▶ 0:23:51Subcommittee will come to order. Without objection, the chair is authorized to declare a recess at any time. Uh we want to welcome everyone to today's hearing on the proxy advisor duopoly and anti anti-competitive conduct. Uh I'll now recognize myself uh for an opening Today we are here to examine a deeply concerning threat to our system of free enterprise and competitive markets. The foreignowned proxy advisor duopoly.
▶ 0:24:21Institutional shareholder services or ISS and Glass Lewis control more than 90% of the proxy advisor market and can sway roughly onethird of the vote on any shareholder proposal. These foreignowned proxy advisers use their power to act as de facto regulators of American companies, dictating the outcome of board elections and major business proposals.
▶ 0:24:48They set their own politically motivated agenda and pressure US companies to comply. ISS and Glass Lewis are not regulatory agencies subject to APA requirements. They're not fidiciaries that owe a responsibility to investors and they are certainly not elected officials answering answering answering to the American voters.
▶ 0:25:12Yet they have become unsupervised referees for every major corporate decision in America. One negative recommendation from this duopoly can erase millions of dollars in market capitalization overnight. Just ask America's oil and gas producers who have seen their boards reshuffled or the American manufacturers forced to adopt costly emissions targets not required by any statute or regulation.
▶ 0:25:41American companies live in constant fear of a proxy advisor duopoly that owes no responsibility to anyone. Even more concerning, both of these gatekeepers are foreignowned.
▶ 0:25:55The strategic direction of American enterprise is being ghostwritten in other countries then rubber stamped on US proxy statements that con that should concern just about everyone who's here today who cares about our econom economic system or America's competitiveness in the global arena.
▶ 0:26:15Today's hearing will show how ISS and Glass Lewis wield power in shaping policy entrenched in their duopoly and stifles all competition. Consider their involvement in the climate cartel. This committee has already shown how ISS and Glass Lewis colluded with climate activists, the world's largest asset managers, and international nonprofits to impose radical ESG mandates on US companies.
▶ 0:26:45And while this subcommittee has been encouraged by the progress made by asset managers to return to its foundational model, the proxy duopoly remains the largest impediment to ensuring our capital markets are forced on growing America's retirement and investment Through their recommendations, ISS and Glass Lewis pressure businesses to slash reliable energy production, adopt DEI quotas, and reroute capital away from lawful, profitable endeavors.
▶ 0:27:16This is not responsible corporate governance. It is policymaking by proxy and it is putting politics over profits. What is the cost of this activism? higher prices for consumers, lower returns for retirees, and the distortion of American capitalism.
▶ 0:27:36And if that were not bad enough, ISS and Glass Lewis engage in a blatant conflict of interest, selling consulting services to the very companies they issue recommendation against and punishing the ones that refuse to pay. In a mafia style shakeddown, companies are forced to pay for the duopoly's consulting services at the risk of retaliation during the next proxy season.
▶ 0:28:04This is not objectivity or sound corporate governance. It is a coerced pay-to-play system that harms businesses and investors alike. And how do the proxy advisers maintain their market They don't just issue voter recommendations. They control the very systems that investors use to vote.
▶ 0:28:26Though they're voting platforms and through those, the ISS and GL ISS and Glass Lewis make sure most investors never see another advisor's recommendations before casting their Rival proxy advisers cannot access these systems and public companies cannot reasonably avoid them. This is the exact kind of gatekeeping that our antitrust laws were written to prevent.
▶ 0:28:54And because ISS and Glass Lewis have complete control over these platforms, they can preload each ballot with their own recommendations. When investors rely on the default settings, as many do, a massive number of shareholder votes move to lockep with the duopoly's ideological agenda. In practice, that means two private foreign entities can shift approximately one-third of the shareholder vote on any given proposal.
▶ 0:29:24And it works. In 2022, when the New York City pension fund filed a shareholder proposal requesting an audit of Starbucks labor practices, the duopoly lented support and the proposal passed with 52%. That same year, ISS and Glass Lewis supported a resolution requesting McDonald's conduct a third-party civil rights audit. That proposal was adopted as well.
▶ 0:29:53Congress cannot continue to allow foreignowned proxy advisers to regulate the practices of American companies and we certainly cannot allow them to continue strong army companies into purchasing their consulting That is why I have introduced the stopping proxy advisors racketeering act which would prevent these advisers from offering consulting services on the very recommendations that give them power.
▶ 0:30:21I would also encourage our competition authorities at the DOJ and the FTC to take note of his hearing of this hearing and consider focusing their attention and resources on studying the potential and the effects on this proxy and the effects of this proxy duopoly. Congress must make sure that American corporations answer to shareholders and the US law, not foreign interests.
▶ 0:30:50Today's hearing is the first step towards doing just that. Our witnesses today have firsthand knowledge of how this system operates and the effects it has on American businesses. Mr. Shawn Egan is the co-founder and president at Egan Jones Rating Company. Egan Jones is one of the few proxy advisor firms competing against this massive duopoly. Mr. Charles Crane is the managing vice president of policy at the National Association of Manufacturers.
▶ 0:31:20He represents American manufacturing firms that have experienced the harmful impacts of the proxy advisor duopoly. Mr. Caleb Griffin is an associate professor of law at the University of North Carolina Law School. He has done extensive scholarly work on the corporate governance proxy advisors and related systematic reforms.
▶ 0:31:42And I want to thank each witness for appearing before us today and look forward to your I now recognize a ranking member, Mr. Nadler, for his opening statement. Thank you, Mr. chairman, and thank you to our witnesses for being here today. Yet again, our Republican colleagues are pushing baseless allegations of antitrust violations at the expense of American consumers.
▶ 0:32:08Today's hearing alleges collusion between the two largest proxy adviserss, consulting firms that provide analysis and recommendations to institutional investors such as pension funds and employee benefit plans on how to vote their shares at company shareholder meetings. The Republicans theory that these two companies, institutional shareholder services or ISS and Glass Lewis, work together to push ideological goals over financial reform.
▶ 0:32:37They they allege that these proxy advisers advance socially liberal policies at the expense of their investors, their customers return on investment, and their own businesses. But like so many of the flawed antitrust theories the Republicans have brought before this committee, it simply does not hold water. Proxy advisers are a vital tool for investors.
▶ 0:32:58While deep pocketed companies or clients can do assessments of proxy materials inhouse, retail investors and mutual funds rely on expert independent advice from large proxy firms like ISS and Glass Lewis. Proxy advisers inform their customers about the hundreds and sometimes thousands of complex proposals they may be called upon to consider, helping them to fully exercise their rights as shareholders of publicly traded companies.
▶ 0:33:26They do this by providing independent assessments of company proxy materials and shareholder proposals. Anyone in the financial services industry understands the value of trusted information. Customers pay ISS and Glass Lewis and sometimes both companies or even a third service for independent assessments of company proxy materials and shareholder proposals.
▶ 0:33:49To be clear, no one is forcing these customers to pay for their services and no investors bound by the subscription to ISS or Glass Lewis to follow their recommendations. The fact that companies generally do follow their advice is a reflection of the hard work proxy advisers do to ensure that their recommendations are in line with the goals and values of their clients. They do not leverage their market power over their clients independent determinations.
▶ 0:34:15If their customers do not like their information or their advice, they can stop subscribing to ISS or Glass Lewis at any time. And we should remember that it is the investor, not the proxy adviser, that cast the ultimate vote at shareholder meetings. Proxy advisers can be particularly beneficial to pension funds by allowing them to maximize returns for their beneficiaries by reallocating resources that would otherwise go to analyzing the vast quantity of shareholder proposals they face.
▶ 0:34:45Take New York for example. As of 2018, it was the third largest public pension plan in the nation and held billion in assets. These assets are overseen by the New York State Controllers's Office and are held in on behalf of more than 1 million members of the New York State and local retirement systems.
▶ 0:35:06The controllers's office, like its counterparts in other states, takes advantage of proxy advisory services to be better informed about the companies in which they have invested public employees funds. The majority's basis attacks on the proxy advisor market may force New York's and other pension funds to expend unnecessary resources conducting their own shareholder analyses, which could undermine their ability to deliver strong returns for their beneficiaries.
▶ 0:35:34Once again, the majority has invented a flawed antitrust theory to justify its attacks on an industry it does not like. Although the vast majority of investment proposals are uncontroversial, such as uncont uncontested board elections or the approval of company company nominated slates of electors.
▶ 0:35:53There are tiny fraction of initiatives concerning concerning social governance that the majority labels DEI or proposes that quite reasonably consider the risks of climate change in making responsible investment decisions. In each case, proxy advisers conduct an independent analysis and offer their best advice to their clients who are free to make their own independent judgment on how to vote. But Republicans do not like some of the recommendations that these two proxy advisers have made.
▶ 0:36:22And therefore, as has become commonplace in this committee, they've launched another unfounded antitrust investigation designed purely to intimidate and harass their opponents. During the last Congress, the Republicans launched a fatally flawed antitrust investigation targeting investment groups that consider environmental, social, and governance or ESG strategies. Now, the majority is following the same playbook and arguing that ISS and Glass Lewis are conspiring to advance prog.
▶ 0:36:56This fact-free investigation is all part of the Republicans larger goal of entrenching corporate interests and conservative political preferences. The Republicans focus on alleged conclusion between ISS and Glass Lewis not only furthers their culture war campaign but also allows them to target and dilute shareholder rights that would otherwise threaten the interests of their corporate allies. The majority alleges collusion between ISS and Glass Lewis because they often off issue similar recommendations.
▶ 0:37:26But this reflects incredibly shallow analysis. If you go to multiple doctors and they each diagnose you with cancer, that is not evidence of collusion. In this case, fair and impartial analyses of market conditions and best practices are yielding similar conclusions. There is nothing nefarious about this. Proxy advisory firms empower shareholders to exercise their own judgment and expertise. The market the market is working as it should.
▶ 0:37:55Yet Republicans are trying to meddle in it for political purposes. I urge my colleagues to end this fishing expedition and to focus on the real issues our constituents face. I look forward to hearing from the witnesses and I yield back. Gentleman yields back and I'll recognize chairman of the full committee, Mr. Jordan, for his opening statement. Thank you, Mr. Chairman. I want to thank our witnesses for being here today and especially want to thank the chairman for the work he is doing on exposing this duopoly and what they've been up to. Um, this is an important hearing, an important subject. With that, I yield back.
▶ 0:38:27Yields back. And now recognize the ranking member of the full committee, Mr. Rasin, for his opening statement. Mr. Chairman, thank you very much. Uh, today's hearing uh is another installment in what I'm thinking of is a series of non-antirit antirust hearings. And because my Republican colleagues seem so confused on the subject, I think a basic primer on what antitrust means may be in order. The Supreme Court has compared the antitrust laws to the Magna Carta of free enterprise.
▶ 0:38:54They're as important to the preservation of economic freedom in our free enterprise system as the Bill of Rights is to to the protection of fundamental personal Robust antitrust enforcement is vital for everyone in American society. from consumers to workers to innovators um to citizens. Antitrust is fundamentally about making sure the marketplace is an open and fair terrain for companies to innovate and compete.
▶ 0:39:22Now, um like Donald Trump, our GOP colleagues seem to think that antitrust is about Congress and the president picking business favorites to help and punishing business companies they disfavor. But that's got nothing to do with antitrust, free markets, or fair competition. That's just gangster state economics. That's how business operates in authoritarian societies.
▶ 0:39:46Our colleagues accuse two proxy adviserss, ISS and Glass Lewis, of colluding to advance a progressive agenda when they make recommendations to their clients in advance of shareholder meetings. Well, of course, on the antitrust subcommittee, we should be concerned about collusion in the market. As Justice Scalia warned, the supreme evil of antitrust is collusion. That's Verizon versus Trinko. Collusion between competitors with the intent to fix pricing is per se illegal.
▶ 0:40:15So, you'd think that if our colleagues were going to use their bully pulpit to charge two companies with the supreme evil of antitrust, they would come armed with mountains of compelling, unassalable, ironclad evidence. But even their own witnesses are not alleging collusion.
▶ 0:40:33It reminds me of when the oversight committee had an uh an impeachment hearing against President Biden last Congress and none of their expert witnesses could identify evidence of impeachable high crimes and misdemeanors and said they couldn't uh find the sufficient quantum of evidence. And it's not like my colleagues haven't been warned.
▶ 0:40:53The Supreme Court has gone out of its way to explain, quote, "An allegation of parallel conduct and a bare assertion of conspiracy will not suffice to constitute an antitrust violation." But that's exactly what our colleagues are doing here. They're making allegations based on the independent market actor sometimes taking parallel positions and then asserting collusion without any proof.
▶ 0:41:19And I don't believe that there's even an assertion of price fixing going on. Now, you might chalk this up to just confusion about antitrust law and an innocent mistake. But our colleagues are using these allegations to intervene in and distort the market and to target ideas and actors they simply disfavor. They don't like.
▶ 0:41:41They did this last Congress by targeting carbon conscious investors for daring to use their rights as shareholders to push oil companies to invest in renewable fuel and position these companies to be more competitive in the face of the pervasive threat of climate change. A global emergency that obviously will have a direct effect on the bottom line of fossil fuel companies. But now the majority wields the same empty theory of antitrust harm against proxy advisers. Why?
▶ 0:42:09simply because these companies help shareholders, including those committed to responsible investing, maximize their rights as part owners of publicly traded companies. Antitrust coal collusion is now the all-purpose GOP name for any market activity or commercial or political speech that they disagree with. The proxy advisers are plainly responding to a marketplace demand. If they weren't, they wouldn't be in business.
▶ 0:42:37They are responding to the needs and the requests of their customers. There's an increased appetite among shareholders to invest responsibly. Some don't want to invest in businesses contributing to climate change or to gun violence. Some don't want to invest in companies doing business with Iran or Russia or other repressive countries.
▶ 0:43:00These investors, proxy advisers, clients want to exercise their rights as shareholders to push for changes to corporate governance and policy in the companies where they own shares. They've got every right to do so. Proxy advisers like ISS and Glass Lewis go through hundreds and thousands of pages of proxy materials and give their customers their independent assessment of shareholder proposals, helping them decide whether to support or oppose them.
▶ 0:43:27Their only role is to provide information to their clients to enable them to exercise their rights. These companies have every right to issue their assessment of these proposals. It's protected as commercial speech, just as their clients have a shareholder right to propose, consider, and vote on them. And to be clear, the issues they're called to evaluate are not just progressive shareholder initiatives. True.
▶ 0:43:50My colleagues seem worked up about shareholder initiatives that call for things like an audit of child labor practices in the meatacking industry or an assessment of working conditions in commercial warehouses that have an extraordinary rate of workplace injuries. But the exercise of shareholder rights is not and has never been a one-sided partisan exercise.
▶ 0:44:11Over the past several years, there's been record growth in shareholder proposals from conservative groups like the proposal at Disney to demand that the company sever its ties with the Human Rights Campaign um and with uh different kinds of gay and lesbian policies. They've got every right to do that. That proposal failed just like many progressive shareholder proposals fail. And even if it had succeeded, let me remind you that these proposals are entirely non-binding.
▶ 0:44:38They can give expression to shareholder concerns of the right, the left, or the center, but they can't force a company to do anything at all. So, what's the real problem here? Why are we repeating a hearing that the Financial Services Committee just had at the end of April? Why are we concerning ourselves with supposed conflicts of interest when the SEC has already addressed them with rules proposed under Trump and kept under Biden? We're here because it seems the Trump administration doesn't seem to believe in allowing voters to be informed.
▶ 0:45:06Instead, they're making it harder for voters to learn about the issues and tougher for voters to cast their ballots, especially when they're likely to disagree with them. Shareholder rights, like citizen rights, are protected by law. This empty theory of antirust harm infringes on the free market, on the rights of shareholders, and on the ability of shareholders to be informed about what companies are doing. Antitrust should not be used to censor political or commercial speech, to distort markets, or to disenfranchise shareholders.
▶ 0:45:36And this is censorship masquerading in the language of antirust analysis. I thank my colleagues and I yield back to you, Mr. Chairman. Mr. Chairman, the gentleman yields back. I have two unanimous consent requests. Uh, state your requests. Okay.
▶ 0:45:51Uh, I ask unanimous consent to enter into the record a summary provided by ESV Strategisters Diligent dated December 21st, 2023, which lists the new competitors expanding the proxy voting advice industry in the US, Egan Jones Proxy Services, Sego Marco Advisors, and Proxy Vote Plus. Without objection. Thank you. I have a second unanimous consent request.
▶ 0:46:15I ask unanimous consent to enter into the record an article from the Guardian titled quote sustainable corporations perform better financially report fines which finds that quote corporations that are actively managing and planning for climate change secure an 18% higher return on investment than companies that don't that aren't and 67% higher than companies who refuse to disclose their emissions.
▶ 0:46:38This puts to bed the tide and false talking point that sustainability and diversity focused shareholder proposals hurt the savings of everyday people. Quite the opposite is true. Without objection, we'll now introduce today's witnesses, Mr. Sha Egan. Mr. Egan is co-founder, president, and CEO of Egan Jones Company, a credit rating and proxy advisor firm. Prior to founding Egan Jones, Mr.
▶ 0:47:01Egan was a commercial and investment banker in the financial Uh, Professor Caleb Griffin. Mr. Griffin is an associate professor professor of law at the University of North Carolina School of Law. His research focuses on business organizations, contracts, corporate law and governance, secured transactions and technology, and the law. Mr. Charles Crane. Mr.
▶ 0:47:25Crane is the managing vice president of policy at the National Association of Manufacturers where he oversees the association's advocacy efforts on behalf of manufacturers in America. He previously was the vice president of domestic policy at NAM working at the innovation organization and as a house and senate staff member. Miss uh Nell Mow.
▶ 0:47:52Miss Menow is the chair of Value Edge Advisors, an institutional investor advisory firm. She previously was the co-founder and director of GMI ratings and was editor and co-founder of its predecessor firm, the corporate library. We welcome our witnesses and thank them for appearing today. And we will begin by swearing you in. Would you please rise and raise your right hand?
▶ 0:48:23Do you swear or affirm under penalty of perjury that the testimony you are about to give is true and correct to the best of your knowledge, information, and belief? So help you God. Let the record reflect that the witnesses have answered in the affirmative. Thank you. You can please be seated. Please know that your written testimony will be entered into the record in its entirety. Accordingly, we ask that you summarize your testimony in five minutes. And Mr.
▶ 0:48:52Egan, you may begin. Chairman Fitzgerald, ranking member Nadler, and members of the subcommittee, thank you for the opportunity to testify today. I'm Sean Egan, co-founder and managing director of Egan Jones. Egan Jones has two primary businesses, a credit rating agency registered with the SEC and a proxy advisory business. I'm testifying today on behalf of the proxy advisory business.
▶ 0:49:20Egan Jones Proxy Services was established in 2002 and has become the leading independent proxy advisor. Unlike the other two major proxy advisory firms, Egan Jones does not offer corporate consulting services, which creates an unmanageable conflict of interest. In our opinion, disclosures and perceived firewalls do not sufficiently mitigate the inherent conflicts of interest.
▶ 0:49:49Additionally, unlike our foreignowned competitors, Egan Jones Proxy Services is owned and operated in the United States. The US capital markets are not well served by the duopoly of ISS and Glass Lewis whose combined market share exceeds 90%. Our clients rely upon our recommendations for voting on corporate matters such as director elections, compensation, M&A and other events.
▶ 0:50:19While we offer several methodologies, our fastest growing one is our wealth focused approach. That is because Egan Jones believes the vast majority of investors are investing for savings and retirement. The policy is not board aligned because directors with poor impact on shareholder returns will be opposed.
▶ 0:50:41Policymakers should focus on legislative and regulatory proposals that bring competition to the marketplace by focusing on the following recommendations which can be summarized as the four Ps. Number one, platforms make them neutral. Currently, ISS provides a voting platform that is used by the bulk of institutional investors. For years, Egan Jones has tried to be included widely in the platform with little success.
▶ 0:51:12The platform carries Egan Jones recommendations, but only if a client explicitly requests those recommendations. For all their potential customers, ISS hides Egan Jones as an Further, ISS refuses to provide critical information such as voting deadlines, making it difficult for us to service Number two, purse. No one can serve two masters.
▶ 0:51:42Proxy advisory firms should not provide corporations with corp with governance, executive compensation, DEI and ESG ratings thereby creating an unmanageable conflict of interest. A wall between the businesses does not address the under address the underlying conflict as ratings or assessments from the consulting side are typically used by the proxy advisory side.
▶ 0:52:08Companies feel obligated to purchase consulting services from ISS and Glass Lewis so that they will receive better outcomes at the ballot box. Others view this as a shakeddown. Number three, policies expand access to alternative proxy advisory methodologies via voting choice platforms. Policymakers should continue encouraging these reforms so investors have greater choice. Number four, practices.
▶ 0:52:39End robo voting and other dubious practices. Shareholders votes are critical to the proper functioning of the economy. Abdicating that responsibility should be Examples of dubious practices including one always voting with management or two voting in a manner that replicates the voting of other investors which is also known as mirror voting.
▶ 0:53:06I commend re representative Fitzgerald's draft legislation, the stopping proxy advisor racketeering act. The legislation would prohibit proxy advisory firms from offering consulting services. In conclusion, the four Ps make this market dysfunctional and impede competition. Number one, platform. ISS's platform is pervasive and access is restricted.
▶ 0:53:34Additionally, information needed for competing proxy advisors should be readily available. Two, purse charging corporations for consulting services creates an unmanageable conflict of interest. Three, policies expand access to alternative proxy advisories methodologies via voting choice programs. And four, practices end robo voting and other dubious practices.
▶ 0:54:00These factors impede the market and make it more difficult for Americans to save for a meaningful retirement. Thank you again for inviting me to testify. Thank you, Mr. Egan. Professor Griffin, you may begin. Chairman Fitzgerald, Ranking Member Nadler, Chair Jordan, Ranking Member Raskin, and distinguished members of the subcommittee. Thank you very much for inviting me to testify this morning.
▶ 0:54:24Proxy advisory firms wield substantial influence over corporate governance, acting as pivotal intermediaries between publicly traded corporations and institutional investors. In our classic archetype of the corporation, shareholders possess both economic and voting rights. Today, however, investors often provide the monetary investment while firm level voting rights reside with another party. This introduces additional complexity into the governance process. How can intermediaries vote such a large number of shares?
▶ 0:54:51And how do we ensure that they possess strong incentives to vote them? Well, proxy advisers have become the deacto answer to the former question, and I would suggest that we have yet to adequately solve the latter. Owners have strong incentives to care about the governance impact of various policies because it is their own money on the line. But this simply isn't true for many intermediaries. Proxy advisers in particular do not capture any of the gains or suffer any of the losses from share price movements.
▶ 0:55:18Uh they are effectively insulated from the consequences of their governance decisions either good or bad. This insulation weakens their responsiveness to investor concerns, generates potentially significant conflicts of interest and may lead to misalignment with investor priorities. In my view, the key issues in the proxy advisory industry can be consolidated into three broad categories. concentration uh competition and conflicts.
▶ 0:55:42First concentration as others have noted just two firms institutional shareholder services and glass lewis control roughly 90% of the market for proxy advisory services. This essentially duopolistic structure significantly limits the range of governance opinions available to investors and it may generate biases or amplify inaccuracies potentially diminishing the health of our capital markets.
▶ 0:56:05Moreover, the concentrated nature of the proxy advisory industry enhances the influence of the major proxy advisory firms over firm level voting outcomes. Research has suggested that ISS and Glass Lewis hold considerable sway over institutional investors voting behavior. For instance, equity plan proposals, uncontested director elections, and proxy contest receive 17%, 18% and 73% more votes in favor respectively when supported by ISS.
▶ 0:56:32Likewise, a favorable recommendation from Glass Lewis generates 16% more support for sand pay votes, 12% more for equity plan proposals, and 64% more for proxy contest ballot items. Second, the proxy advisory industry would significantly benefit from enhanced competition. A key point here is that it is not only the number of meaningful competitors that may be deficient, but also the nature of that competition.
▶ 0:56:56Currently, proxy advisers often cater to the needs and preferences of intermediary agents rather than those of the actual investors and beneficiaries whose retirements are at stake. Third, and perhaps most critically, proxy advisors suffer from important conflicts of interest. For instance, both ISS and Glass Lewis offer certain consulting services whereby they advise clients on governance issues and subsequently influence voting outcomes on those very issues.
▶ 0:57:20Thus, major proxy advisors may occupy multiple roles playing both the part of adviser and arbiter. Uh, for example, consider governance decisions related to executive compensation. ISS issues voting recommendations on thousands of sean pay votes that occur every year. Research suggests that a negative recommendation from ISS on pay proposals is associated with a 25% lower rate of support overall. An impact that, in the words of one scholar, is indicative of strong influence of overshareholder votes.
▶ 0:57:50Companies seeking to garner a favorable recommendation from ISS may be motivated to purchase a service that it calls executive compensation solutions for an undisclosed fee. Companies can consult with a compensation expert to design, monitor, and communicate executive pay programs. The fact that ISS is judging the merits of the same executive compensation packages it was paid to advise heightens the risk of problematic conflicts of interest.
▶ 0:58:14Companies and investors may perceive accurately or not that paying a proxy adviser for governance consulting will influence their voting recommendations. Although the dominant proxy advisers may take internal measures to help emmeilerate this challenge to the objectivity of the recommendations, there is to my knowledge no clear regulatory protection. Much as Sarbain Oxley address similar conflicts of interest in the context of accounting firms, some of the draft legislation in Congress today, such as the bill by Congressman Fitzgerald, aims to provide analogous protection in the proxy adviser context.
▶ 0:58:43In my view, the disclosure and prevention of conflicts of interest in our financial markets is not a partisan issue, but rather an important protection for investors, companies, and American capital markets. Thank you very much for inviting me to testify, and I look forward to your questions. Thank you, Professor Griffin. Uh, Mr. Crane, you may begin. Good morning, Chairman Fitzgerald, Ranking Member Nadler, Ranking Member Rascin, and members of the subcommittee. My name is Charles Crane, and I'm the managing vice president of policy at the National Association of Manufacturers.
▶ 0:59:11Manufacturers have long understood that the proxy firm duopoly of ISS and Glass Lewis has a significant and damaging impact on their businesses. Excuse me. Proxy firms outsiz influence dictates corporate decisions and it distracts from the long-term best interests of Main Street shareholders.
▶ 0:59:30And yet these firms remain stubbornly ISS and Glass Lewis have cornered the market on proxy voting advice and they have not been shy about using their market position to create a feedback loop of power and influence at the expense of investors saving for a new home, a child's education or a secure retirement. Let's start with the facts of this duopoly. ISS and Glass Lewis together control 97% of the proxy advice market.
▶ 0:59:56This dominant position insulates the firms from accountability to the point where the two market players, as has been discussed, have significant conflicts of interest and are widely recognized as offering errorfilled, opaque, and one-sizefits-all advice. And yet, they still enjoy market dominance. In other words, when two entities run the show, they can run it however they please, and everyday people are the ones who pay the price. Bolstering this power are the firm's voting platforms. Now, these platforms do provide a legitimately useful service.
▶ 1:00:26They connect institutional investors to the back end of the proxy voting system, but ISS and Glass Lewis use their proxy voting platforms to push their clients towards their proxy voting research and recommendations. They'll even prefill the platform with their preferred votes and then robo vote and investor shares on their behalf.
▶ 1:00:45This system, which would be virtually impossible for a new market entrant to replicate, leverages the utility of these platforms to push clients towards their voting Now, let's turn to those voting recommendations themselves. First and foremost, these recommendations are powerful. ISS and Glass Lewis can swing the outcome of shareholder votes, meaning they effectively set corporate governance standards for the entire market.
▶ 1:01:10This usurps the authority of corporate boards and of the SEC and it ensures that investors need to hire proxy firms and that companies need to pay them. Further, proxy firms recommendations are both complicated and opaque.
▶ 1:01:24This effectively forces companies to purchase those consulting services to understand the firm's complex methodologies and proxy firm standards appear designed to increase their own market power often at the expense of companies and Take for example Proxy Firm's insistence on annual say on pay votes when Congress has made explicitly clear that annual votes are not required.
▶ 1:01:49Who benefits from forcing annual votes more than ISS and Glass Lewis who will be paid to provide voting recommendations for each and every one of these votes across thousands of public companies every single year. Similarly, on some issues, the proxy firms require companies to meet a supermajority vote threshold to avoid a future negative recommendation. The easiest way to fail to meet that threshold, of course, is to have ISS or Glass Lewis recommend against the company.
▶ 1:02:17So, a negative vote recommendation can depress shareholder support, which in turn leads to more negative vote recommendation, which further depress shareholder support on more issues and more nominees, and on and on and on. And all the while the company manufacturers across the country are being pitched by proxy firms consulting services to just pay up and avoid this costly and self-perpetuating These complicated fact patterns keep emerging because proxy firms operate with conflicts of interest baked into their
▶ 1:02:47business models. One half of a proxy firm operating a consulting service to help companies avoid a negative recommendation from the other half of the same proxy firm is a per se risk to investors. Raising the spectre, which we have seen time and time again of recommend recommendations that are designed to enrich the firms rather than benefit investors.
▶ 1:03:09That's why manufacturers support Chairman Fitzgerald's legislation to prevent proxy firms from offering supposedly neutral proxy voting advice if they have a conflict of interest poisoning their Manufacturers understand the stakes of getting this right and we stand ready to help Congress reign in the proxy firm duopoly and institute much needed guard rails that address proxy firms conflicts of interest, their errors, their robo voting, their one-sizefits-all standards, their ESG agendas, and more. Thank you.
▶ 1:03:39Gentleman yields back. Miss Minnow, you are now recognized for five minutes. Thank you very much and thanks to the committee for including me. You know, uh, when I worked in the Reagan administration, one of the things that I was proudest of was our commitment to free markets and to reducing nannyate type regulations.
▶ 1:04:00So, I feel like I'm a little bit through the looking glass here today because it's very disappointing to me to hear the Republicans on this committee want to interfere with the most robust free market evolution of a product that I could possibly imagine. It meets every one of the criteria that I learned at the University of Chicago.
▶ 1:04:24uh it uh the proxy advisory firms arose to meet a need that began in the 1980s. In fact, I was there at the beginning of ISS. We intended to have a different product entirely and everybody we talked to said what we want is proxy voting recommendations. Nobody has to buy it. Nobody has to follow their recommendations. They are purchased by the most sophisticated financial professionals on the planet.
▶ 1:04:52And what I'm hearing here is a lot of vague uh allegations that are not supported. ISS, if ISS and glass loos are too powerful, corporate America should be popping champagne corks. They recommend votes with management 96% of the time. I would love to hear from America's corporations why 4% of the time a suggestion that perhaps they might disagree with management is too much.
▶ 1:05:21It's very disappointing to me to hear corporations say they don't want to hear from their shareholders and they don't want independent advice to be available to them. Uh if there are more votes against pay because of in because of proxy advisor recommendations that's because those pay packages have been determined by market forces to be too much. And I suggest you look at Mr. Zazlov's uh pay package which did get a majority vote against.
▶ 1:05:51Remember though those votes uh as Mr. Askin point out are nonbinding. So even a 100% vote in favor of whatever shareholder proposal that you don't like if it's about the environment or ESG the company doesn't have to follow it and companies do ignore these votes even a 52% vote uh all the time.
▶ 1:06:14So why they wouldn't want this very low pressure u mechanism for delivering comments about shareholder concerns I do not understand. I hear terms like dictates stubbornly unregulated. We the last people who need the nanny state stepping in are these financial professionals the largest investors. Proxy advisory services are not sold to individual households. There are new entrance all the time.
▶ 1:06:43I personally use one that is nonprofit and free for my accounts. Uh we have ones that are more pro-ESG. We have ones that are explicitly anti-woke, anti-ESG.
▶ 1:06:58Public corporations are currently devoting enormous amounts of money and effort and I might say creativity to coming up with ways to cut off shareholder oversight in including resisting restricting the sole sources of independent research on matters presented to them for their approval. Really the worst you can come up with is that they want to review pay annually instead of every three years. Congress gave shareholders the right to choose whether they wanted to look at say on pay annually or every three years.
▶ 1:07:28They choose annually and ISS doesn't get paid by the vote. It's more work for them for the same pay. That is just completely wrong. So I strongly urge this committee to allow the free market to operate. Thank you very much. Thank you very much. I'll now proceed under the fiveminut rule with questions. The gentleoman. Mr. Chairman, I have a unanimous consent request. Gentleman's recognized. Can we hold some of these till the end, I guess? Okay. After this one. Okay. Go ahead.
▶ 1:07:58I ask unanimous consent to enter into the record an article dated July 31st, 2024 entitled ESG, illegal conclusion or just good business sense, which explains how quote limiting investors ability to assess risk and reducing competition for financial services is detrimental to investors returns in these states. And the people who are paying the price for this are the constituents, the firefighters, the police officers, the teachers.
▶ 1:08:26Without objection, the gentleoman from Wyoming is now recognized for five minutes. I'm sorry, but this sounds like a racket. I mean, I can just hear that. That's a nice company you have there. It'd be a tragedy if something happened to it. About 70% of publicly traded equity shares are held by institutional investors rather than individuals.
▶ 1:08:50ISS and Glass Lewis control at least 90% of the proxy advisor market, exerting influence over $20 trillion in investor assets. Glass Lewis is owned by two Canadian financial institutions and ISS by a German corporation. Yet together they dictate votes for most of America's publicly traded companies. Mr. Egan, should foreignowned businesses hold that kind of power and control over US companies?
▶ 1:09:22Thank you very much for uh the question. Um in our opinion uh for capital markets to work properly, you need a diversity of views. Um perhaps the biggest concern um that exists in the market is that it is dysfunctional uh in the sense that the two dominant proxy advisory firms are not independent that they're using the recommendations and the scores
▶ 1:09:52and the ratings on the consulting side to drive their proxy advisory votes. uh if they charge nothing for their proxy advisory services um and basically using a monopoly on one area that is with the platforms to extend to the other area um they would be just fine.
▶ 1:10:14So there's relatively little competition because there's blockage and those four items that I had mentioned uh really should be examined to uh uh keep the markets competitive. Well, do you think that most Americans know about this for foreign ownership or what these companies actually do? Um, I highly doubt it. Okay, Mr.
▶ 1:10:37Crane, with this much control, there must be an understanding of whether proxy advice actually aligns with investor preferences as these firms grow in power and influence. In your experience in working with US manufacturers, have these ideologydriven directives based in climate change policies, the DEI agenda, ESG policies and more and more strengthened their competitive or added unnecessary costs and constraints.
▶ 1:11:06Thank you for that question, Congressman uh uh Congresswoman, excuse me. I I think that the key thing to remember here is that the proxy advisory firms don't have a an a fiduciary duty to the underlying main street investors who are saving for a secure retirement via these larger institutional investors. So when they're making these voting recommendations and casting investors votes through their robo voting services on their behalf, they have no underlying obligation to those everyday Americans, whether that's on everyday corporate governance topics or on some of the ESG matters that you've described.
▶ 1:11:35They have their own set of beliefs about how corporate America should be run and they don't have any obligation to align those beliefs with the financial needs of everyday Americans saving for retirement in the public market. Well, that in listening listening to the testimony from the four of you, that is the thing that struck me the most is that it this seems to be a fundamental violation of these companies fiduciary responsibilities to maximize profits for their shareholders. Do you agree with that, Mr. Crane? I do.
▶ 1:12:01And that's a question that's been raised at the SEC in fact of of whether and to what extent the institutional investors who blindly follow these proxy firm recommendations or indeed allow votes to be robo vote without even reviewing what the proxy firms are suggesting whether and to what extent they're complying with their fiduciary obligations as managing assets on behalf of everyday Americans saving for retirement. Mr. Griffin, I'd like to turn to you.
▶ 1:12:24If proxy advisers are making recommendations to asset managers who vote with other people's money and these recommendations are politically driven, then is the system actually protecting the interests of the real real owners such as the retirees and savers or is it really uh furthering the the agenda of these uh other Thank you for the question. I I think there is a risk that uh we prioritize different interests than those of the true investors.
▶ 1:12:51uh those individuals who are working people, teachers, firefighters saving for their retirement um and those interests may diverge from the intermediaries uh who hire the proxy advisory firm. So I think that's a real risk. Has the market share of ISS and Glass Lewis allowed for this shift from protection from protection of real investor interest to what seems to be a more politically driven agenda? Mr. that's uh certainly possible.
▶ 1:13:15I think that it the market concentration and market power that they have has created essentially put them in a quasi regulatory role in some ways allowing them to determine uh things like influence financial materiality standards standards for director independence um and effective voting thresholds for uh board response to shareholder proposals. So well thank you gentlemen and Miss Mow for being here today. I ask a unanimous consent to introduce into the record a document entitled the conflicted role of proxy adviserss from May 2018.
▶ 1:13:45Without objection, gentleoman yields back. Thank you. The ranking members now recognized for 5 minutes. Thank you, Mr. Chairman. Miss Mow, you worked in the DOJ's antitrust division. Is there any evidence that ISS and Glass Lewis are colluding? There is none. Is there any evidence that they're fixing prices? There is no evidence of that. Is there any evidence that they are blocking new entrance?
▶ 1:14:10No, there are new entrance all the time as I mentioned including two nonprofits and two one started by Vivec Ramaswami that are explicitly anti-woke. Typically when competitors collude they do so to raise prices. The majority however is alleging that ISS and Glass Lewis are colluding to push ESG and DEI agendas. But at the same time, the majority is arguing that ESG and DEI issues are detrimental to the companies that their clients are invested in.
▶ 1:14:39If both things are true, wouldn't this collusion mean that investors are getting bad advice from proxy advisers and that therefore the investors would be incentivized to change providers? Absolutely. And let's remember that the clients of the proxy advisory services are enormous multi-billion dollar financial firms who are very sophisticated and who are completely driven by shareholder returns.
▶ 1:15:05Furthermore, ISS and Glass Lewis and I presume all the other all the other proxy advisory firms are constantly in touch with their clients saying do we need to change our policies to better reflect your priorities. So the uh the people who purchase those services are market driven and the people who provide the services are market driven to re to meet their needs. Thank you.
▶ 1:15:31And are there are there competitors that these investors could turn to but but we are not seeing a retreat from these firms? Isn't that correct? That's right. you know, uh, if Sean's firm wants to compete with, uh, ISS and Glass Lewis, he should probably try to produce a better product. And what I really don't understand is why he thinks he has a right to the platform that they built with their time, with their energy, with their expertise.
▶ 1:15:58It would be like my saying, I'd like to send my packages through Amazon trucks because they've got this great infrastructure. If he wants to compete with that, let him build his own, make it better. And assuming that the majority is right, these actions would presumably undermine ISS and Glass Lewis's own bottom lines in revenue and therefore would hurt these firms and damage their position in the market. But there is no evidence of that, is there?
▶ 1:16:24There is no evidence of Miss Miss Mow, the majority also claims that ISS and Glass Lewis prevent new market entrance because they control voting platforms as well as provide advisory services. Is this true? No. They developed their own platforms just as if you want to log into your account on the bank at a bank or a brokerage house. They they created their own platforms and anyone else can create theirs as well.
▶ 1:16:52So investors are not forced to use the voting platforms and thus they could get advice from ISS and Glass Lewis and then use a separate entities voting platform. Is that correct? That is correct. and ISS told me that if enough of their clients ask to have uh Sean's firm on their platform, they would add it. But nobody's asking for it. Thank you.
▶ 1:17:14This hearing is yet another example of my colleagues across the aisle weaponizing an empty theory of antitrust harm to come after free speech and the exercise of shareholders rights simply because they disagree with the content of that speech and the exercise of those rights. It's a dangerous use of this committee's and I urge my colleagues to reconsider and I yield to uh the chair the ranking member of the full committee. Thank you very much. Uh Mr.
▶ 1:17:43Nabler, um Mr. Egan, um does your firm you you're essentially a competitor to the two big firms we're talking about? Is that right? Thank you for your question and the answer is yes. Okay. Does your firm collude with other proxy advisors? No. Um, do you have an ESG policy for the people you advise? We do. And do you have a non-ESG policy for the people you advise?
▶ 1:18:11We don't label it as non ESG. We have a wealth focused policy. Okay. But if I want ESG, I could come to you, but if I don't want ESG, I could come to you. I've got alternatives options. That's accurate. And why do you set it up as an array of options like that? to provide uh uh investors uh with a choice. So, you're meeting the needs and desires of your clients and meeting a market demand. That's accurate. Okay.
▶ 1:18:38It seems to me that's exactly what your competitors are doing and I understand you're a new entrant there, but everybody is responding to a market demand and so I appreciate your cander and answering. Yield back. Thank you, Mr. Back. Gentleman yields back. Gentleman from Texas is now recognized for five minutes. Hi, Mr. Griffin.
▶ 1:18:56Can you explain what guard rails, whether legal or regulatory, exist to ensure that ISS and Glass Lewis provide voting recommendations in the best financial interest of shareholders and that they're not giving conflicting recommendations to clients about the proxy and shareholder proposals, if those exist? Thank you for your question, Congressman. Uh there are very limited legal and regulatory guard rails in place right now.
▶ 1:19:20uh currently there are no direct fiduciary duties to the ultimate investors the clients of these uh institutional investors who in turn hire the proxy adviserss. Um and I think when you know we look at market demand when we use the term uh investor to refer not to the people who invested their money uh but to the financial intermediaries who control it can generate incorrect policy insights. So in my view, firms like Black Rockck should be considered intermediaries rather than uh true investors um essentially custodians of the true investors money.
▶ 1:19:49So if I understand this correctly um kind of moving on down the road of some things I heard earlier, is it is it accurate to say that ISS is able to offer advisory services to boards of directors while also offering recommend recommendations for how shareholders vote. Is that a thing? That's correct. And do you know of any other industry where such an inherent conflict of interest might exist? Uh I'm not aware of any.
▶ 1:20:18I know that some uh analogous conflicts existed in the uh auditing and accounting firm context, but those uh Congress took action with respect to those. And so the board of directors could be paying for them for services and then also they're getting paid to recommend to the proxy adviserss. Does that seem right? It it does generate a potential conflict of interest. Yeah. Do you think, Miss Mow, that there's a potential conflict of interest there? Yes, I do.
▶ 1:20:43That's why I don't buy ISS services and I do believe that anybody who does want to buy them should be able to buy them, understanding what the conflict of interest is. Interesting. Uh, Mr. Egan, I uh I think I'm hearing that Egan Jones is taking on two duopolistic actors and in doing so creating a more competitive marketplace.
▶ 1:21:08Uh, one of those areas that's been a particular concern for this subcommittee has been the ESG issues, which are inherently politically charged. Do you know how often ISS and Glass Lewis are voting against the boards of directors on ESG issues? I do not. Okay. I I'd like to hear more from you, Mr. Griffin. This this idea of these conflicts of interest, is this is this a thing with a business like Mr. Eaggan or is this a problem with just the the two big ones?
▶ 1:21:37I I think uh the specific conflict of interest you're referring to arises from the provision of consulting services uh rather than the proxy advisory service itself. And so I my understanding is that his firm does not offer those types of services. Um and the two largest proxy advisors do. What do you recommend that Congress should do to fix that? Uh well I think there are a number of uh potential solutions.
▶ 1:21:58I think Congressman Fitzgerald's bill uh providing for enhanced disclosure of and and regulation of conflicts of interest uh I think could be very beneficial in in a number of ways. Um something analogous to what we did in the accounting firm context for Sarbain Lockxley uh may be beneficial here. Thank you. I'd yield my extra time to the chairman if he has Chairman is recognized. Jim, do you have anything?
▶ 1:22:30yeah, we'll uh I'll I'll I'll recognize the uh ranking member for five minutes. Okay. Thank you very much, uh, Mr. Chairman. And, um, I'm I'm very new to this whole field, but one thing I've learned about the proxy service community is that it is one that favors alliteration. So we have platforms, purses, proxies, practices, concentration, competition, and conflicts of interest.
▶ 1:22:58But even though they're both P and C words, I didn't really hear anything about collusion or price fixing. Um, which leads me to believe that the the fact that we're the in the antitrust subcommittee today and we're talking about antitrust is really the use of a metaphor here. I don't know. I mean, perhaps Miss Mow, you can correct me. Did you hear any allegations of an actual antirust violation from any of your fellow witnesses? I did not. Okay.
▶ 1:23:25So, what I heard a lot about conflicts of interest and just to be clear about this, um, is a conflict of interest an antirust collusion? No. Okay. So, a conflict of interest is not an antitrust violation.
▶ 1:23:40I understand that the whole question of conflict of interest within this proxy service community is something that is heavily discussed and contested within this the securities and exchange commission and within our colleagues in the financial service committee. Am I right about that? Do you know about that the the conflict of interest? Well, perhaps I I can come to you Mr. Crane. You're using antitrust here as a metaphor. the way sometimes people say the Democrats and the Republicans are a duopoly.
▶ 1:24:10They control 90% or 95% of the votes. They control the House and the Senate. And sometimes actually that duopoly engages in unconstitutional practices. Like in Maryland, if I want to run for office, I just need one signature. If I want to run as an independent, not as a Democrat or Republican, I need 87,000 signatures. And so although it's not an antitrust violation strictly speaking, that metaphor helps to understand why there's a first amendment problem there or an equal protection.
▶ 1:24:39But you're just using antitrust as a metaphor. Am I right? Just help me understand. It's not a gotcha question. I'm trying to figure out what we're doing here. Yeah, I I I think it's a fair question. Um from from manufacturers perspective, they certainly feel the effects of this duopoly. I obviously defer to the distinguished members of the subcommittee about whether and to what extent it's a officially an antitrust violation, but certainly manufacturers have experienced the effects of the market power that these firms yield. All right. Well, all right. Let's talk about conflicts of interest then. Uh Mr.
▶ 1:25:07Egan, your firm was actually charged with uh misrepresentations by the SEC. Was it in 2008 or 2009? Is that right? Um we have been in NRSOR for a number of years. Uh we've been uh in the business u uh as a rating firm for over 30 years. There's been a number of regulatory action. Well, let me just speed ahead because I've got so little time. In 2022, you were charged with a conflict of interest.
▶ 1:25:37Is that right? Um Egan Jones and myself personally said um reached a settlement order on the rating side. uh with our regulator in 2022. In 2022. Okay. But you were not charged with antitrust violations then. You were just charged with a conflict of interest and you settled that with SEC. Is that right? Um uh we reached a settlement in 2022 with our regulator.
▶ 1:26:07All right. Ms. Mino. Do you know whether ISS has been charged with a conflict of interest by the SEC? They have not. And what about the other one? glass Lewis. I don't believe they have. I certainly haven't read anything about it. I know that there have been discussions about it, but as I said, that is really for their customers to judge whether that affects their ability to provide independent research or not. Okay.
▶ 1:26:32Um, look, if proxy advisors or or the duopolies, they're calling them are so omnipotent uh and they're allegedly colluding to advance so-called progressive proposals against corporations. Why do the vast majority of the recommendations actually align with the management view? I would think that this duopoly is much more in service of the corporate state viewed from the right or the left.
▶ 1:26:56Isn't that 96% of their recommendations are to vote with management on matters like unopposed board members. So, we're having an antitrust hearing about whether two firms out of many firms that are operating for profit and not for-p profofit that advise companies voluntarily who want to come and become their customers about how to vote in shareholder proposals that are are engaged in in antirust conspiracy. It just blows my mind.
▶ 1:27:24You mentioned one though where um I I don't know where the the companies were on this, but Zazlov's salary was rejected. It was a $51.9 million salary and the shareholders voted that was too much money in Disney and the board dropped the salary by $16 million. So what's wrong with that? That's exactly how markets are supposed to work. And I would just say that how did the proxy advisors go on that one, gentlemen? They recommended a vote against the as did all of the financial press.
▶ 1:27:54I mean, it's objectively too much money for that CEO and yet the company still can ignore it if they want. Gentleman's time is expired. Gentleman from North Carolina is now recognized for five minutes. Thank you, Mr. Thank you, Mr. Chair. And uh thank all of you on the panel for uh your testimony today. Mr.
▶ 1:28:11Crane, from my understanding of your testimony, your organizations argued that proxy advisors should give companies an opportunity to provide feedback on vote recommendations and to let shareholders see the dialogue prior to a vote. There was a 2020 rule from the Securities and Exchange Commission that did expand transparency in this way, although such requirements were later revised uh and also struck down by the courts.
▶ 1:28:38In your view, was this rule effective at all in improving the proxy advisor ecosystem? Thank you for that question, Congressman. We certainly believe that that rule would have been effective at uh enhancing the degree of transparency and reliable, accurate information that investors could rely on. As you indicated, unfortunately, under the previous administration, Chair Gendler rescended critical parts of that rule, including the provision of uh recommendations to companies so that they could respond appropriately.
▶ 1:29:07and it's been tied up in litigation since then. The NAM is actually a party in that litigation and we're hopeful that we can defend the SEC's authority, but ISS has been steadfast in not wanting to be regulated. So, we certainly think that there is more work to be done both by Congress and by the SEC to ensure that there's appropriate degree of oversight of these powerful actors. Well, let me just follow that up then that now that that rule is no longer in place, what would you say in your opinion should be done to increase proxy advisor transparency? Thank you for that question.
▶ 1:29:37Again, I think we start with the conflicts of interest. Um certainly the the chairman's legislation about outright banning those conflicts is something that we support from the SEC side. We have long supported transparency around those conflicts. And then the issue that you raised at the beginning of your line of questioning of allowing the proxy firms to provide to companies draft recommendations that they can respond to, to spot errors and misunderstandings, and most importantly to convey to investors, here are the two sides of this issue. and then that way they can make an informed decision.
▶ 1:30:07That's something that we move the ball forward in the right direction in the 2020 rule, but there's much more work to be done depending on how the outcome of these court cases go. Well, proxy advisers exist obviously because shareholders don't have time to research the company's policies before they are called on to help make decisions. So, how do you think having access to more information would be helpful?
▶ 1:30:28Essentially, if shareholders don't look at that information, how would it improve the proxy advisor's work I think it's critically important um that shareholders have access to all the information they need to make an informed decision. Unfortunately, under the status quo, we often see that proxy advisors robo vote investor shares before even reading the proxy firm's recommendation to say nothing of a potential corporate response to that recommendation.
▶ 1:30:52So, we really are starting behind the eightball here in terms of investor understanding of these issues and transparency into them. And so there's much more work that needs to be done to ensure that investors have the information that they need to make an informed decision. Okay. Well, thank you very much, Mr. Griffin. When Americans invest in funds and companies, these entities have a fiduciary responsibility to act in the best interest of their investors. Unfortunately, ISS and Glass Lewis have worked together to push companies to implement ESG agendas.
▶ 1:31:21Does pushing recommendations, Mr. Griffin that favor ESJ ESG reflect the preferences of everyday Americans who are affected by these decisions. Thank you, Congressman. I I I think that uh the system is set up to serve the interests of these intermediaries rather than the investors that uh they are to whom they owe fiduciary obligations. And so um when we speak about it being market driven, I I think that uh there are important limits on that.
▶ 1:31:50And to the extent these large intermediaries favor the current system, favor the status quo, I find that unsurprising because it's designed to serve their interests. And in your opinion, what would be the most effective way to help ensure proxy advisors are ser serving the interest of the American investors and consumers? I think there are a number of uh excellent proposals throughout some of the bills in Congress today.
▶ 1:32:12Um I think conflicts of interest are a particularly ripe area for for looking at uh just to ensure the objectivity and neutrality of the recommendations that proxy advisors provide. Thank you. Thank you very much. And Mr. Egan, you mentioned in your written testimony that unlike our your foreign unlike your foreignowned competitors, Egan Jones Proxy Services is owned and operated in the United States. As we know, ISS is owned by a German corporation. Class Lewis is owned by two Canadian financial institutions.
▶ 1:32:42What are the concerns surrounding the fact that the two leading uh providers of proxy vote guidance in the United States are based abroad? Could you expand on that? Um yes and thank you for the question. Uh in my opinion um the structure of this industry needs to be needs attention.
▶ 1:33:02The reason why I say that is because it's very easy for regulators to push on regulated entities without anybody's knowing about it, without any rules, without any Um, in the case of one of our competitors, ISS is owned by Deutsche. Uh, my presumption is that on a regular basis, they're meeting with the regulators because there's so many issues connected with the stock exchange.
▶ 1:33:30Therefore, those regulators um you might have a completely different view than what's in the United States for what it constitutes protecting value. Thank you. Gentleman's time has expired. Gentleman from Illinois is now recognized for 5 minutes. Uh thank you uh Chairman uh Fitzgerald. Uh I heard some very interesting descriptive language at the beginning of the hearing and I want to ask Miss Mow three quick yes or no questions hopefully. Are you part of a climate cartel? No.
▶ 1:33:59Are you engaged in any racketeering? No. Uh, have you participated in any mafia style shakedowns? No. Okay. Uh, today's hearing is supposedly about antitrust issues involving proxy advisors. But what is going on here is we're seeing culture war and pro-corporate policies being advanced.
▶ 1:34:29Republicans argue that Glass Lewis and ISS have too much power and collude to advance so-called woke corporate governance. I would agree that any market that's 90% controlled by two entities should be scrutinized and proposals to foster more competition should be considered. But let's be clear, there's no evidence of collusion between Glass Lewis and ISS.
▶ 1:34:55And what are some of the examples of woke corporate governance where these proxy advisors have recommended against the company's board's position hasn't been made.
▶ 1:35:08reporting on the use of child labor in supply chains for meatacking corporations, auditing working conditions at Amazon, adopting living wage principles at Walmart, reporting by tech companies on the risks posed by generative AI, deriding labor rights as woke gives away the game. Republicans are always siding with the bosses over workers.
▶ 1:35:37And the irony is that these examples of wokeness are outliers. Miss Middle, thank you for being here. Uh, isn't it true that in 2024, ISS recommended voting with management on 96% of management proposals? It is. Thank you.
▶ 1:35:57And in your experience, including as president of ISS, have you seen any evidence that ISS and Glass Lewis are using the recommendations to push a progressive agenda? No. And you you uh studied at the University of Chicago. Did I hear you correctly? I did. I'm from Illinois. Very well. Thank you.
▶ 1:36:19Republicans are trying to crush shareholder rights to benefit the corporate executives who fund their party and they've continued to push the narrative about ESG and world corporate governance to distract us from the truth.
▶ 1:36:38The truth is we are nowhere close to our achieving economic democracy that would empower workers including through worker representation on corporate boards by any stretch.
▶ 1:36:52The truth is, as ridiculous as Republican attacks are against ESG, we must not allow wealthy corporations to exploit ESG as cover for their predatory practices, including union busting, worker exploitation, and consumer fraud.
▶ 1:37:14And the truth is that we're living in an oligarchy where increasingly dominant corporations and billionaires control most of our government and public policy. The fundamental problem is not proxy advisors or ESG. It's a government that's been captured by the wealthy and serves their interests above those of working people. I represent a district of working people.
▶ 1:37:45If Republicans had any interest other than protecting billionaires and wealthy corporations, this subcommittee would be focusing on policies that t tangibly improve the lives of our constituents, but they don't. So, we're not. And to me, that's a betrayal of the real working class in America. Thank you and I yield back. Gentleman yields back.
▶ 1:38:14Now recognize the chairman of the full committee, Mr. Jordan, for five minutes. Thank you, Mr. Chairman. Mr. Crane, what percentage of publicly traded equity shares are held by institutional investors in pension funds? It's a very large percentage. I forget the exact number. It's north of 80, I believe. 80%. And because of that, most shareholder votes are cast through proxy voting because the shareholder can. Is that right? That's exactly correct. Okay.
▶ 1:38:37and proxy advisors advise or recommend to the institutional investors into the pension funds how they're supposed to vote. Is that right? That's correct. And is uh is their advice followed? Pardon? Is their advice followed? Is the proxy advisor's advice typically followed by the institutional investors and the pension? It's absolutely followed and in many cases their shares are automatically cast by the proxy firms in line with those recommendations.
▶ 1:39:02Well, it's so they're do what they're they're the the institutional investors pension are doing exactly what the proxy advisors had tell them. That's exactly correct. Yes, sir. Okay. Um and who are the two largest again who we've been talking about? ISS and Glass Lewis. ISS and Glass Lewis. And how much of the market do they control? 97%. 97% of the market, 80% of the uh shareholders, the equity shares are with institutional and pension investors and their advice is followed 95% of the time.
▶ 1:39:32That's essentially correct. Wow, that's pretty big. That's pretty big. How much um how much money we talking about? Trillions of dollars of equity across the market. 5 trillion, 20 trillion, 30 trillion. How much we talking? I I don't know the size of the market, but it's a large number of the equity markets in the United States. My understanding is it's at least 20 trillion dollar and there's and the other side says nothing to look at here. Nothing to look at here.
▶ 1:40:00Really, that seems like there's a lot to look at there and that's why we're having this hearing. Now, what kind of advice? So, their advice is followed 95% of the time, 70% of the market, over $20 What kind of advice are they given? It's advice on everything that comes before shareholders. It's uh how the company is run, how the executives are paid, the shareholder proposals that have been discussed. It's everything that comes before the shareholder base for a vote. What kind of advice are they given in a political context?
▶ 1:40:26Uh we know that ISS for example recommended in favor of more than 80% of ESG shareholder proposals in 2023. Prode DEI as a general rule. Yes. Not with not 100% of the time, but yes, as a general rule, vast majority of the time I would say yes. Okay. So kind of leaning to the left, right? I think that's probably a fair characterization. Their advice is followed 95% of the time. They have 90% of the market.
▶ 1:40:5070% are these are they're given advice to and it's always almost always leftwing. I think that's a fair characterization. Yeah. Is that is that how you see it, Mr. Egan? I have no reason for disagreeing with that. What about you, Mr. Griffin? I think that um while it varies by year and we've seen sort of swings with somewhat mirroring the political election cycle that that is that an accurate picture. Is that an actual framework? Okay.
▶ 1:41:19Now, but that's not that's not the end of it, is it? Because it's even worse because this duopoly not only offers proxy advisor services but cons but consulting services as well. That's exactly right. Okay. So you can go consult with them before they give you the recommendations that are always followed. And if you don't consult with them, they might give you recommendations that in many ways harm the company and therefore harm the shareholder. Is that right, Mr. Crane? It is.
▶ 1:41:47And we've seen that when companies get negative recommendations from the advice side, they'll immediately get a solicitation from the consulting side saying, "Hey, wouldn't you really like to have us help you out next year to avoid those negative recommendations from our friends down the hallway?" Yeah. Pretty concerning fact pattern. Will you pay the Will you Will you pay the protection money? Will you pay the shakedown? Exactly. Holy cow. Such a deal. Such a deal. And Miss Mow was part of it all when she worked at ISS. Is that right? I'm not The question wasn't for you. It was for Mr. Crane.
▶ 1:42:16I understand that, but he doesn't know the answer. And I do. Well, I wasn't asking you a question. He is wrong. I did not allow You might be able You might be able to do the consulting services and the not allow ISS to do consulting when I Does ISS do consulting now? ISS does do There you have it. There you have it. My question, the way it works is the members get to ask the questions and to the people they want to give the answers. My question was to Mr.
▶ 1:42:41Crane, I appreciate you jumping in, Miss Minnow, and telling us that ISS does now offer consulting services in addition to the proxy advisor thing, which is the problem, which is well, not the full problem, but certainly part of the problem. Is that right, Mr. Crane? I would agree with that. Yes, sir. And then you could even go even maybe one step further and say on the platform, no competition's allowed, which I sort of get. I sort of get Miss Mow's argument on the Amazon issue.
▶ 1:43:04I sort of get, but it's almost like they got this thing rigged from start to finish and it's two companies and the other side says nothing to look at here. I think that's kind of ridiculous and I appreciate the chairman and his work on this important issue. With that, I yield back. Chairman yields back. The gentleman from Georgia is now recognized for five minutes. Uh, thank you, uh, Mr. Chairman.
▶ 1:43:28And I'd like to offer Miss Menow the opportunity to uh fully respond to uh uh Mr. Jordan. Thank you very much. I appreciate it. Um yes, when I was at ISS and I was president, I did not allow us to do consulting services and yet we were spending a ton of time trying to walk corporations through who would call us and say, "We want to understand your system." And so I understand why they do it now.
▶ 1:43:54Um, and the large institutional investors who choose to use their services bake that in. You know, uh, Mr. Jordan mentioned, uh, the 4%. You agree with ISS's decision. It's my time. It's my time. Uh, he mentioned the 4% where they disagree. Interestingly, whenever ISS recommends a vote or Glass Lewis recommend a vote contrary to management, what we find there, if you look at the numbers, is that the clients uh make up their own minds.
▶ 1:44:24So that for example, ISS recommended a vote against Elon Musk's ridiculous 58 billion pay package and yet the shareholders voted overwhelmingly in favor of it. Great example. Uh, do you believe Milton Freeman, since you're a a graduate of the uh, University of Chicago, would he be turning over in his grave listening to uh, this attack on the free market system that this hearing represents? He would be spinning like a top. Yeah.
▶ 1:44:54Thank you. Um, Mr. Uh Egan um since 2002 you've been involved as a uh in the business of proxy advisor services uh Since u uh 2002 and uh since 2002 your primary competitors in this proxy advisor service industry uh has been uh Glass Lewis and ISS.
▶ 1:45:24Correct. That is correct. And you have fought your way up to the top. Now you are now the third largest proxy advisory firm operating uh in the nation. Correct. Uh we've been the third largest for a number of years and um and and I commend you for that. Uh this hearing gives you an opportunity to promote the fact that your company is an anti-woke uh proxy advisory firm.
▶ 1:45:53I would not characterize our firm as an um uh firm. We offer ESG products. Well, I tell you, your testimony, your written reads and looks like a promotional uh brochure for your company. I've never seen anything like it.
▶ 1:46:12Um, and you're here today uh to basically get some government help in positioning your business to uh become a larger player in this industry. Isn't that correct? In my opinion, no. Well, let me ask you this. If I can answer the question, you ask question and I'll be happy to answer. Well, I'm g I'm moving on.
▶ 1:46:36But I want to ask you about that 2012 SEC complaint that uh was filed against you. They charged you with, among other things, uh having conflicts of interest. And uh you hired uh the attorney, the same attorney that represents uh Donald Trump Jr., Mr. uh Allan Fertivus. Isn't that Uh Mr.
▶ 1:47:06Futterfus has not represented your lawyer. He hasn't represented the uh firm for over over 10 years. He was your lawyer though, right? Same lawyer. Probably about 15 years ago. Yes. Same lawyer that uh now represents Donald Trump Jr. are you uh one of the uh folks who contributed to uh Trump's um inauguration campaign? We are not or his campaign. No.
▶ 1:47:37Okay. All right. But you sure are seeking um some exposure today on this anti-woke uh tip. I'm here today to provide uh insight in our experiences in this industry. You're trying to uh create a competitive advantage. This is like crony capitalism. And I'm sure that Yeah, there's some real problems in this industry.
▶ 1:48:02I'm sure that Milton Friedman would not uh be approving of this kind of uh conduct complicit uh with a Congress that is a rubber stamp to everything that Donald Trump is trying to do to put his finger on the free market system and make it such that it works for him and his interest and uh everything else is secondary. And with that, I'm going to yield back. Gentleman yields back. Gentleman from Virginia is now recognized for five minutes.
▶ 1:48:32Uh thank you, Mr. Chairman. I'm going to yield as much time to the chairman. I just I thank I think gentleman for just a quick question for Miss Minnow. Uh so is ISS wrong now that they offer consulting services to uh to their Um I disagree with it, but uh I'm all in favor of every possible option being offered to the market and letting the market decide. They're wrong. I don't use their services. Okay, great.
▶ 1:49:02Thanks. I'll yield back. Thank you. Um, I want to restate what the gentle lady from Wyoming uh started her questioning with. Sounds like a racket to me. And, uh, Mr. Griffin, ISS and Glass Lewis's 90% plus market share. Uh, clearly suggest a violation of section one or section two of the Sherman Act. Would you agree? Thank you for your question.
▶ 1:49:29I I uh I'm more I'm a corporate governance expert. I'm here to talk about that. I think it potentially does, but I I'm not able to opine on that. Would DOJ or FTC scrutiny be justified based on historical enforcement standards? I think there this situation certainly warrants further study. Um and and more broadly, I would charact I would take issue with the characterization of this as a market driven phenomenon and a response to market pressure.
▶ 1:49:53I think it is a response to regulatory pressure to vote by these asset managers who are also I think bear very weak uh financial incentives uh to respond to to the concerns of the actual shareholders. Well, it is pretty clear the absence of fiduciary responsibility paired with high market concentration supports a case for closer antitrust scrutiny or regulatory intervention. The opposition seems to believe that these practices are immune somehow from antitrust scrutiny simply because they occur in the context of shareholder voting.
▶ 1:50:22uh firms apparently firms with effective monopoly power um should be allowed to self-p police their own competitive and ethical boundaries. Um Mr. Griffin are ideologically aligned ESG recommendations that mirror each other grounds for a section one Sherman Act claim due to collusion? I think that uh it's it may merit investigation.
▶ 1:50:46Um I think broadly that these asset managers are not incentivized to serve uh interests beyond those of the intermediary clients that they possess. Uh in particular they very very weak ties to the actual investors. Does offering consulting services to the same firms you issue proxy recommendations for meet the legal threshold for monopoly leveraging?
▶ 1:51:08It may be a a an important example of the market power they wield and there may be a cross subsidy essentially between their consulting services uh and their advisory businesses. Mr. Crane, how have ESGdriven voting recommendations affected your members costs and operations. Manufacturers are focused on growing their business, delivering return for shareholders, creating jobs for American people in every state and every congressional district.
▶ 1:51:33And so to the extent that they're distracted from that critically important mission to support the US economy to respond to activist proposals on the proxy ballot or to the agendas of proxy advisory firms, that's a distraction from the ultimate goal that that I think we would all want to support, which is that driving the American economy and creating manufacturing jobs. Have your members reported feeling pressure to purchase consulting services from these proxy firms? They absolutely have.
▶ 1:51:56It's a it's a relatively common fact pattern that you'll receive a negative vote recommendation and then soon thereafter receive solicitations from the consulting service side of the business asking if you would like to subscribe to avoid negative recommendations in the future and to structure your policies in line with what ISS andor glass lewis want so that you'd avoid negative recommendations in the future. There's absolutely that degree of pressure.
▶ 1:52:18If if this type of dual role conflict is done by credit rating agencies or financial auditors, wouldn't it be uh just as unacceptable for for it to be happening in those areas as well? And Congress has stepped in in those regards. Um and the SEC did in this case. Um and unfortunately that rule has been held up in court for the last 5 years and not been allowed to take effect. Right. Uh Mr. Crane, I'm sorry, Mr. Egan, have you ever lost business to ISS Glass Lewis due to bundled consulting services? Would you mind repeating the question?
▶ 1:52:48Have you ever lost business to ISS Glass Lewis due to bundled consulting services? Yes. Um wouldn't you say that uh can you cite specific shareholder proposals or or climate related screens that seem ideologically driven rather than investor oriented? Well, we see those regularly.
▶ 1:53:07But regarding losing business, bear in mind that they can charge nothing on the proxy advisory business and pick up compensation on the other side of the business and maintain their preferential position. Wow. Which is crazy when you think about it. Yep. That sounds like a scam to me. I yield back. Gentleman yields back. Gentleman from California is now recognized for five minutes. Thank you, Mr. Chairman.
▶ 1:53:32Uh so many good questions have been asked and uh I'm going to try and uh close some of them together for a moment. Uh any trust is is complicated and you always have to ask things like what's the relevant market and and so on. But per se when you have just two that control 90% in general of a of a assuming it's a relevant market that's monopolistic power. Correct.
▶ 1:54:02Nobody on any side disagrees that we have the potential for monopolistic behavior because you have such a concentration. Now in monopolies the most common thing that we look at is One product being leveraged by another.
▶ 1:54:21Is there anybody here that doesn't see that at least in the abstract there appears to be a tie-in when the two companies controlling 90% of a market also have a product that is in fact could be independent could be spun off but isn't because it's a tiedin product any okay so after all this time of not necessarily all agreeing we've got agreement on those two which means that we have per a monopolistic
▶ 1:54:52power. We have a tiein. And now what we're trying to discover is have they used that tiein? And uh Mr. Egan, I'm going to I'm going to I'm going to push the the envelope of of of this body by reminding people of Godfather one.
▶ 1:55:11And in Godfather one when the Koleone's representative goes out to California and he's talking about the things that could go bad like union problems and so on and that the Godfather would be very appreciative if he just give this man a part in his movie and then those problems wouldn't exist and he gets thrown out and then there wasn't a union strike but there is a response.
▶ 1:55:41In your experience, have you seen that? That's essentially what's happening. You're being told by others, hey, you know, if you if you hire these guys, things go better. And when you don't, you end up with an adverse proxy situation. Isn't that sort of what happens? It's not quite the godfather. There's not actually a horse in your bed. But in fact, you do see bad things happen when you don't hire them and less bad things when you do. I can't disagree with that.
▶ 1:56:11In fact, I no one disagrees with The Godfather. It's just it's one of my favorite Okay, I I will open this up at at some risk and say if that's the case, then shouldn't we agencies of the federal government in general be looking at a breakup of that power to create a tie?
▶ 1:56:37And isn't that what we're really here u on both sides of the aisle hopefully looking and thinking we should consider each of you Mr. Egan? Yeah, absolutely. Uh this market it has become dysfunctional. Okay.
▶ 1:56:54from from our perspective that you have u two companies particularly one company ISS controlling the platform uh with consulting and um uh and then also the proxy advisory work when we have been hired by a major institutional investor and we're relying on ISS to get information so we can conduct our business we're not getting that information that information as I mentioned in my oral testimony
▶ 1:57:24was when the proxy uh due date is. If we don't have that, it's very very difficult. And they've said, "Hey, listen. We're distributor here. We're not going to give you that information. We've been impeded." Okay. And as I've said before, they can charge nothing on their proxy advisory service and more than make it up on their consulting service. That's why we call it a tie-in. Absolutely. And this notion of just because it's a free market, everything is fine.
▶ 1:57:51Well, with almost every single uh monopoly or duopoly situation, it started off as a free market and then it became dysfunctional. Mr. Kaine, you're you represent so many of manufacturers who are just trying to compete. They seldom if ever have a 90% or a 45* 2 uh market share.
▶ 1:58:12And isn't it true that one of the biggest impediments to there being competitive is when the sources that they want to buy their products subcomponents from have if you will a lock on the market of 90% between two vendors. Isn't that the most Isn't that by definition what it makes your the people you represent unable to deliver a product is even if they're a diverse group that if they're buying from one of two vendors they get to pay a lot more.
▶ 1:58:43Correct. That's correct. Thank you. I yield back. Gentleman yields back. This concludes today's hearing with uh we thank our witnesses for appearing before the committee today without objection. All members will have five legislative days to submit additional written questions for the witnesses or additional materials for the record. Without objection, the hearing is