Minnow, what is the argument for supporting more federal regulation of uh advisors uh on to promote accuracy when they uh review shows no material misstatements uh of Proxy advisors are publishers of reports just like newspapers. They give restaurant.
▶ 1:32:02If I could sue my newspaper in my town for an error rate of greater 0.3%, I could afford to retire from Congress. Absolutely. There's no possible justification for that Um, is there any organization that is Can we close the door back there? It's creating uh and I ask to suspend the clock. Yep.
▶ 1:32:31Suspend the clock, please. Apologies. I believe the gentleman was at a minute 30 left in his his time. Thank you. And he may resume.
▶ 1:33:01so if an investor wanted to invest in a fund that was dedicated to moving us away from fossil fuel, how could that fund vote those values without uh getting any advice? Could that work? Exactly.
▶ 1:33:22As I said, the proxy advisors came of age in the 1980s to prevent the conflicts of interest that the investment managers were facing. Okay. And what if you wanted a fund that invested in traditional values now and then as I posited the idea that there might be a a question before a corporation as to whether to get involved in the pornography business. They say that you can make money in that.
▶ 1:33:47Um uh if we had uh in investment advisors, if if the proxy advisors were required to uh uh give advice consistent with maximizing profits, would they then have to advise a traditional values fund to vote yes on pornography? They're happy to do it. They're in business, Ranking Member Sherman.
▶ 1:34:10And if you come to them and say, "I would like you to develop proxy voting policies or vote my proxies for me according to whatever policy you want, they will provide." So if you pay them to tell you how to vote traditional values, they will unless Congress prohibits such advice as has been proposed by some of my Republican colleagues. I yield back. Chair now recognizes a gentleman from Arkansas, the chair of the full committee on financial services, Mr. Hill, for five minutes. I thank the uh chair uh Mr.
▶ 1:34:41Crane, good to have you with us and I was thinking about your your members and uh just curious when they design their corporate policies and compensation programs, do the the views and the policies and the likely recommendations of the proxy advisory firms influence that? They absolutely do. If if you're putting together one of these policies, you absolutely need to take into account the very powerful fact.
▶ 1:35:07And if you quote unquote get it wrong, then ISS and Glass Lewis might recommend against you. And the best way to avoid quote unquote getting it wrong is by paying for their consulting service. They will tell you what is in the secret sauce to help you structure the policy in a way that aligns with their view of corporate governance and then you avoid the negative vote recommendation at the end of the day. That's absolutely part of the calculus for publicly traded manufacturers. Wow, that's amazing.
▶ 1:35:31is that uh that seems like that's just way outside the scope of the business judgment rule and fact that uh we have all these rules in state law about having independent boards of directors that are responsible for all that. But you're saying there's this is you would you would describe this as an outsized influence over the board. I absolutely would and I think it's why is it more outsized than you know some successful money manager at Kalpers? this Kalpers, it's a powerful money manager out there in California.
▶ 1:36:00Do they rely on ISS or somebody to tell them what to do even though they're one of the biggest in the country? Uh my understanding, I'm I'm not an expert on on their specific relationships, but I do believe they rely on on the proxy firms to some extent. I think your point is well taken though um that proxy firms uniquely are unregulated in this space.
▶ 1:36:18If you think about the large institutional investors, if you think about the exchanges, if you think about the publicly traded companies who are operating in America's capital markets, everybody is a participant in the capital markets and they have some appropriate degree of regulation. And we can all agree or disagree with exactly what that appropriate degree is. But proxy firms don't. They're unregulated and that's an issue despite their influence. Yeah. And I appreciate what my friend Neil Mow said about when she started her company was in the dark ages though.
▶ 1:36:49Right. And so Yes sir. So so so back in 1992, you're reflecting on the 1980s LBO craze, leverage buyout craze. Two classes have stopped staggered directors, no independent directors, no independent compensation committee, no separate chairman from a CEO, right? Those were top issues then. Would you agree? Among many others, but those were top issues. Those were definitely the top issues at that time. Okay.
▶ 1:37:13So but since 2000 uh the implementation of Sarbain Oxley where we have all this micromanagement of influence between investment bankers, investment research, owners, owner disclosure. It's a different world. Wouldn't you say that today's capital markets are different than 1992s? I have kind of a denzian and best of times, worst of times assessment of that.
▶ 1:37:37We certainly are doing much better with regard to independent directors and the number of boards that they serve on. There a lot of big improvements and and Sarbain Oxley uh it was has a huge uh impact on that. However, some things are worse and to the extent that they are better legislation played an important role but so did the shareholder feedback. Yeah. Well, I'm for shareholder feedback. I was in 1992 when you and I met each other and I'm for it now.
▶ 1:38:06The problem is we have like fewer public companies now. Public companies aren't going public because of the cost and litigation around this kind of stuff. And you know, I credit the success of this industry to Harvey Pit and the no action letter in 2003. Nobody, this is a selfcreated self-fulfilling prophecy set of organizations due to that no action letter which basically said if you use one of these folks, you're off the hook to Brad Sherman's comments that he just made about Excuse me. But that's been rescended.
▶ 1:38:36Yeah. Well, but it was still the origin of how this business grew in my opinion. Do you agree with that? Uh I would think that my origin story goes back to the labor department and their letter um in in 1988 uh for for Orisa fiduciaries, right? Yeah. Well, I mean, I think we've taken care of that. We're they're doing a good job on that. Yeah.
▶ 1:38:58So uh I want to turn and ask u uh missing from your experience how influential the proxy advising firms and voting outcomes um they're very influential but obviously depends on the specific company at issue but we've seen um studies that show for example on say pay votes it can be upwards of a 40% difference um the uh and what the way we often will also see that that
▶ 1:39:28influence show up is um not just in the vote totals but also in the dramatic impact that happens once the the left hand issues the voting recommendations and the right hand casts the votes and so you swiftly see it. I appreciate that. I yield back to the chair. Gentleman yields back. The chair recognizes a gentleoman from California, the ranking member of the full committee on financial services, Miss Waters, for five minutes. Thank you very much, Madam Chair.
▶ 1:39:55Um, as I stated in my opening remarks, I firmly believe that uh, President Trump's ongoing efforts to line his and his family and his friends pockets is an illegal and despicable attempt to use the office of the president for personal gain and I think is deserving of this committee's immediate attention. Nevertheless, I will indulge the witnesses with a few questions about the proxy advisory industry.
▶ 1:40:21For those listening at home, proxy advisors are independent research firms that help asset managers and ordinary investors alike to better understand the numerous proposals they must vote upon at the annual meetings of the companies they're invested in.
▶ 1:40:39Critics of pro proxy advisors often claim they have too much power over corporate governance and often accuse them of recommending votes that are contrary to what corporate management wants. I want to ask the question of you uh Miss Mau. As you point out in your testimony, however, ISS recommended a vote with management on a whooping 96% of proxy proposals in 2024.
▶ 1:41:09And those proposals went on to receive 90% 96% of the vote. Almost all of those proposals were recommendations to vote in favor of unopposed board candidates, auditor approvals, and other routine matters. Sounds to me like management words of an all powerful proxy advisory cartel are overblown. I might go so far as to say that proxy advisers are too aligned with corporate management.
▶ 1:41:39Can you talk a little bit more about the role of proxy advisors and whether silencing them or some of the bills posted for this hearing would do uh would benefit the advisors? I'd like to hear from you. But I tell you the truth, if you were talking about tariffs, if you were talking about social security, if you were talking about Medicaid, if you were talking about the issues uh that are really confronting us at this time with a president who is leading this country in a terrible direction, I'd
▶ 1:42:10be more interested. But this is my duty. I'm gonna sit here and listen to all about these powerful proxy uh advisors. Please go right ahead. Thank you uh Representative Waters and I hope we can have that other conversation sometime too. Uh yeah proxy advisors as I said they are in business. If you come to them and say I would like you to vote proxies for me and here are my policies.
▶ 1:42:34I for example there are a number of extremist right-wing proposals that are appearing this year on on proxies. They we want to vote all in favor of those and against all of the ones that are coming from the nuns and the uh the public interest groups. They will be happy to vote your proxies exactly as you say. But what they do is they provide a lot of research.
▶ 1:42:56And if you'll permit me, I would like to give uh to add to the record two examples of ISS uh proxy advisory reports uh which I think should be a part of the record because you'll see quite honestly they go into great quantitative detail and their evaluation and they say and this is what management says and this is what we say and this is what somebody else says and I think they would really enhance the record of this hearing.
▶ 1:43:24Uh, I ask permission to enter into the record a recent report from ICCR, the Sustainable Investment Forum, and the Shareholders Drives Group on shareholder proposals. Objection so ordered. Thank you. We have a little bit more time left. You have know anything about I mean, uh, you know, Wall Street is telling us that there's so much uncertainty. They don't know what this president is going to do from day to day. Um, he really doesn't know anything about tariffs.
▶ 1:43:53Uh but anyhow, I think he uh was trying to uh improve the tariffs on a little island called Loto in Africa. I think it have no people on the island, what have you. Uh but to tell you the truth, I just wish that this committee uh would take up some serious issues. We're gonna have a markup uh on Wednesday. I want everybody to pay attention. I got something for them. Okay. Okay. You sure you don't know anything about tariffs?
▶ 1:44:24Oh, that's okay. These big old important proxy advisors, that's what we hear about today. They have so much power. Got to do something about them. Can't let the What are they doing? Telling the wrong people uh the the right thing or the right people, the wrong thing. We don't know. And frankly, I don't care. Uh but I got to do this, you know, as a ranking member. I have to pretend. But I tell you, sit in with us tomorrow. Listen to us what's going to happen on the markup.
▶ 1:44:54Okay. Yes, ma'am. I yield back my time and I'm glad to do it. Thank you. Chair now recognizes the gentleman from Oklahoma, the chair of the task force on monetary policy, Treasury Market resilience, and economic prosperity. Mr. Lucas, for five minutes. Thank you, Chair, and thank you to our witnesses for testifying today, and I too look forward to hours and hours and hours and hours and hours of good insights tomorrow. But for the moment, let's turn to the perspective.
▶ 1:45:21Uh last week, Paul Atkins was sworn in as the 34th chairman of the SEC and this is certainly a welcome change as the previous chairman had pursued an aggressive rulemaking agenda undoing much of the progress made under the first Trump administration. For example, many of the reforms implemented under Chair Clayton intended to increase transparency and pro proxy advisory industry were rolled back or went uninforced under Chairman Gendler.
▶ 1:45:48Uh, Miss Izzing, what would you suggest to the new chairman as the first order of business in improving the misguided regulations of the past? First order of business, what would you tell the new chairman? I think the first order of business with respect to proxy advisors is uh restoring the common um well first making sure and continuing the the um grounded view that uh proxies advisors are engaged in solicitations uh bringing
▶ 1:46:18back the 2020 rules which as Charles mentioned are very much a a a reasonable approach and continuing to focus on the need for transparency for fairness and predictability on how these firms terms operate. Mr. Crane, as Miss Izzing just detailed, there are a number of positive steps that the SEC could take with its existing authority.
▶ 1:46:40But now turning to Congress, what statutory changes should this committee be looking at so that public companies are not burdened by regulatory whiplash that you talk about uh in your written testimony? So the first place that I would look is the uh Exchange Act's clear directive that the SEC has the authority to regulate solicitation and that proxy advisers are in fact engaged in solicitation.
▶ 1:47:06Hopefully the NAM is successful this Friday in protecting that authority in federal court. But in the I'm going to say unlikely event that we're not. Knock on wood. Uh I it would be incredibly impactful if Congress were to weigh in and re make clear that the Exchange Act does have that authority. Putting the authorities aside though, there are plenty of specific reforms that Congress could institute that would ensure that there's not a pendulum swing when there's a change in administration.
▶ 1:47:31So things like company's ability to review draft recommendations to identify errors, company's ability to respond to the proxy firm's recommendations and ensure that investors have access to those responses. Things like regulating conflicts of interest and increasing transparency. There's a lot of work that you all can do separate and apart from whatever happens at the SEC or in court. Mr.
▶ 1:47:52Washington, my bill, the Public Company Advisory Committee Act, would provide public companies opportunity to engage with the SEC on a range of regulatory issues, including the ones discussed today. Can you speak more to why the SEC would benefit from establishing a public company advisory committee? Delighted to do so, and thank you for this pallet cleansing bipartisan moment. Um, because we think this is a an issue that both sides of the aisle can embrace.
▶ 1:48:19Um, you know, the SEC has a number of advisory committees, including one for investors. They don't have one for issuers. And we think that having a group of issuers, large comp, small and midcap companies who can get together and advise the SEC in advance of proposing rules, resending rules, revising rules will dramatically streamline the regulatory process, improve decisionmaking, and reduce the burdens on investors, issuers, and the government alike.
▶ 1:48:49So, we really hope that this is a your legislation, we appreciate your leadership on it, is something that can be embraced in both sides of the aisle and can move forward. Madam Chair, before I yield back, I would note I'm looking forward to quality bonding time with all my friends tomorrow. And with that, I yield back. It'll be a spectacle, that's for sure. The gentleman yields back. The chair now recognizes a gentleman from California, Mr. Vargas, for five minutes. Thank you very much, Madam Chair, and thank you for holding this hearing. And there's nothing like bonding.
▶ 1:49:19looking forward to it. Nothing like bonding around here. It's fabulous. Now, I I tried to research your backgrounds and you have stellar backgrounds obviously and I believe that four of the five of you are attorneys. Mr. Crane, I don't believe you're an attorney. Is that correct? That's correct. I'm But I believe the four of you are. Is that correct or am I incorrect about that? You are. Great. Okay. And and Mr.
▶ 1:49:45Washington, you you've mentioned conflict of interest a couple times here, and I think that's very important. So, we've been reading about the president's cryptocurrency and his memes. Is there potential here for a conflict of interest? I mean, wouldn't an investor want to know some information? Well, you're an attorney first. Could you tell me, is there a possibility for a conflict of interest here?
▶ 1:50:08We heard from the New York Times that in American history, we've never seen so much um intertwining between public policy and a president's personal fortune. Is there potential here for conflict? I would advise you before that remember what Lisa Marowski said. Yeah. No, I think she said that they fear retribution from the president if they speak freely.
▶ 1:50:38So, go ahead. Yeah, there are different rules that apply in determining whether it's a conflict of interest in the political sphere, in the legal sphere, and in the corporate sphere. Um, I feel qualified to talk about the conflicts of interest that exist in the legal sphere and the corporate sphere, but not in the political sphere, respectfully. Would anyone else like to try it? Spino. Uh, thank you very much.
▶ 1:51:05Before I went into ISS, I was in the government and for a while I was an ethics counselor in the government and I can tell you it is a per se conflict of interest. Why is it a per se conflict of interest? Because the president uh like the other people in government is supposed to have one interest and that is that is what he swore to the benefit to uphold the constitution and to benefit all Americans.
▶ 1:51:34and when he sells access to have dinner with him, when he sells products and gives better um attention to the people who buy those products, that is not just a perceived conflict, but an actual conflict of interest. But who's going to police it then from the federal government? I think it's probably Congress, sir. Congress, not the CFPB, not any other institution that we have and the press.
▶ 1:52:02Well, it wouldn't be anybody else. I mean, don't you want Now, if you're an individual in, you know, investor, retail investor, or an institutional investor, wouldn't you want information on this? Wouldn't you want to have some The president only once tried to have a public company with outside shareholders, and he learned very quickly that he was not happy about that. So, I don't know who his who his other shareholders are, but they're probably just members of his family. Well, I I bring this up for two reasons.
▶ 1:52:32One, I mean, obviously, you want advice. I mean, if you're the if you're going to invest in a company, you're the investor. You're the owner of that company. Ultimately, you want advice. That's why I think proxy advisor is so important. You want advice. Whether it's the nuns or whether it's Opus Day, it doesn't matter. I mean, they have two very I'm Catholic. I can tell you they have very different views. But they want advice. But you also want to make sure that there's not a conflict here.
▶ 1:53:00And this is where I think it gets very important that we look at this as an institution. I mean, it is fascinating that we're not talking about that today. You know, you see this incredible opportunity for corruption and yet there's silence. No one's talking about on the other side. The people in power don't want to talk about it. But again, I think Senator Mowsky kind of let the cat out of the bag when she said there's retaliation. There's repercussions.
▶ 1:53:28We fear the president because of political actions that he may take. So again, I I thank all of you for being here. I I don't see how you get over the fact that investors are the owners of the company and they can get any advice they want. And again, whether they want advice on climate or whether they want advice against pornography or whether they want any kind of advice, they should get it and they should invest the way they want.
▶ 1:53:53And lastly, just on a personal note, if you could say hello to your sister, she was my professor at Harvard and we can say Harvard these days. We're very proud of it today. Thank you. Thank you, sir. Chair now recognizes a gentleman from Ohio, the chairman of the subcommittee on national security, elicit finance, and international financial institutions, Mr. Davidson, for five minutes. Uh, thank you, Madam Chairwoman. I really appreciate you having this hearing.
▶ 1:54:20I can't believe it really took us this long to get this hearing. It's a common sense solution to a problem. Uh there are very few things where you have 97% market share by two firms and there aren't people that are concerned and I have people here that um at least one person here seems not concerned and we have colleagues who think that the right way to run capital markets is to just just check with Kalpers and whatever they say is probably what we should do for the agenda for the hearing.
▶ 1:54:50Thankfully, Mr. Sherman's not running the agenda for the hearing and may we never see that day. um in the uh you know the the space that we're talking about really you know chairman Hill uh highlighted it but you know ISS the incumbent in the proxy voting advisory space was founded in 1985.
▶ 1:55:13ISS was a pioneer providing proxy voting recommendations to institutional investors and they were capitalizing on growing uh governance expertise. As I understand it, other firms existed, but none uh had ISS's early scale or influence. And then the SEC issued their 2003 rule requiring mutual funds to disclose voting policies. Mr. Washington, do you agree with the timeline and the industry's development?
▶ 1:55:42Why exactly is it that a duopoly consisting of ISS operated 18 years before Glass Lewis existed is now Look, in almost any market, there are different economies of of of scale. Um, and so there will be markets where there'll be naturally one player, two players, multiple players.
▶ 1:56:07I would say, you know, as a society, we are interested in encouraging more players to enter into this market. Um that is why we believe in light touch regulation because we actually want the environment to be conducive to more players coming into the into the market. Um at the same time we want to make sure that the players who come into the market are providing accurate reliable information to their clients.
▶ 1:56:36So, um, we're hopeful that legislation will proceed that'll provide those market conditions to increase competition while ensuring accuracy. Thank you, Mr. Rose. What would it take to get, you know, some market share beyond the 3% that isn't gobbled up by the two big incumbents?
▶ 1:56:54What would it take to get that to Well, I think that it's quite challenging if you look at markets like this where you have a sort of certification function provided by uh market players, look at credit rating agencies, you look at auditing, they tend to be dominated by a small number of uh of folks. And so again, I guess I would reiterate Mr. Washington's point. That's why light touch regulation would be helpful here.
▶ 1:57:22I do think regulation is necessary but a light touch so that it wouldn't create barriers. Well, it's safe to say that they they just the two firms exert quite a lot of influence over our capital markets, right? Does anyone disagree with that? Absolutely. Okay. So, I is it also a concern that they're both foreignowned?
▶ 1:57:40I mean my understanding is ISS is owned by Deutsch Boris and uh Glass Lewis has been owned by various Canadian firms but currently Pelaton Capital Management uh private equity firm based out of Toronto. Should we be concerned about that? In my view it creates an additional layer of risk.
▶ 1:58:00uh those firms are a little bit less uh I suppose a little bit less regulated by either US investors directly as shareholders or by US regulators and then you know we've talked a little bit about it in terms of um you know Mr. crane. You you mentioned a potential conflict of interest inherent when proxy advisory firms uh are aligned there. You know, um you know, they want to serve their clients.
▶ 1:58:27They want to serve people maybe better uh by giving uh you know, favorable or unfavorable um referrals on proxies. So as the uh national mo ass association um NM notes 59% of manufacturers cited unfavorable business climate as primary concern we often hear about the task code barriers. However is any part of the unfavorable climate for manufacturers connected to corporate governance guidance.
▶ 1:58:56I think absolutely when you think about an unfavorable business climate you think about burdensome regulations you think about uncompetitive tax policies as you mentioned and you think about access to capital. One way to access capital is by going public. One thing that makes going public more difficult is the influence and the power that these proxy firms have. So I think that's absolutely fair. Thank you for your uh testimony today. My time's expired and I yield back. Gentleman yields back. The chair now recognizes a gentleman from Illinois, Mr. Casten, for five minutes. Thank you.
▶ 1:59:24Uh there's a certain irony hearing concerns about capital flying from the United States without mention of the last 100 days when it's running away from equities and treasuries, but I guess we're not going to talk about that today. Um, Mr. Crane, I want to just give you a hypothetical. Let's suppose that I am looking for a sole investor in my business. Um, setting aside what this business does. I need 250 grand from you. You're going to be my sole investor.
▶ 1:59:47Um, you can ask me any question you want about cash flow management, my compensation, hiring, strategy, but I reserve the right to tell you that your questions are immaterial and not answer them. Um, setting aside what my business does, you on board? I think my first question would be why are you approaching someone who doesn't have 250 grand to give you? But would you invest in a company on those terms that that that I take your money and then I get to tell you whether your judgments are material?
▶ 2:00:16I I think certainly investors in a company especially if I'm the sole investor in your business uh would certainly have some questions about what you're using. So I say that as a you know as a guy who you know built some companies with you know with with private equity never never took a company public but I always it always struck me that there's this disconnect where if you're starting a company and you find an investor it is understood that as the entrepreneur as the CEO you are the custodian of someone else's capital and you work for them
▶ 2:00:46and yet once you get a large diffuse investor base there's this idea that somehow well Now, their questions are kind of a nuisance. They're not as sophisticated as I am. They're not asking the kind of questions that I would have. And since you uh I guess since you don't have the $250,000, let me reframe the question. I got my money. Um I want you to work for my company now. And as a condition of working for this company, you have to join a labor union. And you have to pay dues to the labor union.
▶ 2:01:15The labor union is going to negotiate for compensation and benefits and all that, but they have to present their proposals to me first as the CEO, and I will I will roll them back to you for consideration after I've had a chance to vet them. Would would you want to work for that company? I'll admit to being a little lost in the hypothetical, but I think the answer you're looking for is no.
▶ 2:01:33Um, so I asked that because like number one, like we have a proposal right now that would permit companies to say that shareholders are going to actually pay for these proxy advisory services, but then the company gets to review them before the people who actually paid for it can review them. And we've got another bill that would allow the companies just to ignore certain proposals outright because in their judgment, this isn't material.
▶ 2:01:55I guess mow like I am sympathetic to the argument that you can't possibly have every investor in every company someone who owns one share of a you know company with 20 million shares outstanding to ask you every question. But is isn't this just a collective action problem? In the same ways that we have you know we you know labor unions help negotiate so that people can speak with one voice.
▶ 2:02:20Aren't these proxy advisory firms just providing solving a collective action Uh, thank you very much. I'm very very happy with that question because that is exactly how I describe it. The when you're making the buy sell decision, that's that is something that where there's a premium on exclusivity and you just want to have information that nobody else has as long as it's legal.
▶ 2:02:43But when you're talking about proxy voting, I can vote the best proxy policies in the world, but if I can't get other people to vote with me, um there's a there's an awful economic term called rational apathy. And it means that it's more expensive for me to learn what's on the proxy than it than it could possibly benefit me. And that's why proxy advisors perform such an essential role. And I really appreciate that question. No, and I'm and I'm guilty of being that 96% probably that just says, "Yeah, I'll just vote what they'll easier." Right.
▶ 2:03:11Um so I guess I just want to leave a question for all of you. The um Dan Savage, the love sex advice columnist and very funny philosopher of all things in my view had this great comment and it was in the context of you know people saying some fairly homophobic things to him. He said when somebody accuses you of something you've never thought of they're telling you what they're capable of.
▶ 2:03:37And there's something that is very strange to me that we're sitting here saying we should never allow outside groups to tell a management team that they don't that their wisdom their judgment about how to run a company is s is sufficiently like that they we can't that we have to challenge them because they might do something foolish otherwise.
▶ 2:03:58And yet I don't hear peep about the State Financial Officers Foundation who's going out and telling pension funds, "We're going to change laws in your states because we don't want your pension fund to invest in companies that prioritize ESG, prioritize DEI, prioritize climate change." That's a real thing. That is really a group that is actually doing the thing that we are theorizing some I don't know some combination of George Soros and Dan Savage might be doing on the other side but that's actually happening from the right.
▶ 2:04:29I yield back. Gentlemen's time has expired. The chair now recognizes the gentleman from Wisconsin the chair of the subcommittee on digital assets financial technology and artificial intelligence Mr. Style for five minutes. Thank you very much. Uh, Madam Chairwoman, always good to have the last name pronounced like a true Luxembburger. Um, we have a huge opportunity today to talk about a duopoly that most Americans have never heard of, ISS and Glass Lewis.
▶ 2:04:56But two companies have a huge impact on their lives or ability to save for retirement and their own financial security. And I think a lot of Americans would be surprised to know that both of these companies are foreignowned. Mr. Crane are either ISS or Glass Lewis at least American companies if they're having such a big say on American retirement accounts. I don't know the exact structure of their ownership, but no, I don't believe so. Does Mr. Mr. Rose, do you know their their ownership structure?
▶ 2:05:25I believe that they are both foreignowned currently. Uh I think that they're Germany Germany and Canada they're foreignowned enterprises. Yep. and they're opining on US retirees accounts. This should be concerning out of the gates for people. And then we might want to know how do they make their money? Sure, they provide uh advisory services and people pay for that. But Mr. Rose, do they make money Well, they can make money through consulting services. Consulting services.
▶ 2:05:54Why would why would somebody want to pay ISS and Glass Lewis, a German uh company and a Canadian company, a whole bunch of money for consulting services? a lot of consulting companies here. So, they could help convince your shareholders to vote for whatever proposal. Oh, so you're saying that that conflict of interest might go right over the so-called Chinese wall to the other side because they're making money on this side and they're making money on this side all on the backs of American retirees. Is that correct? That is the danger. Yes. And so, wait a minute. We should probably disclose these conflicts of interest.
▶ 2:06:24Do you think I agree? Does anybody on this this panel think that we should not disclose conflict of interest for proxy advisors? the record to reflect all of our witnesses think we should disclose them. Mr. Crane, are they of course then required to disclose these conflicts of interest under current securities law? Unfortunately, they're not. Holy cow. So, it sounds like Democrats and Republicans at least agree on the point that we should know if there's a conflict of interest for foreign companies are advising a whole host of voting on American retirement accounts.
▶ 2:06:54This is egregious. Well, of course, there was a period of time where the SEC came forward and said, you know, maybe we should regulate these entities and they wrote forward a law and or they wrote forward a rule and regulation and then what happened to that rule and regulation, Mr. Crane? They suspended it and then they rescended it. And were they legally allowed to do that, Mr. Rose? Sorry, repeat the question. Were were they they suspended the proxy visor rule? Were they legally allowed to do that? They were. And away we go.
▶ 2:07:23And now we don't have any rules or requirements of substance with meat and potatoes on the bones protecting American retirement accounts because Gary Gensler went and gutted a wellthought through well ststructured rule that in my opinion didn't even go far enough. He guts it out.
▶ 2:07:39And what we're doing is we're allowing these foreignowned companies to be making money on the consulting side, not telling anyone what their conflicts of interests are and then advising places like I think Kalpers was referenced earlier uh by one of my colleagues on the other side of the aisle who receives uh this advice and counsel. That seems like a heck of a problem. Do you agree, Mr. Crane? I absolutely would. And so what should the SEC do? I think we should pass my legislation.
▶ 2:08:06and we brought forward a healthy chunk of it to the House floor last Congress. We passed it uh across the House floor. The Senate uh did absolutely nothing. I'll comment on the Senate later. Uh, but I think we now have a real opportunity to bring this forward because American retirement accounts are at stake because of this these two companies that are making money, not sharing their conflict of interest, not letting the American people know why their shares that are held in all sorts of retirement accounts, pension
▶ 2:08:36funds, how or why they're being voted on. Let me hit another quick point with you if I can, Mr. Crane. What happens, of course, it wouldn't be the conflict of interest. I don't want to accuse anybody of any wrongdoing, but what would happen if they gave terrible advice? Let's say there was a proxy adviser that recommended a yes vote in favor of a resolution that was illegal. Has that ever happened, Mr. Crane? I if that happened, they would probably be robo voted in favor of that resolution if that's the recommendation they made.
▶ 2:09:04And so when we had the general counsel of ISS and the general counsel of Glass Lewis and I asked them, they sat right where you sat and I said, "Mr. General Counsels, do you review for legality?" And what was their answer to me? No. In my opinion, they've advised in a case of travelers, and we could look it up. We could spend more time on this sometime to actually recommend in favor of an illegal action. Do you agree with that, Mr. Washington? Yes, that has occurred. And so this is horrific. So they're not are they and are they liable for that? Do you know, Mr. Washington?
▶ 2:09:35Not under the current regulatory. So in my bill, they would at least be liable for that. We have massive reform that needs to be done on the this proxy advisor duopoly. I'm excited we're here talking about it. Thank you, Madam Chair, for holding today's hearing. I yield back. Gentleman yields back. The chair now recognizes gentle woman from Michigan, uh, Miss Mlan. I request 10 seconds. No, thank you. U the, uh, chair now recognizes the gentleman gentlewoman from Michigan, Miss McClan, for five minutes. Th Thank you, Madam Chair, and thank you, Mr.
▶ 2:10:05style for for bringing forth uh this wonderful piece of legislation. Uh I think it's well noted the I I do have to take one moment and just notice the hypocrisy. Um we think conflict of interest is a bad thing, right? Except when it's like from our party's conflict of interest or it has something to do with me.
▶ 2:10:29So, what I would just ask all the witnesses up there is could we just keep our um context the same no matter what context it is? I mean, I think it's very interesting that my friends across the aisle want to talk about influence pedaling. Um, and they accuse our president of having a conflict of interest and maybe having having some influence pedaling when we had hearing after hearing about the past president Biden and his his son Hunter Biden.
▶ 2:10:58clearly doing influence pedaling, but I think they had a different view on that. However, Madame Chair, I am extremely excited to know that this is a bipartisan piece of of legislation or bipartisan hearing that we actually agree on and that is transparency is good. Right. I mean, Mr. Crane, Congress has mandated that investment firms must be fiduciaries. Correct. That's exactly right.
▶ 2:11:27However, the firms they are hiring, the proxy firms, do they have the same um responsibilities um and goals like fiduciary as as the the firms do? They do not. Proxy advisory firms don't have a fiduciary duty to the ultimate mainstream investors who are investing with the asset manager. So, is it safe to say their goals don't align? Yes. Do you think that's a problem? I do. I think so, too.
▶ 2:11:55I think the American people would say that's a problem as well. Mr. Crane, these proxy advisors are claiming that despite their tremendous influence over how investors cast their vote, that they should not be subject to SEC oversight. Can you, which is very interesting to me, but can you discuss the history of the SEC's authority to regulate proxy advisors? Absolutely.
▶ 2:12:24This goes back to 1934, the Exchange Act. Uh, Congress, uh, in your wisdom, your predecessors, gave the SEC the authority to regulate solicitation and soliciting entities. What the proxy firms are doing in the present day is soliciting. They're soliciting proxies and casting them on investors behalf. And yet, they are arguing in court this week that they aren't soliciting, that they shouldn't be subject to SEC regulation. It's different different kind of like our um conflict of interest opinions, right? Um, Mr.
▶ 2:12:54Crane, can you also describe how the Biden administration created more uncertainty surround surrounding this proxy advisory industry? So, under the first Trump administration, the SEC, under Chairman Clayton had finalized a common sense compromise rule that had been in process for a decade at that point. Under Chairman Gendler, under the Biden administration, um, they suspended and then ultimately rescended that rule.
▶ 2:13:21Both of those decisions were found to be unlawful in federal court. Um, but the effect that they have on the market is that it's the pendulum effect that you just mentioned where companies don't know what the rules of the road are. Interesting. Maybe there's a conflict of interest there we should look at, but let's not let the facts get in the way of a good story, right? Um, Mr.
▶ 2:13:40I I seeing ISS describes ESG policies as being no longer optional but rather a necessary part of investment and asset management. And part of this strategy involves committing to the 1.5 degrees Celsius of the par uh the Paris agreement.
▶ 2:14:00Companies have a fiduciary responsibility to their shareholders yet are being held hostage by the agenda of staff at foreignowned proxy advisory firms. Can you discuss reasonable common sense regulation that would protect shareholders from the ideological preferences of rogue staffers? I think the key here is is that we do not have sunshine on what the proxy advisers are doing.
▶ 2:14:29We constantly see errors in the reports whether it's on uh proEG proposals, it's counter ESG proposals. The issue is who are the people making the decisions and why is it that we need to pay for consulting services to be able to have the understanding of the underpinnings um and the ultimate decisions that ultimately dramatically impact um the the proxy voting decisions being made. Thank you. And with that, I yield back, Madam Chair.
▶ 2:14:59Gentle lady yields back. The chair now recognizes a gentleman from Florida, Mr. Heridopoulos, for five minutes. Thank you, Madam Chair. And I also let the folks know that the Florida Attorney General's actually launched an investigation of ISS in Glass Lewis and uh on the impacts that they have had on Florida businesses, etc. And I'm glad to see our attorney general in Florida making that maneuver. Uh Mr. Crane, I want to ask you a question if I could please.
▶ 2:15:23What would be the consequence for our markets is if ISS prevails in its litigation against NAM in your opinion? Essentially, they would be entirely unregulated. Uh, and so all of the consequences that we've been talking about today, the conflicts of interest, the errors, the one-sizefits-all policies, the robo voting, they would be left entirely unchecked from a regulatory perspective. And that's incredibly problematic for public companies and probably more importantly for their investors who are the ultimate owners of those companies.
▶ 2:15:50And just to kind of build on that, I really appreciate Congressman Styles uh points that are made up and I want to emphasize the the Gendler uh actions the last four years have been a little bit challenging for this committee on multiple fronts. Um what is your uh what do you think the consequence of Mr.
▶ 2:16:07Gendler has been in in giving the SEC guidance on this So what the Gensler SEC did is essentially rescend all the efforts previous uh that had been made to uh bring proxy firms under reasonable oversight and then they even went further and stopped defending their authority to write any type of rule at all.
▶ 2:16:27So if ISS is successful in this case, the SEC used to be in that case and they walked back from that opinion that they even have any authority in this space at all trying to tie the hands not just of the Gendler SEC but any future SEC under a different administration. So, it's incredibly problematic specifically in this proxy firm space. And and my last question, um, Mr. Crane, please describe to me maybe some examples of the most egregious current conflicts of interest among proxy adviserss and some of the adverse impacts it has had on investors. If you could.
▶ 2:16:57So, the clearest conflicts of interest is ISS's consulting service. And we know as publicly traded companies, as publicly traded manufacturers, that the business consulting service will wait for a negative recommendation from the proxy voting service. And then as soon as that negative recommendation comes in, that's when they send out their asks for for businesses to buy their services because the best way to avoid a negative vote, a negative vote recommendation, I should say, is to just hire ISS. But it's not just ISS.
▶ 2:17:24Glass Lewis has has recently launched a stewardship service where they're advising activist investors and institutions on how to best pressure and influence companies whether it's by shareholder proposals by vote no campaigns etc. who's going to ultimately be recommending whether shareholders should vote for those campaigns. it's Glass Lewis. Uh, and so the conflicts are baked into their business models and that has a real impact on the recommendations they make and on the companies that they're making recommendations about and ultimately on the investors who have holdings in those companies.
▶ 2:17:55Madam Chair, just to close, I want to applaud you for bringing this to our attention as a new member of the committee. It is important as we understand some of these moving parts and and it it's really eye opening to say the least some of the things that Chairman Style as well as Miss Mlan and others have brought up today and we appreciate the candid uh information and I I am so glad that our attorney general in Florida is also looking at these type of measures because again this this is the future of so many folks who've made investments and to see that this type of unique behavior to be generous takes
▶ 2:18:25place I'm glad that we're having this public disclosure so we can put the appropriate legislation in place to stop uh some of the shenanigans that have happened. So, thank you so much, Madam Chair, and I yield back. I thank the gentleman and he yields back. The chair now recognizes a gentleman from Montana, Mr. Downing. Thank you, Madam Chair. Uh before I begin, I would like to request unanimous consent to submit uh this comment letter from Egan Jones Proxy Services for the record. Objection ordered. Well, thank you.
▶ 2:18:54Uh I'm going to start out with Miss Icing. Um, you know, institutional investors are required to act in the interest of their clients, you know, to to maximize their returns. Yet, ISS and Glass Lewis have been criticized for rout routinely endorsing left-leaning proposals at shareholder meetings. You ISS and Glass Lewis control 90% of the pro proxy advisory industry and can sway up to 30% of votes in shareholder meetings.
▶ 2:19:20Can you give some specific examples of when ISS and Glass Lewis endorsed proposals that were not focused on maximizing the returns or or resulted in diminished returns for investors? I'm happy to do so and I would note that even the u the voting percentages that were given recently are are particularly notable because last year ISS recommended u for more than half of all shareholder proposals that were voted on just in 2024.
▶ 2:19:47And we see that relevant to your question of how they were um not focused. They don't do a costbenefit analysis. Our companies um boards of directors have fiduciary duties to act in in the best interest of the company and the shareholders to maximize shareholder returns and those they are not always the proxy advisor firms are not taking that into account and doing their analysis. So for example, there was recently a proposal a shareholder proposal that ISS supported on the use of pig gestation crates in a company's supply chain.
▶ 2:20:16Um the company noted that it didn't breed, process, transport, own or raise animals and that it already announced a move away from sourcing pork raised in and gestation crates and yet ISS said no, this is something the company should be spending its time on. So is there any reason to believe that ESG related proposals are generally more aligned with shareholder value than right leaning proposals? And you know if not how do you explain the discrepancy in the proxy advisor's recommendations?
▶ 2:20:45So I I cannot explain the discrepancy. What I will say is is that this is a symptom a of on a on a or a related note is is there's just there there's a need for meaningful reform on shareholder proposals, right? That needs to happen. And the fact that the proxy advisory firms are so uh focused on supporting many of these proposals, they shouldn't even be getting to to to the ballot. Well, thank you. Uh I'm move to Mr. Crane.
▶ 2:21:10Uh, does the way the proxy advisory industry operates in the US discourage companies from going or staying public? It absolutely does. So, America has the the deepest and most liquid capital markets in the world. And if you're a company looking to grow, then going public is a critical way to access capital, which is obviously important for that company, but it's also important for everyday investors who largely can't invest in privately held companies.
▶ 2:21:35But when a business goes public, they have that investment opportunity and they can take advantage of the growth opportunities as that investment grows, as that company grows. But if you're considering going public and you're looking at burdensome, costly regulations, and you're looking at having to be held accountable by these firms who are themselves unregulated, meanwhile, you're making a whole bunch of SEC disclosures, but the proxy firms are not. They're effectively unregulated, and yet they're exerting influence on the corporate decisions that you're making.
▶ 2:22:03That's a real disincentive from going public and that has a significant impact on both companies and investors. Well, I I appreciate that and you I've had some experience that has led me to some conclusions about the weaponization of these proxy uh programs. Uh you know, I was a former uh securities and insurance regulator and I had some public reinsurance companies coming to me saying we know we're making decisions that are not in the interest of the business.
▶ 2:22:30you know, a lot of it was about uh uh not, you know, uh not putting risk money out for oil and gas because they didn't want to be involved in that and they said, but their backs were against the wall because of these proxy votes. So, I I I've seen that as a regulator and it's really really bothered me. Um I'm going to move on to Professor Rose. Uh do you have any more suggestions that have not been mentioned today to increase competition in the proxy advisor advisory space?
▶ 2:22:57Well, I as I mentioned, I think it's a it is a real challenge and uh I am quite hopeful that maybe uh technological innovations can can help provide some benefits here. Maybe there are ways to uh get around some of the the work that the proxy advisor do perform those functions but without uh the political leanings that might accompany that. But it is a it is a real challenge.
▶ 2:23:25I do think the the proposed legislation uh could help. Again, so long as those regulations are not overly burdensome, the barriers to entry are not too significant. Yeah. Thank you, sir. Finally, Mr. Washington, um how does your advice to members defer based on whether the proxy advisers are likely to rem recommend a quote vote for or a vote against a particular shareholder So in all cases the board needs to consider what is in the best interest of the corporation.
▶ 2:23:56The issue is that the proxy advisory firms can tilt the balance of those considerations because it can increase controversy, reputation risk and so forth that can affect the board's decision making. Um, and I just, if I might, there's no doubt that our members truly value the conversations that they have with their real investors. There's no question of that.
▶ 2:24:22The question is here, the proxy advisory firms are not in the same position as the investors and yet they yield um a greater investor. Thank you, Madam Chair. I yield my time. I thank all of our members for participating.
▶ 2:24:37I'd like to thank all of our witnesses for their testimony today in this long overdue hearing on cleaning up the proxy uh atmosphere I'll say and we've got some good legislation that I think is going to do that and I think we've got grand support for it. So without objection all members will have five legislative days to submit additional written requests for the witnesses to the chair. The questions will be forwarded to the witnesses for their response.
▶ 2:25:07Witnesses, please respond no later than June 4th, 2025. This hearing stands adjourned.