▶ 0:18:35The Committee on Financial Services will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. Today's hearing is titled Proxy Power and Proposal Abuse, Reforming Rule 14A88 to Protect Shareholder Value. Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. I now recognize myself for five minutes for an opening statement.
▶ 0:19:05Good morning. Welcome to our committee today. As our securities laws were being considered during the Great Depression and the years after, corporate governance policymakers sought to ensure that stockholders had an active voice over any entrenched management, inattentive directors, or a controlling group.
▶ 0:19:25The intent was that all shareholders could assert their ownership rights around key components of running the business and capital Thus, while our proxy access process was originally designed to empower shareholders and provide them with a voice in company oversight, in recent years it's increasingly become co-opted by activist investors who primary focus often lies not in maximizing shareholder value, but
▶ 0:19:56in pushing narrow political, social, or personal agendas. We've seen the shareholder proposal process diverted away from that critical business strategy focus and instead become a tool for advancing proposals to distract from companies missions leading to an erosion of shareholder value and additionally costly burdens on companies that are working to navigate today's complex business conditions and global
▶ 0:20:26As we examine the shareholder proposal process, we also must consider the role of proxy advisory firms on capital markets as a whole. While these firms can offer valuable perspective, over the past two decades, their influence on corporate governance and voting on particular shareholder proposals has grown significantly.
▶ 0:20:49We must ask ourselves if these firms are still fulfilling the intended purpose of serving in the best interests of shareholders or if they are distracting from the primary goal of enhancing long-term shareholder value. As we evaluate the current landscape surrounding for uh rule 14A88 at the SEC, it's essential that we assess the impact of recent regulatory interpretations and guidance and how these have led us to where we are today.
▶ 0:21:19Particularly, we want to look at SEC staff legal bulletins 14L and 14M, which have had a significant impact on influencing how companies and shareholders engage with the proposal process.
▶ 0:21:35Staff legal bulletin 14L issued in November of 2021 under then SEC chairman Gensler shifted the focus from shareholder proposal review from the proposal's relevance to a specific company to whether the proposed issue had broad societal impact.
▶ 0:21:54Expanding what counts as relevant, a relevant proposal, makes it harder for companies to block items unrelated to their particular business, letting activists push measures that are disconnected and immaterial from the company's performance. As a result, we've seen an uptick in proposals that prioritize social or political issues over shareholder returns, which can divert attention from the fundamental goal of maximizing value for all investors.
▶ 0:22:25As we look at these recent developments, it's crucial to consider how we can reform the regulatory framework to restore balance and ensure that the proposal process serves its uh original intent.
▶ 0:22:39And I would argue that I hear from uh directors of public companies on all sides of the political perspective who share the view who share the view that this process has uh gotten away from that core tenants of the 1930s and 1940s of preserving long-term shareholder value. And with that I yield back and I recognize my friend the ranking member from California the full committee Mrs. Waters for a four-minute opening statement. Good morning.
▶ 0:23:10Uh, thank you very much, Mr. Chairman. For years, this committee has proudly championed the values of capitalism and the free market. But Donald Trump's actions with companies like uh, Nvidia, Intel, and US Steel is not capitalism by any definition of the word.
▶ 0:23:30To be clear, I do think it is appropriate for the taxpayers and the citizens of this country to have upside uh when taxpayer investments generate profit for corporations and their shareholders. If we appropriately tax corporations, especially those that receive substantial government subsidies, we the taxpayers would benefit. But we won't. We don't.
▶ 0:23:57Yet, what Trump is doing is not growing the economy or protecting workers. His chaotic interference in private markets and the misuse of government tools is only to give Trump more ways to bully the American people. He's used the government to attack cities like Los Angeles and Washington.
▶ 0:24:20Universities like Harvard, Colombia and Brown, nonprofits like the National Endowment for the Arts, news organizations like NPR and PBS, former government officials and law firms. Now he's attacking corporations.
▶ 0:24:37And by the way, Trump promised that tariffs would bring American manufacturing back, but the latest job numbers show that the US lost 42,000 manufacturing jobs since April, and businesses continue to pass off the of tariffs uh to consumers.
▶ 0:25:00This is the kind of sweeping authorian style communist takeover that China's leadership would applaud. And just like in China, Trump isn't doing this to help workingclass families. It's simply about control, consolidating power, punishing his enemies, rewarding political loyalty, and retaliating against those who refuse to bend to his will.
▶ 0:25:28As Trump tramples on American capitalism and our democracy, I'm absolutely appalled that as I look at Republicans who claim to be strong capitalists and tout the businesses they own. For example, Mr. are you ready to hand over 10% of your gravel business to Trump? Of course not.
▶ 0:25:52Instead of speaking out in defense of capitalism and democracy, Republicans are working with Trump's SEC to advance legislation that will further his anti- capitalist agenda by silencing the voice of shareholders. They want companies to ignore legitimate concerns from shareholders about climate change and other risk simply because those concerns don't align with Trump's political agenda.
▶ 0:26:21And if you want a case study in why shareholder rights matter, look at After Delaware's Chancery Court voided Mr. Musk's 56 billion award for a flawed flawed process, the company reincorporated in Texas and is now proposing to award Mr. Mus with the obscene and outrageous pay package that will exceed $1 trillion.
▶ 0:26:50If Republicans get their way by silencing investors and remaking their boards to no longer be independent, public companies may experience a fate similar to that of Enron or WorldCom. And we all know what happened to them.
▶ 0:27:09As Trump operates as a communist and uses his government to control the economy, Democrats will fight to ensure that workers, not just the corporate elite, see and fill the benefits. We will also fight to ensure Congress and not the president determines how the government spends taxpayer resources on things that truly benefit taxpayers, like building housing, supporting health care, and caring for those in need.
▶ 0:27:38Anything less is unacceptable. I yield back.
▶ 0:27:41Gentleoman yields back. I now recognize the ranking member of the subcommittee on capital markets, Mr. Sherman, for a one minute opening statement. Under capitalism, if by the sweat of your brow and the frugality of your spending, you accumulate capital. If you have the courage to invest, you become a shareholder. And shareholders should be in control, not managers. Once again, the Democratic Party rises to the defense of capitalism against its greatest enemies, crony capitalism, and the hand and its and their handmaidaidens in Washington.
▶ 0:28:12The chair points out that corporate managers have said, "These damn shareholders have gotten out of hand, and we've got to stop them." And that's what the bills in front of us are designed to do. This is not just theoretical that we know which side of capitalism the Chinese Communist Party is on. They are going to want to buy the technology behind artificial intelligence. They're going to want to control it. They're going to offer corporations huge amounts of money.
▶ 0:28:41And when those transactions close, the board gets huge bonuses. And they don't want shareholders to have a vote. And we will be told, shareholders, get out of the way. It's a big payday. That's shareholder value. No, that's selling out America to the communist. I yield back. Gentleman yields back. Today we welcome the testimony of Mr. James Copelan, senior fellow and director of legal policy at the Manhattan Institute, Mrs. Frell Keel, partner at Jones Day, Mr.
▶ 0:29:11Ron Mueller, partner at Gibson Dunn Crutcher LLP, and Brad Lander, the comproller of the city of New York. We welcome all of you and we thank you for being with us, taking your time uh to share your views with the committee. Without uh objection, each of you will be recognized for five minutes to give an oral presentation and your written statement will be made part of the record. Mr. Copen, we're going to start with you.
▶ 0:29:38You're recognized for five Thank you, Mr. Chairman. Is this on? Chairman Hill, Ranking Member Waters, members of the committee, thank you for the opportunity to testify. My name is James R. Copelan. Since 2003, I've been affiliated with the Manhattan Institute for Policy Research, a nonprofit public policy think tank in New York City, where I have served as senior fellow and directed the institute's legal policy research.
▶ 0:30:07Although my comments draw on work conducted for my employer, my statement today is solely my own. I am pleased that the committee is examining how the Securities and Exchange Commission oversees the submission and voting of shareholder proposals under rule 14A88. I have studied this process for more than 15 years alongside related issues in securities regulation, including the role of proxy advisory firms and the voting practices of large index fund families.
▶ 0:30:37I address those topics at length in my written testimony. In this opening statement, I will focus on three brief points. First, US capital markets continue to lead the world. Our markets efficiently allocate capital and have enabled firms founded within the last few decades to become global leaders. That dynamism helps explain why US per capita growth has outpaced most other developed nations over the last 30 years.
▶ 0:31:07Second, public listings, however, have fallen by more than half since the mid1 Many factors contribute, but a significant one is the increased cost and complexity of being a public company in the United States.
▶ 0:31:23That reality discourages listings and impedes capital Third, part of the rising cost of public ownership has been spurred by congressional actions, including well-intentioned, but in some cases overreaching legislative responses to the collapse of the.com bubble and the 2008 financial crisis.
▶ 0:31:45Other costs of public ownership, however, have flowed from regulatory decisions by the SEC and other agencies without clear congressional mandate. Chief among these is the SEC's use of rule 14A88 to compel inclusion of shareholder proposals on corporate proxy ballots in ways that in practice override state corporate law.
▶ 0:32:12My conclusion, which I stated before this committee two years ago, remains. The SEC's shareholder proposal regime exceeds Congress's statutory mandate, displaces state corporate law without authorization, and impedes the efficiency and capital formation Congress has instructed the agency to Congress should clarify that shareholder board interactions are matters of state law and remind
▶ 0:32:43the SEC that its role lies in facilitating disclosure, not dictating the substance of corporate Two developments have magnified the costs of the SEC's long-standing error. First, proxy advisory firms. Two firms control virtually the entire proxy advice market. Each is foreignowned. And these two firms have often favored environmental and social campaigns in shareholder engagement.
▶ 0:33:12Federal policy choices helped fuel the rise of this industry and the shareholder proposal process has increased its leverage over US companies. Second, passive index fund concentration and voting. Passive investing has been a boon to ordinary investors, including myself. But the three fund families that dominate this market now control a large and growing share of all shareholder voting.
▶ 0:33:40For various reasons, the big three index fund families, like the proxy advisors, have often supported shareholder proposals advancing social and environmental objectives not aligned with the interests of the average In some two dominant foreignowned proxy advisory firms and the big three passive index fund families hold extraordinary sway over the governance of all publicly traded corporations in the United States and the committee is well
▶ 0:34:10advised to consider the SEC dictated process over proxies in light of this reality. The 15 bills noticed for this hearing move in the right direction, though several warrant refinement as I discuss in my written submission. I applaud the committee for tackling an issue vital to the American economy and to workers retirement savings. I welcome your questions and look forward to working with members and staff on this important subject. Thank you, Mr. Chairman.
▶ 0:34:40Thank you, sir. Mel, you're recognized for five minutes. And if we need to let Mr. Mueller share his mic if your mic's not working. Uh,
▶ 0:34:50You guys get cozy there. That the box will move. Mr. Mueller, it's not glued to the desk there. You can move it a little bit. There you go.
▶ 0:34:58Sorry. Thank you.
▶ 0:35:00Thank you, ma'am. You're recognized for five minutes.
▶ 0:35:03Chairman Hill, ranking member W ranking member Waters, and members of the committee. Thank you for the invitation to testify today. My hope is to shed light on why rule 14A88 no longer effectively serves the interests of shareholders at large. My observations draw upon my experience counseling public companies big and small on securities, corporate governance, and ESG activism. But I am here today in my individual capacity and not in behalf of any client. I'll start by outlining a few of the challenges with rule 1488 and then humbly offer a few ideas as to alternatives.
▶ 0:35:33Challenge number one, shareholder democracy needs rational bounds. No right is limitless. For example, if I buy a seat on an airplane, do I have the right to use it as a soapbox and hold my fellow passengers captive for the duration of the flight? In the shareholder proposal world, any individual can buy a megaphone and a billboard on a company's proxy statement for $2,000. To put it in context, that represents 0.00002% of the market cap of the average S&P 500 company.
▶ 0:36:02Proponents are getting prime proxy real estate at bargain basement prices. It doesn't have to be this way. We see healthy shareholder engagement around the world despite much higher participation thresholds. Challenge number two, rule 1488 is too complex, making it subjective and efficient and easy to manipulate. The SEC has issued interpretive guidance on rule 1488 through 18 staff legal bulletins over the last two decades. These bulletins change the goalposts with each new administration.
▶ 0:36:29And the guidance contains exceptions to exclusions and highly subjective frameworks that force companies and proponents alike to apply fuzzy standards like does a proposal transcend ordinary business or does it fall short? Is it significant or insignificant to social policy? Will it have a broad societal impact or just a limited one? Does it probe too deeply or just the right amount? The answers can only be known to the eye of the beholder.
▶ 0:36:56Complexity has a cost and that cost is that rule 14A88 is unusable to the ordinary shareholder. How valuable is a right to speak if the average shareholder can't even figure out how to submit a proposal? The only people who have a shot are professional activists, individuals and organizations who are oftentimes not even shareholders. These professionals effectively borrow a shareholder stake to get their foot in the door and then control the process from start to finish.
▶ 0:37:22It's not uncommon for the named shareholder to not engage with a company a single time. This means that the term shareholder proposal is a misnomer. In reality, most proposals are activist proposals. Challenge number three, a proxy ballot is not an efficient place to hold a political referendum. Rule 1488 has turned company's annual meetings into political hopeds. For example, this proxy sees in multiple companies had one shareholder asked them to promote DEI while another shareholder ask them to abolish it.
▶ 0:37:51More generally, proposals increasingly ask companies to appine on polarizing issues as if companies can solve the toughest legislative and regulatory questions of our day. For example, proposals have asked a store that sells hammers and nails to make a statement on reproductive rights, a theme park to state its position on geopolitical issues in China, a credit card company to unilaterally formulate and execute gun sale regulation. I want to be clear, these are critically important issues. But what we're really talking about can be summarized in three questions.
▶ 0:38:21Is a company's annual meeting the right forum to address these issues? Are companies best situated to serve as de facto regulators or are you? Do shareholders at large garner from the political proposals that have a tenuous connection to a company? Issue number four. Shareholder proposals are not costless. Companies pour an immense amount of energy into addressing proposals and it can take a company hundreds of employee hours to coordinate its engagement strategy and response.
▶ 0:38:49A company must consider whether it would cause them to jeopardize legal privilege, breach non-disclosure provisions, disclose proprietary or sensitive employee information, or reveal competitive strategies. Reducing the expense of a proposal to dollars and cents simply does not capture the intangible costs. What is the alternative? So, with a system that's threequarters of a century old, it's time to rethink the process. I think there are three essential options. Option one, keep rule 14A, but significantly revamp it.
▶ 0:39:18At a minimum, the ownership requirement would need to be raised, but it could also include other modifications like the SEC getting out of the business of adjudicating no action letters. The SEC and shareholders could rely on the independent boards to exercise their fiduciary duties and apply rule 148 in good faith. Truthfully, companies would struggle with this version of the shareholder process given it is much easier to blame an umpire here, the SEC.
▶ 0:39:42Option number two, eliminate 14 a and let states decide what is a proper subject matter, which is actually how 148 was originally intended to operate. And then option three would be something more akin to what we would describe as private ordering. So you would keep 1488, but let companies and their shareholders decide how 148 should be applied. I'm not sure I know which answer is best, but I do believe that living with the current system does not serve the interests of investors in the long run, and it'll ultimately hurt both companies and shareholders. Thank you again for the opportunity.
▶ 0:40:13Gentleman yields back. Mr. Mure, you're recognized for five Chairman Hill, ranking member Waters, and members of the committee, thank you for the opportunity to share my observations on why Exchange Act rule the SEC's shareholder proposal rule, should be revised, and to address proxy advisory firms.
▶ 0:40:35My observations, which are my own and not on behalf of anyone else, are based on over 35 years as a securities and corporate governance lawyer working with a wide range of US public companies and addressing literally thousands of shareholder Rule 14A88 is highly consequential, impacting many US companies and all of those companies shareholders as well as the US economy.
▶ 0:41:02Under the rule, a shareholder can require a company to include the shareholders proposal and supporting statement in the company's proxy statement, thereby allowing all shareholders to vote for or against the proposal. As several as chairman Hill acknowledged when this rule was first adopted, the rule was designed to provide access to a company's proxy for a proposal that is otherwise proper under state law.
▶ 0:41:29However, the rule has taken on a life of its own with detailed eligibility and procedural provisions and 13 substantive bases for excluding a proposal from the company's proxy statement. If a company believes that a shareholder proposal does not satisfy the rule and wishes to exclude the proposal from the proxy statement, the burden is on the um to submit a no action request to the SEC or to handle the matter in court.
▶ 0:42:00While I believe that shareholder proposals have and can be useful, the shareholder proposal landscape has changed dramatically over the past 10 or 15 years. First, the volume and the subject matter of shareholder proposals have changed significantly. During the 2017 proxy season, the number of social policy and environmental shareholder proposals exceeded the number of corporate governance proposals for the first time.
▶ 0:42:28And by the 2022 proxy season, the number of social policy proposals alone exceeded the number of corporate governance Second, the shareholder proposal process has changed. Rule 14A88 has become subject to dramatic swings in how the rule is interpreted, resulting in uncertainty and increased cost to both companies and to shareholder proponents.
▶ 0:42:53In addition, proposals increasingly are crafted by special interest groups focused on narrow policy issues or specific outcomes. For example, a group that calls itself the shareholder rights group includes some actual shareholders but also includes investment advisors and consultants who handle most or all of the shareholder proposal process for their clients. They are in essence ESG guns for hire.
▶ 0:43:22The 16 members of this group count for account for more than 40% of all shareholder proposals. The role of the proxy advisory firms in these developments cannot be overstated. Shareholder proponents typically cater and structure their proxy their uh their proposals to comply with proxy advisory firms voting policies, meaning that the proposal is often a facade for the true objective of the proponent.
▶ 0:43:50As discussed in hearings before the subcommittee on capital markets, the proxy advisory firm's objectivity is easily questioned. More proposals means more work for them. And of course, the proxy proxy advisory firms have no economic stake in the consequences of their voting decisions, are not subject to any regulatory oversight, and do not have fiduciary duties to accompany shareholders.
▶ 0:44:16The shareholder proposal process imposes significant costs on companies, as Mrs. said, um, particularly diverting key employees, executives, and directors from their normal work. As discussed in my written testimony, receipt of a shareholder proposal triggers numerous concurrent work streams that occurred during an already busy time of the of the corporate year.
▶ 0:44:44Given all these consequences and costs, one has to question why a single shareholder owning shares with a value of $2,000 can initiate a process that imposes significant costs that are borne by all of the company's shareholders. In light of these dynamics, the case for reform of rule 1488 and for regulatory oversight of the proxy advisory firms is compelling.
▶ 0:45:09Legislation limiting the abuse of 1488 can serve the interest of all shareholders and will help to maintain the business and focus and promote the continued success of US companies. Thank you very much and I look forward to your questions.
▶ 0:45:24Thank you sir. Comproller Lander, you're now recognized for five minutes for your oral presentation.
▶ 0:45:29Good morning Chair Hill, Ranking Member Waters, New York members Velasquez, Meek Sanres, and other members of the committee. Thank you for the opportunity to testify today on the importance of shareholder proposals and engagement. These tools help protect the retirement security of New York City's teachers, cops, firefighters, nurses. They're also an important foundation of the freedom to invest that has bolstered US capital markets for decades.
▶ 0:45:55Yet, the sponsors of today's proposals are seeking to gut these modest tools for accountability, allowing corporate CEOs to run roughshod over shareholders. As controller of the city of New York, I serve as the investment adviser, custodian, and a trustee of our city's five pension funds, managing $300 billion on behalf of over 700,000 current and retired civil servants. My fiduciary duty is clear to safeguard their retirement security for many decades to come.
▶ 0:46:25So, we aren't day traders. where long-term stewards invested broadly across 10,000 public companies and markets worldwide. Strong corporate governance and risk oversight are foundational to healthy companies, healthy pension funds, healthy capital markets. As investors, we know that economic, governance, legal, operational, environmental, workforce, and reputational risks all affect company performance and shareholder value. Of course, they do.
▶ 0:46:55It is our duty to weigh those risks. Shareholder proposals and engagement are among our most effective tools to do so. Over time, shareholder proposals have led to widely accepted practices that define modern corporate governance, strengthening our pension funds and broader capital markets. Consider executive compensation clawbacks. After the financial crisis, our systems filed shareholder proposals urging stronger policies.
▶ 0:47:23At Wells Fargo, our 2013 proposal led to a tougher clawback policy used to take back $60 million from executives after the fake account scandal. Or consider insider trading. In 2021, we brought shareholder proposals that highlighted concerns we had about 10b51 plans at Abbott Labs and McKessan. Those votes helped inform the SEC's 2022 amendments protecting all shareholders from insider trading.
▶ 0:47:53Other reforms such as stock shop, stock option expensing, and advisory votes on executive pay began as shareholder proposals and were later codified. Another example is shareholder access to nominate independent directors, an effort we led through our boardroom accountability project.
▶ 0:48:11Independent research has found that proxy access has led to improve performance at the companies where it was adopted and now broadly across the Most of our proposals though are resolved through engagement. In recent years, for example, we brought proposals at several US banks for disclosing the ratio of their fossil fuel financing to clean energy financing. Simple disclosure useful for all investors.
▶ 0:48:38JP Morgan Chase agreed and called it, and I quote, an excellent example of what ongoing engagements and pragmatic and reasonable requests can accomplish. at Starbucks. Prompted by reports of management's interference with employees rights to organize a union, we filed a shareholder proposal requesting a third-party assessment of Starbucks adherence to its own commitments to workers rights. The proposal received 52% of the votes of all shareholders, and Starbucks commissioned and disclosed the assessment.
▶ 0:49:08Other shareholder proposals have addressed investor risks, including excessive drug pricing and addictive opioids, railroad safety, online child safety at tech companies. The proposed legislative changes could block every one of those. They would erode the freedom to invest that has made American capital markets the envy of the world.
▶ 0:49:29They would lead to a world with more insider trading, fewer protections for investors, workers, consumers, and the environment, and more relatives of the CEO on corporate boards. Indeed, it's no coincidence these proposals come at the very same time that some corporations are seeking to evade accountability by reinccorporating in states that have eroded shareholder rights.
▶ 0:49:52Tesla's proposed $1 trillion CEO pay package uh enabled by cronyism on their board is the most visible example. In other words, these proposals would harm our teachers, our cops, our firefighters, and our nurses on behalf of billionaire corporate CEOs. And more broadly, they would weaken the United States economy. As fiduciaries, our duty is clear to protect the financial security of our beneficiaries.
▶ 0:50:20for with the health of our markets is essential. Shareholder proposals and engagement strengthen accountability and ensure that US markets remain the most trusted and resilient in the world. Let's not screw that up. Thank you for the opportunity to share my perspective. I look forward to your questions.
▶ 0:50:37Gentleman yields back. We'll now turn to member questions and I recognize myself for five minutes for questioning. Sarbain Oxley and DoddFrank have significantly impacted public corporations annual proxy statements by increasing their regulatory requirements for disclosure uh words and discussion about executive compensation and shareholder access.
▶ 0:50:58Together, these two laws have driven up costs, increased the length and complexity of proxy statements, and expanded the disclosure and oversight process and fundamentally changed much of the shareholder access to the proxy system. Likewise, the now rescended but 2003 safe harbor uh for investment managers using a proxy advisor to be off the hook for the responsibility of voting by delegating that authority to a uh advisor that's been withdrawn.
▶ 0:51:29But it on top of these other changes added to uh exactly this costly process. And to the comprollers's points, this isn't about reigning in executive compensation, capital allocation, dividend policy, 10B5 funds. That's all, I think, absolutely in the realm of what should be available for proxy access. It's where it goes beyond that to non-material business operations issues.
▶ 0:51:55And I uh put up my static display here in compliance with House rules to just show the change in the proxy process since I've been involved in corporate finance now 40 years. I picked uh uh four public companies that have been consistently part of the S&P 500 since 1980, my first full year in the financial business. IBM, Proctor and Gamble, 3M, and Merc. And the proxy in 1980 for IBM was 26 pages. Proctor and Gamble 12.
▶ 0:52:26Uh in 2020, IBM's proxy was 83 pages and Proctor and Gamble's was 85 pages. Mr. Mueller, let me start with you. As you see these changes, uh then well outlines all the reasons why both statutory and regulatory. Uh would you say that the length of proxy statements has uh what what would you say the primary driver for that length in the proxy statements over the past 45 years? What what's the top contributor you think?
▶ 0:52:56Sure. Chairman Hill certainly three things certainly the regulations that you mentioned um but I think there's two other factors going on. One is good and one is bad. I mean the the good news here is that companies now treat their proxy statement as a communication document not just a compliance document. Uh shareholder democracy is alive and well in America and the proxy statement helps fulfill that purpose.
▶ 0:53:23But the second cause is not so good and again it's the subject of this hearing which are shareholder proposals and proxy advisory firms. Proxy advisory firms have certain criterias they look for when they're making their voting recommendations and they will only look at an SEC file document and so preparing a proxy has now become an ISS and a glass lewis check the box compliance process adding to the length there's also the
▶ 0:53:53shareholder proposal process itself whether or not a company receives a shareholder proposal companies are acutely aware of what other propos proposals are being submitted to other companies and so many companies try to avoid that target by proactively saying look what we're doing on this issue what look what we're doing on that issue. Thank you. I've always been concerned that sometimes more information is too much information and it's confusing. I don't know that it's in plain English.
▶ 0:54:22I I really admire the issue of trying to expose clarity and in management compensation for example. I think we want comp committees that are, as Warren Buffett says, filled with cyber to saber-tooth tigers, not, you know, pussycats. But on the other hand, I'm not sure the average investor could remotely figure out the pages and pages and pages of of comparisons in a proxy. And so my advice to the commission would be to make that a lot simpler. Uh, Miss Keel, thank you for representing Vanderbilt University today.
▶ 0:54:52Abley, glad your mic is working. Uh, talk to me about the economic relevance. uh uh issue around legal bulletin 14M. Do you think that change will be better to allow companies to exclude uh proposals that really don't have an economic relevance to the committee I mean to the corporation's business operations?
▶ 0:55:13Sure. Thank you. Um I think it's definitely a step in the right direction but I don't think we can kind of overstate that it's going to be the kind of savior to the process. So before 14L, I counted just about 20 examples of when the economic relevance um exclusion was actually relied upon. Um and I think it goes back to my my written remarks about the kind of complexity of actually applying these standards.
▶ 0:55:34So if we look at this year's success rate with this economic relevance standard, which uh for background, it allows you to exclude a proposal if it relates to 5% or less of a company's operations.
▶ 0:55:46Thank you, ma'am. Uh I appreciate your testimony. Thought it was quite well done. I yield back and I recognize the ranking member of the full committee from California, Mrs. Waters, for five
▶ 0:55:55Thank you very much, Mr. Chairman. Mr. Lander, you're a fiduciary, which means you legally have to act in the best interest of the city of New York, responsible for the retirement security of over 750,000 public servants who work or have worked for the city. I want to get your take on a developing matter related to shareholder value and shareholder rights.
▶ 0:56:21As you may have read, President Trump has secured an over 10% equity stake in Intel, the great American chipmaker. As part of this deal, President Trump has promised that the US government's holdings in Intel will be passive.
▶ 0:56:41He has promised that the US government will vote with Intel's board and according to Intel's management on all matters as a fiduciary for 750,000 beneficiaries. If you were to own 10% of any large company, especially one that apparently has and governance issues that have caused it to lose out to its competitors, would you forgo
▶ 0:57:11your opportunity to exercise voting rights?
▶ 0:57:16Thank you, Ricking Member Waters. Of course, we would not forego our uh responsibility, not just our rights to exercise our voting power if we were 10% of shareholders. Um, and I think what you said at the beginning about the hypocrisy being exposed here.
▶ 0:57:33I mean, what could be more a form of crony capitalism than the president deciding without any clear rules, without any role for Congress, without any guidelines when the US government is going to take a position in companies and then say, as you've just said, that management can do whatever they want.
▶ 0:57:52There's 90% of the other shareholders in Intel are people like our funds, our small investors who now have been told the US government is going to take a very large position and just let the management do whatever they want. It will erode independent shareholder governance and accountability the foundation of our capital markets make it hard for funds like ours to invest in tr with trust and confidence.
▶ 0:58:18Um, and it really arises, you know, both the retirement security of small investors and beneficiaries like ours and the broader independence of our capital markets and their accountability to Continuing on, President Trump is supposed to be acting in the best interest of the American people.
▶ 0:58:38Is it prudent and financially responsible to blindly go along with Intel's management on, for example, executive compensation or providing corporate perks like apartments, private jets, or year-end bonuses? As you know, these are the kinds of decisions that Intel's board and management are responsible for. What would stop them from rewarding their failures if Intel's largest shareholder is voiceless and voteless?
▶ 0:59:07The the whole concept of shareholder governance is that on the board there will be some independent shareholders uh independent members who represent independent shareholders in relationship to management. Some interests of course are aligned but not all interests are aligned. So what is appropriate for CEO compensation? How the board itself should be structured. Uh how compensation will be deferred.
▶ 0:59:35There are a whole set of areas where you've got to have independent members of the board exercising that responsibility to provide oversight. And if what happens increasingly in American companies is that the president decides to take a large position and then give cart blanch authority to its managers. Again, that is what we mean by crony capitalism. On some of these boards, you have the relatives or buddies or former business partners of the CEOs.
▶ 1:00:04And what you need is independent uh tr members who are looking out for the interests of the much broader, smaller, and more diverse set of shareholders. Uh and these steps the president has taken and Intel jeopardize that independence.
▶ 1:00:20Thank you very much. What I don't get is this. Why is it management with the so-called independence board would think shareholders are not interested in having the best results if they are you know responsible for the fiduciary u concerns of the board? Why do they believe that somehow they're not in the best interest of earning profits for everybody? You get it?
▶ 1:00:48Yes. Look, this is an important debate. There's a room for conversation between management and board and and board members, but shareholders want good returns at the companies that we invest in. All the proposals that we bring are designed to achieve that.
▶ 1:01:02Gentle lady's time is expired. The gentleman from Michigan, Mr. Heisinga, who is also the vice chair of the full committee and former chairman of the ESG task force is now recognized.
▶ 1:01:13Hey, thank you. Uh I was gonna say Chairman Hill, but Chairman Bar, uh I know Chairman Hill's got a markup. Um, I I just, Mr. Chairman, I do have to at least address one thing. My my family business, third generation sand and gravel operation was brought up. And I guess I would just note that I'm glad I'm not a publicly traded company and not subject to uh uh a bunch of ESG woke activists from California coming in and trying to tell me how to dig dirt.
▶ 1:01:40Uh, but not every company has that uh that that same fortunate position. Uh, but I I I do want to thank the the committee and and Chairman Hill for continuing to highlight the abuses that happened under the leadership of former SEC chair Gary Gendler, who allowed and frankly encouraged activist investors to hijack the shareholder process and push a social agenda that ultimately harmed publicly traded companies and their investors.
▶ 1:02:08By some estimates, under the Biden run SEC, uh these environmental, social, and political proposals grew by almost 60%. Uh I'm proud of the work of the ESG working group as you had just noted and what we had done. Um and many of the issues that uh uh exact issues that we've talked about already today were uh were touched uh were explored by that committee.
▶ 1:02:32Uh lastly, I think it's crucial that the committee continue to explore and hold the proxy advisor firms accountable. The outsiz influence of Glass Lewis and ISS have harmed the shareholder process. These proxy advisory fir firms bear none of the consequences their recommendations have and have even fought against exact proposals when it applied to them that they encouraged to be applied to other publicly traded companies.
▶ 1:03:00uh they operate without sufficient transparency and have become the de facto standard settlers for corporate governance policies in the US. And as chairman, I was happy to see them testify before our oversight uh committee last Congress. And I think we should continue to hold them accountable, encourage them to be more transparent, especially as they navigate conflicts of interest in the firms that they supposedly serve. Uh Mr. Copelan, I want to start with you. A lot has happened since the first time you came in front of our committee in uh 2016.
▶ 1:03:31Uh the issue of proxy voting and shareholder proposals has become somewhat of a political football to say the least as shifts in policy have flipped back and forth. Um how has the volume and nature of the shareholder proposals changed over the past decade? And are you seeing more proposals focused on specific social or political issues? and and and have we been able as through our work here in Congress, have we been able to maybe curb some of that and and influence the impact of those?
▶ 1:04:01Well, the short answer is the volume's increased significantly up until this year and we've seen uh a decrease this year. I do think that the the
▶ 1:04:09regime change I think it happened.
▶ 1:04:11I think I think the regime change and from the SEC going from 14L to 14M has made a difference. Um, but we in terms of how these have been received, I mean certainly as Mr. Mueller sort of talked about in his opening statement, we've seen a a up until recently a substantial uptick in the number of social and environmental proposals. When I started tracking this 15 years ago, u you know, they were there were still a fair number of them, but they were a much smaller percentage.
▶ 1:04:41Um, the the other
▶ 1:04:42it's really exploded.
▶ 1:04:43Yeah. And and when I first testified, it's not the first time I testified in front of this committee, but on this subject matter specifically in 2016, I could say no shareholder proposals ever gotten majority shareholder votes over board opposition at the Fortune 250. That switched shortly after that in 2017 and you started seeing more of these and that's a reflects the change in voting pattern from the proxy advi voting advice from the proxy advisory firms and voting pattern from the big three
▶ 1:05:15passive index investors have been brought up or at least alluded to and and they seem to have scaled back some of the support for ESG proposals. However, uh the proxy advisory firms uh can swing approximately a third sometimes of of those types of votes. As a committee, we've discussed bills such as the index act and my empowering shareholders act as a solution uh which would uh I think deemphasize their influence. Should large brokerage firms continue to move towards empowering individual investors?
▶ 1:05:46Yeah, I think that's a good idea. I I don't think the uptick is going to be huge from it. So, I do like something like the mirror voting uh that that the index act that Senator Sullivan originally introduced does on that. Um I I explain it more in in in my written testimony and in the paper I wrote last year that I
▶ 1:06:04we'll follow up and miss uh Mrs. Keel I want to last moment I'm going to have to follow up in writing. Uh I I wanted to know resource-wise the impact uh that uh these proxy advisory uh uh firms have on the SEC and we'll we'll submit a question. I want to talk about Toyota in
▶ 1:06:24Gentleman's time expired. Gentleman's time is expired. The gentleoman from New York, Miss Velasquez, is now recognized.
▶ 1:06:30Thank you m Thank you, Mr. Chairman and Controller Lander. It's always great to see you, especially here in Washington. while the other side continues to rail that corporate disclosures and shareholder input on subjects like corporate diversity, executive pay, climate and political donations are woke ideas that have no connection to a company's bottom line.
▶ 1:07:00They failed to recognize these subjects are about investment and market risk. As head of the New York City Pension Fund, one of the largest in the country, don't you want all relevant data and information about an investment?
▶ 1:07:20Absolutely. There is simply no simple line for an investor in thinking about what the risks are at a particular company. You worry about reputational issues. You worry about leadership and will it change? you worry about is the broader regulatory structure in the industry going to shift. There's no neat line. That's what it means to be an investor. All investors are trying to get all the information we can assess that range of risks.
▶ 1:07:46And yes, of course, some of them are shifts in the economy or the economic sector, but they're legal, they're operational, they're environmental, they're workforce. What these proposals do is bring more in information and transparency so we can evaluate those risks effectively. In fact, isn't it your um duty as a fiduciary to our city's pensioners to consider all material data risks and opportunities relevant to a
▶ 1:08:16Absolutely. And I'm lucky to have a great team of people to help assess those risks who say here's what we need to know from a company. And sometimes they'll tell us directly and we can do it through engagement. often we file a proposal and then the company works with us as I mentioned for JP Morgan Chase sometimes we bring a resolution and that helps provide that transparency
▶ 1:08:36and as a fiduciary isn't it true that your main responsibility is to secure the strongest risk adjusted return for your beneficiaries
▶ 1:08:49uh my fiduciary duty is to secure the strongest risk adjusted returns for my uh my beneficiaries who again are teachers and nurses and school crossing guards. Risk adjusted is what's key there. What an investor is doing all the time is assessing risks. How can you do that without the full paniply of
▶ 1:09:09Thank you for that answer. Controller Lander, you lead our city's pension fund. The New York City Pension Fund has filed resolutions for decades on issues associated with climate change, diversity, human rights, and political spending. As head of our city's pension fund, what is your philosophy that leads you and the pension fund to use the resolution approach?
▶ 1:09:38And do you believe it is consistent with your fiduciary's duty as chief financial officer? So we always start from fiduciary duty to achieve maximum riskadjusted returns for our beneficiaries. And again, when you wake up every day responsible for the retirement of the hardworking people who make our city run, it's easy to keep that in mind. Um, I gave some examples in my testimony. If we think a company's got insider trading risks, that's a thing we're going to look at. with corporate board diversity.
▶ 1:10:09It has been proven through independent research that Bloomberg and others have done that having a more diverse board helps you see the broad issues facing your economic sector better and improves financial returns. The same is true for proxy access to nominate directors. That's what we evaluate. Um all of the effort to bring shareholder proposals to evaluate risks are done to improve that risk adjusted return. And have you found companies to be responsive uh to these
▶ 1:10:40Most of our proposals are resolved through engagement. Uh I'm gave the example of JP Morgan Chase. No, you know, a no small company who last year agreed after we filed a resolution with them uh asking seeking disclosure of their ratio of their fossil fuel financing to clean energy financing. They engaged with us and they agreed to start providing that disclosure. We then withdrew the proposal. It didn't have to go to the ballot. All investors have that information.
▶ 1:11:11So based on your experience so far, why do you think my colleagues on the other side of the aisle and their allies in the MAGA movement are focused on limiting shareholder input?
▶ 1:11:24I really don't understand it. Once upon a time, Republicans were defenders of free markets, and this is an effort to erode them and give more power to corporate CEOs at the cost of small
▶ 1:11:36Thank you. I yield back.
▶ 1:11:38The gentleoman's time is expired. The gentleman from Oklahoma, Mr. Lucas, also chair of the monetary policy task force, is now recognized.
▶ 1:11:45Thank you, Mr. Chairman. Beginning with you, Miss Keel. There's broad consensus here that reforms need to take place in regard to shareholder proposal process. How can we make the necessary changes while protecting the legitimate rights of shareholders to engage in good governance governance?
▶ 1:12:06Sorry, can you say the last part?
▶ 1:12:08How can we make the necessary changes while protecting legitimate rights of shareholders to engage in good
▶ 1:12:16Sure. So, I think what we're what we're really here to talk about is not limiting any sort of shareholder right. We're trying to add um you know boundaries to make it an orderly process to make it focused on things that are important to companies not things that are just political um referendums to to you know decide whether or not uh a social policy is good or bad or or its merit.
▶ 1:12:40What we really need to do is to focus it on on a proposal that's worthy of the investor's attention and that is something that is going to bring value to the Let's focus on the relevance exclusion in rule 14A-8 I5. I've heard from industry stakeholders that the rule's broad language has rendered the exclusion almost meaningless. Mr. Copelan, would a materiality standard be more workable?
▶ 1:13:09Would it be helpful in limiting shareholder proposals to those that are truly relevant to a company's business?
▶ 1:13:17Yes. And I've argued in my testimony and previously that u it would be very helpful to to codify materiality uh as a requirement for the SEC. I I think uh Representative Husen's got a a bill here on that on that point and and it's um it's very important because you know we had a SEC commissioner in the last administration Allison Herren Lee who was arguing our disclosure rules didn't have to be material at all.
▶ 1:13:44Um, and that's where we got the climate disclosure uh rulemaking.
▶ 1:13:50I've been very focused in my time on this committee on strengthening capital formation through our public markets and the previous administration's SEC promagated rules that discouraged companies from going and remaining public due to high compliance cost. Mr. Mueller, how can we increase the attractiveness of our public markets through corporate governance regulatory
▶ 1:14:13Well, thank you. It's important to re-examine the rules and make sure they are still working. And um the good news here, I think, is that SEC Chair Paul Atkins is one of the first chairs in a long time that is looking at old rules and saying, do they do the they justify the cost and benefits. Um it would also be incredibly helpful to have a public company advisory committee at the SEC and there's legislation supporting that.
▶ 1:14:44And let me simply say in closing, I would note that my bill, the Public Company Advisory Committee Act, would give public companies a formal avenue from which to advise the SEC on the practical effects of their rules, regulations, and policies. This idea has bipartisan support and would help prevent the regulatory whiplash that we've seen through the SEC between administrations. And with that, I yield back, Mr. Chairman.
▶ 1:15:11Gentleman yields. Gentleman from California, Mr. Sherman, who is also the ranking member of the capital market subcommittee, is now recognized. Thank God we've had shareholder proposals. They've helped us create the norm of having independent directors, of having annual elections for directors. Uh the average Russell 300 company gets a shareholder proposal about once every eight years. So they were not overwhelmed by all this. Mr.
▶ 1:15:42Copeland and Ms. Mueller say that we should leave these issues to a matter of state corporate law. What an outrageous attack on shareholder power because you've got 50 states. And so if Delaware says no to a trillion dollar compensation package, you just go to Texas. But wait a minute, Texas might limit you to a trillion. Go to Wyoming. They'll do tr two trillion.
▶ 1:16:09And you know where you can go if you need three children, you just incorporate the Cayman Islands. And look, Wyoming is desperate for money for their state operations. It's not their the job of their legislators to police the national capital markets.
▶ 1:16:25And if they see 10 or 20 or 30 million dollars of revenue for their state, why shouldn't they uh uh accept that in order to make sure that Elon Musk gets two trillion instead of the one trillion that tech that cheap people in Texas might limit him to. We're told that there are only two firms that are providing this advice. So we should have more and we do. Vivavik Ramwami is creating one. Egan Jones is creating one. Um, I like Mr.
▶ 1:16:55Copelan for pointing out that these are not frivolous proposals that just get voted down. The reason we're here is because these things pass and the crony capitalists don't want to be disturbed in their power. Um, this isn't about companies that won't publish a 93page document that used to be a 28page document. Um, Miss Mueller uh uh and and others have said, well, the company shouldn't decide or the shareholders shouldn't decide DEI policy.
▶ 1:17:24Uh, they shouldn't decide ESG policy. Who in the hell should decide that? The crony capitalists. Um, I Mr. Lauder, uh, thank you for pointing out that shareholder proposals have focused on opioids. If only there had been a shareholder proposal that passed at Purdue Pharma, that would have been shareholder value and would have saved thousands, tens of thousands of lives.
▶ 1:17:49Uh, under communism, the party decides who controls the means of production. And we are told now uh by the chair of the SEC that it is simply illegitimate to for the shareholders to have a role in ESG. We're told by others uh that you have to be an Ebenezer Scrooge investor. You cannot be a John Denver investor.
▶ 1:18:15In which country are the capitalists told you have to emphasize profit over the survival of the planet? Shouldn't the shareholders decide that materiality is what the shareholders want, not just what's earnings per share. But Mr. water.
▶ 1:18:32If um there was a proposal at a a company considering selling the most valuable AI technology, the keys to the 22nd century, the keys to dominance in the world, and the company was going to make a lot of money, um and the big bonuses for management. Uh do you think that would be good shareholder value that you would vote
▶ 1:18:56This is such a good example. We are going to need good AI policy in the coming years. And of course, Congress will have a role in developing and setting it. But the corporations that are operating that technology are clearly going to have a role as well. And of course, shareholders need an ability to weigh in on those issues and not just leave it to managers who indeed have much more short-term and personal interest. So that is a great example of something that needs to be figured out in this.
▶ 1:19:25when the corporation can hire whatever law firm it wants without Um they can devise policy without sharing it in advance with the other side. Um, should shareholders be subject if if there's a battle between management and shareholders, should it be a fair fight or should we have uh rules as to who uh you can hire if you're a shareholder, but no rules for who you can hire as an account consultant? If you're
▶ 1:19:53One thing I think that's important to point out here is the SEC already rules for management 68% of the time when shareholders bring proposals and managers object to them. So,
▶ 1:20:04and we should be changing the rules to allow more shareholder democracy. I think Miss Mueller pointed out how complicated these rules are. We should make them simple and allow shareholder power. I yield back.
▶ 1:20:18Gentleman yields. Gentleman from Texas, Mr. Sessions, is now recognized. Mr. Chairman, thank you very much. I want to welcome the panel that we have today. I think each of you have come to Washington. and you knew what existed before you came up here and that is the difference of the sides not only politically but also our viewpoint of the marketplace.
▶ 1:20:38So I've I learned a long time that ago that politically driven policy certainly has objectives and it also has outcomes and the outcomes that I think that I follow is that my dear friend Frank Lucas said is shareholder value when we're dealing with these companies. So Mr. Copelan. During the Biden years, over 80 environmental and social shareholder proposals were approved.
▶ 1:21:09Yet, in the past year for these proposals, many of these proposals collapsed with no environmental proposals passing and only four social proposals succeeding. Generally speaking, I have heard you and the panel say that they think that the big three uh passive assets managers had a direction to this outcome. Could you discuss that again for me, please?
▶ 1:21:36Yes. All all three of the passive index fund families of Black Rockck, Vanguard, State Street uh reduced their support for the environmental and social proposals uh relative to recent norms. I mean they they previously were not as as much behind them and there sort of this bubble up and then this year they've they've pulled back. The proxy advisory firms also have been less likely to recommend for some of these proposals. I do think obviously the change in leadership in Washington has has had a lot to do with that as well as public.
▶ 1:22:05So it's it's policy that is political not so much economic.
▶ 1:22:12Well there are economic imperatives right? I mean when when Black Rockck is is facing investigation from state attorneys general when they're seeing advertising campaigns about it it could hurt their market share etc. I think they've realized some of this but I do think a lot of it is you know there there's a different and sort of an enforcement environment uh there's a different rulemaking environment and so
▶ 1:22:33sometimes it's a result of actually how the performance in the marketplace worked. I don't want to just say Tesla. There could be a lot of other things. But some of these uh the selling of these proposals based on politics did the outcome did not exactly work the way we thought it would. Did it?
▶ 1:22:56No. I mean, it's a strange example to to to fixate as as some of the members have on on executive pay at a company that's in the last 25 years become one of the 10 biggest companies in the world. Uh it's a strange it's a strange you know it's a strange fiduciary obligation uh that that the comproller is asserting here and that's that's part of the problem right I mean we need shareholder oversight but we need shareholder oversight for people who have skin in the game that are long-term uh thinkers and that are taking significant stakes in companies like real activist
▶ 1:23:26investors. He's saying we're not buy you we're long-term buy and hold in the entire market. The passive index funds are the same way. Why why are they well positioned to be dictating this stuff? You know, he's an elected politician.
▶ 1:23:39Yeah. Miss Keel, Miss Keel, if you could address for a second the impact we receive feedback as members of Congress from companies, many times CEOs, many time board members. Could you tell me what you think they have a feeling about having these in essence three big companies, three big asset manager groups to to drive the people and their agenda?
▶ 1:24:07Sure. I mean, every company is going to have to take into account the the different constituents and so there's a lot of engagement. I think there's um kind of a misunderstanding sometimes that companies are not engaging with their shareholders. They are and they're doing it during the season, offseason. and they are always um talking and and and receiving that feedback. So I think that companies welcome shareholder feedback. I think that is needs to be
▶ 1:24:31Yes, ma'am. But I'm talking about specifically that's driven by these asset managers that are attempting to drive what might be political ideas as opposed to necessarily economic as it relates to that company.
▶ 1:24:45No. So I've been focused mostly on the proxy advisors. I think companies probably feel the sting from the proxy advisors a bit more. uh directly and acutely than the big three. But you're certainly right that each of the big three has their own policies and they apply those and as a company's evaluating what it's going to do or position it's going to take, it has to look at all of its, you know, big stakeholders, each one of their policies, each policy of the proxy adviser and it's going to have to kind of take into consideration each of those in addition to the SEC requirements and other regulatory environments that they're subject
▶ 1:25:15to.
▶ 1:25:15Thank you, Mr. Chairman. I think that this panel as we've gone across both sides is answering a lot of important questions and I thank them and I thank the chairman. I yield back.
▶ 1:25:25Gentleman yields. Thank you. Uh the gentleman from New York, Mr. Meeks, is now recognized. Thank you, Mr. Chairman, and welcome to Atlanta to Washington DC. Uh you know, I'm sitting here listening to the questions and I've been thinking why are we here today? Uh, I think we're here today because Republicans think it is bad that shareholders of companies get to decide how their companies uh that they own operate.
▶ 1:25:50They're upset because that some shareholders of some companies choose to emphasize things like the environment, like diversity and LGBTQ rights. And as you know, different studies have been done on the companies that undertake environmental, social, and governance uh initiatives. And I've had the opportunity to talk to some of the CEOs and others. And you know what they've told me? Why?
▶ 1:26:15I said, "Why do you do these things?" Often what they say to me is because it's good for
▶ 1:26:23It's good for their bottom line. That's why they do it. Uh and you know here we are and we continue to focus on everything else rather than confronting the president of the United States gross mishandling of the economy.
▶ 1:26:45And I got to tell you, I never expected to see the day where a Republican president is taking 10% stake in an American manufacturer on dubious legal authority. But you know what surprises me more is that my Republican colleagues in Congress who say that their for free market is entirely silent on this issue if not supportive.
▶ 1:27:15And that's not to mention Donald Trump's trade war against the world. The economy is slowing, prices are increasing, and the unemployment rate is rising. Countries around the world are no longer sending us packages, and postal shipments are now down 80%. My Republican colleagues could do something about this if they demanded a vote on repealing the tariffs. Or, you know what they could do?
▶ 1:27:45could sign my discharge petition to get a vote on these tariffs that tax it raise that raises the taxes on American families. And that is the context for today's hearing. The president wants to bring peroam to the potic and Republicans in Congress want to look the other way while arguing owners of a company should say less in how their company is ran.
▶ 1:28:14controller lander, my colleagues on the other side of the aisle, I believe, you know, when this is what they're trying to do. They're trying to turn ESG into a boogeyman. But I want to ask you to clarify for the American people how this actually works. If a shareholder proposal gets a vote, does it only need 10% support to govern the company?
▶ 1:28:36Yes or no?
▶ 1:28:37Uh, no, Congressman needs a majority.
▶ 1:28:39Oh, more than 25%.
▶ 1:28:41Well, I'm sorry. More than 10%. More than 25.
▶ 1:28:44More than 40%.
▶ 1:28:45More than 40%.
▶ 1:28:46Oh, I'm shocked.
▶ 1:28:49So, it needs at least what? A majority is what you say.
▶ 1:28:5350% plus one.
▶ 1:28:55Okay. So, a majority is needed to approve a proposal. What are the demographics of the shareholder base? You know, are there young left-wing activists the main holder of capital in this country?
▶ 1:29:10They are not. They're not. Okay. Now, so the shareholders are the founders and senior managers of a company, riskadverse institutional investors, and working Americans interested in saving for retirement rather than cultural wars. Would you say that better describes who these individuals are?
▶ 1:29:35Yes, it does.
▶ 1:29:36Great. Now, in the little time I have, you know, I chair the a ranking member of the House Foreign Affairs Committee, and I'm concerned that uh they're making moves, Republicans are making moves now that would restrict investor shareholder rights and backfire on us because Europe is actively making itself more attractive to global investors, integrating its financial markets, and rolling out new reforms to deepen market access.
▶ 1:30:03For example, the European Commission even rebranded his capital markets union as a new savings and investment union to channel more private investment into EU markets. So my question is if we hamstring investors here in the United States by undermining their rights, won't pension funds like New York cities now just look other places and go overseas uh to put their money?
▶ 1:30:27If we allow this to be adjudicated in 50 different state courts, we will see much less investment in US capital markets.
▶ 1:30:36The gentleman's time has expired. Uh I now recognize myself for five minutes. And it's good to hear my my friend from New York uh extol the virtues of business and capitalism. Maybe he could impart that wisdom on his his friend Mr. Mamdani. Uh maybe he could learn from you m Mr. Meeks. Uh so let's be clear.
▶ 1:30:56allowing a small group of left-wing activists to hijack the proxy proposal process to push social, environmental, DEI or political objectives totally unrelated to the core business of a company does not advance the cause of capitalism. It undermines capitalism. It corrupts capitalism because it results in the misallocation of resources of the company.
▶ 1:31:24It undermines the profitability of the company. It hurts the It doesn't advance the the the value of of of the shares of the stock. It hurts the value of the shares of the stock. That's what we're talking about here today. Um and and let's let's go to Mrs. Keel because you've you've you've seen this in in your in your practice.
▶ 1:31:48What is the cost in terms of time, resources, legal fees of responding, engaging with these petty political shareholder
▶ 1:31:57Sure. So, I'm happy to kind of tick through what the especially the intangible costs are, which is, you know, deciding whether something has first been substantially implemented. So, a lot of times these proposals will have been already considered by a board and implemented. That's a cost to determine that in and of itself. You'll have to decide whether it's um a compliance with law type proposal. So, for example, um this season we saw a lot of illegal deforestation and avocado supply chain proposals. Next, you're going to have to ask, is this something
▶ 1:32:25avocado supply chain? I mean, this this stuff is so absurd. Does any of this advance the profitability of the
▶ 1:32:35I have not seen the financial analysis.
▶ 1:32:36So, it's not about what's good for business. It's actually trying to hijack and undermine the business. It is it is an attempt to politicize the business. totally unrelated to the mission and core uh uh uh mission of the business. Um mi Mr. Mueller, h how has the SEC's interpretation of significant policy issues evolved over time and has this evolution contributed to the use of shareholder proposal uh process for non-puniary ends?
▶ 1:33:05It certainly has during um during the Gendler administration. the uh slab 14L that we talked about just totally divorced relevance to the company from the shareholder proposal process and it's important to focus that many of these proposals that are being cited as good examples were all corporate governance proposals but if ESG matters are good for the companies then the executives are pursuing that they don't need the cost and expense of a shareholder proposal
▶ 1:33:35to tell them how to run the company best and and explain how the deter determination of what is a significant social policy issue has changed over the years and why the shifting SEC interpretations are harmful. The shifting interpretations are harmful because they really introduce uh cost to to both sides. Uh it makes it hard for shareholders to know what is a proper proposal to submit and it makes it hard for companies to say um do we have to fight this at the SEC or should we put it in the proxy statement?
▶ 1:34:05Miss Miss Ke, why isn't uh the SEC rule 14A88 I5 which is supposed to exclude irrelevant proposals and all these proposals are totally irrelevant to the management of the company. Are why is that not more more frequently used as a basis for excluding shareholder proposals?
▶ 1:34:23Sure. So first you have to do a calculation of the 5% test. That's a a fairly straightforward although it's also a kind unclear how to apply that. Then there's a an exception that says unless it's it's significantly, you know, relevant or important to a company. And so if you give some examples from this season, we saw four that were successful. They related to human rights in India, sugar supply chain, puberty blockers, and the sale of the abortion pill. Those are examples of what was successful in getting them excluded.
▶ 1:34:50And then the ones that were unsuccessful were reports on religious discrimination, indigenous people's rights, and human rights in Russia or Ukraine. So you see that it's kind of hard to draw a line. the example that you give about a a a business that's in the business of selling hammers and nails and they have a proposal on reproductive rights. I mean, this stuff is out of control. And we need to we need to get rid of the politicization of business. This is not about capitalism. Let's be clear. This is about hijacking capitalism.
▶ 1:35:20It's about politicizing businesses. And we got to get rid of this rotten stuff. And we got to get back to actual capitalism so that so that shareholders can actually uh get a return on in their investment and stop and get politics out of this so that shareholders don't lose uh the the returns that they deserve. Uh and with that uh I will yield and uh recognize the gentleman from Georgia, Mr. Scott.
▶ 1:35:47Thank you very much. Uh, chairman, you know, the stock market is the heart and soul of our financial system. And, uh, I went to elementary school in Scarsdale, New York at Fox Meadow Elementary School.
▶ 1:36:09And our class project in the sixth grade was to go out, earn our own money, do our own research, and purchase stock, and then take the Scarsdale New uh bus down to the New York Stock Exchange and buy stock. And I've been buying it ever since.
▶ 1:36:31And I can tell you this, proxy advisors provide critical independent research and recommendations that allow shareholders to hold boards of directors accountable and to access responses to corporate and make the investor have
▶ 1:37:01some sense of protection. That's all we're talking about here. So, Mr. without proxy advisors Uh what uh challenges do shareholders face in analyzing thousands of proposals and director slates during the
▶ 1:37:31proxy small shareholders simply would not be able to have information to assess the risks they're faking facing and vote their vote their interests without the kind of information that the proxy advisers give.
▶ 1:37:44And let's remember these rules come from the SEC's creation out of the Great Depression and the stock market crash specifically to give small investors the ability to confidently invest their money in the stock market and getting the information that they need is critical for small investors like you uh and many others to be able to engage in investment confidently.
▶ 1:38:10Well, I'm glad you make that uh point that proxy advisors are not dictating outcomes, but they are empowering large and small with information they would otherwise lack and need and that's all it is.
▶ 1:38:34So, uh, critics argue that ISS and Glass Lewis yield outside influence. Address this. But is it not the case that their recommendations are just that, recommendations, and that these investors still make their own voting decisions? Is that
▶ 1:39:03that is correct? So we vote all our proxies at US companies. We subscribe to both ISS and Glass Lewis to get information and my team review that information as we make our independent decisions. So their advice is just advisory. Most of the time they side with management when there is a difference between management and proposal bringers. And it's worth remembering that the shareholder proposals themselves are advisory. They don't dictate policy to companies.
▶ 1:39:32They let management know the opinions of their shareholders and the vast majority of the time they are advisory as well.
▶ 1:39:40Now, Mr. Landers, what barriers do entry uh exist for new proxy advisory firms? And what can Congress and regulators do to foster more competition without undermining the independence of the advice provided?
▶ 1:40:07This is a great uh question and I think would be a great topic for the committee to explore how to encourage more information to be provided. As was mentioned, some new firms are coming on to the marketplace. I don't know that will subscribe to Mr. Ramaswami's service but of course he should be able to provide it and give more information to investors but the answer can't be less information for shareholders and investors it's got to be more
▶ 1:40:32thank you very much appreciate it
▶ 1:40:40gentleman he kneels back I now give myself five minutes witnesses uh for many small and medium private companies considering an IPO the decision often comes down to whether the benefits of assessing public markets outweigh the risk of compliance. But as we have seen in recent years, the shareholder proposal process can be dominated by a small group of activist investors advancing niche political agendas that have little to do with long-term value creation.
▶ 1:41:07At the same time, proxy advisory firms wield outside outsized influence over voting outcomes and operating with limited transparency and potential conflicts of interest. So together these dynamics can create an uncertainty and additional costs that make public markets less attractive. So Mr. Copeland, can you explain why the existence of both radical shareholder activists and proxy advisory firms can be a deterrent for small and medium cap companies that are looking to go public?
▶ 1:41:35Certainly. Uh, I mean, at the end of the day, you've got these activist forces empowered by, you know, an SEC rule that are are trying to tell you how to run your business. And it's important for for shareholders to have oversight. But why do we have shareholder voting rights? It's not to create many democracies with companies. You don't have to be an expert. I I say this in my testimony, you don't be an expert in public choice theory to understand that, you know, it's hard for the political process to work efficiently.
▶ 1:42:04It's good that we have representation here, but this is not a body that's known for its efficiency. Businesses need to be efficient. So, if you're trying to run a business, I mean, certainly we want them to to come to to to public markets. It's a good way to allow uh original founders of companies to get liquidity. Um, it's a good way to allow everyday people on the street to get a piece of those returns.
▶ 1:42:29And when we're making it harder and harder for these public companies to do that, uh it hurts the average investor out there uh as well as the the the company's returns themselves. Sorry. As we have seen in recent years, the proposal process has been overtaken by activists who file dozens of proposals, many of them pushing political or social agendas that are far removed from adding shareholder value. Boards are spending hundreds of hours each proxy season dealing with these kinds of proposals.
▶ 1:42:59And while companies are dragged into debates over climate policy, DEI or other issues that have no place in the boardroom, this polit politization undermines the very purpose of shareholder oversight. So, Mr. Mueller, how do you distinguish between a proposal that is legitimate tool for corporate oversight and one that is an illegitimate tool to make a political
▶ 1:43:20Sure. Well, certainly corporate governance is the relationship between boards and shareholders. And we've talked about some of the good corporate governance shareholder proposals, but when proposals start interfering with how a company is running a business, not just asking for information about that, but really seeking to dictate what um actions they take, whether um the company is pursuing a certain climate change strategy or not. um and really remove that from relevance to the company business.
▶ 1:43:51Those proposals um are clearly an activist proposal. Okay. Uh, in recent weeks, the US District Court for the Western District of Texas, my state, entered a preliminary injunction against the Texas law, SB 2337, which would bring transparency to the proxy duopoly by requiring these firms to file disclosures when their services are based on non-financial factors such as ESG or DEI considerations.
▶ 1:44:18Recommend a vote contrary to company management's recommendation to provide conflicting advice across clients. So, Mr. Copeland again to you. What benefits do you see as a result of this legislation if implemented? And how can transparency bring balance to proxy advising?
▶ 1:44:33Yeah, I I think it's it's valuable to have transparency in this market too, right? I mean, at the end of the day, we have these voting rights because of agency costs. The people running the businesses aren't necessarily uh going to going to act in the best interest of the shareholders. Is why we want these voting rights. But these proxy advisors have more agency costs. So, you know, ultimately I think a federal solution here would be better.
▶ 1:44:57Um, but uh it it makes sense that in the absence of of uh federal action or or with legal contestation and and and withdrawals of various federal action in this that a state's going to stand up for it. And and again, corporate governance should be a state level question. Uh disclosure, this is what my my Yale law professor Roberto Romano called the the genius of American corporate law. disclosure at the federal level, substantive rights at the state level. This has worked.
▶ 1:45:25This is why we dominate world capital markets and and you know all of these trends are undercutting the secrets of that success.
▶ 1:45:35Thank you very much. I yield my time back. The gentleman from Illinois, Dr. Foster, is now recognized for five
▶ 1:45:41Uh thank you, Mr. Chair, and to our witnesses. Um I' I'd like to start by just pointing out that lengthy proxy statements as was pointed out by uh Chair Hill. Um they're not necessarily an intrinsically bad thing by themselves. You know, if I looked at the four companies he talked about where the length of the proxy statements have gone up by several hundred%. Well, the market cap of the companies involved have gone up up by well over a thousand% over the same time period.
▶ 1:46:07So it's not necessarily um you know a trend that's out of scale with the increased complexity and size of their operations. Also in in the future everyone is going all of the shareholders are going to do what we're already doing already which is to ask your personal AI agent to summarize these complex proposals and and and they'll look at them in whatever level of detail they they're comfortable with and want.
▶ 1:46:31And so it will be possible to get for the average shareholder to make a decision on the basis of the amount of information that they can actually absorb. So I think that same point applies to very complex regulations, but we're going to be able to use AI to tolerate very complex regulations because because of the ability to to chew through the complexity.
▶ 1:46:52Um I'd also um have to say that I am in favor of making some tweaks to this uh that you know that in in particular one when I looked over the list of of um the the requirements to bring forth a proposal the the point that you have to be a long-term holder I think is fundamental.
▶ 1:47:10I am very concerned about sort of the rise of meme stocks that I have with completely share price from any plausible future revenue stream from the companies and and that I if I was going to choose what hearing to have that would be it because that is generating huge misallocation of capital in our in our country. Um and so you know and I would put not only GameStop but Tesla in that that bin though this is not no this is not uh investment advice.
▶ 1:47:39So I just want to make that clear. Um another point is that that you know political ideas have financial impact on companies and you can't really hide from it. Uh this is um you know we we see that in the company I started 50 years ago that now manufactures most of the theater lighting equipment when our country behaves badly. You know, we saw this at the when President Bush got us into uh the war in Iraq with by telling a bunch of our allies things that turned out not to be true.
▶ 1:48:10Uh that we found foreign foreigners simply did not want to buy American products. And if you ask yourself why is it that we're now in our sixth month of manufacturing contraction uh since the start of liberation day and and this is not new. It's a repeat of what happened in the first term of the Trump administration where his policies put us into a manufacturing recession one full year before COVID hit. Okay.
▶ 1:48:35So these so reputational risks are real and a company's stance on the the issues of the day matter uh to to certainly to their customers of these companies and that that hits the bottom line. So I think it's a mistake to imagine that we can that companies can hide from these things. Um and and so let's see. I I was interested, Mr.
▶ 1:48:58Lander, you referenced in your in your remarks that actually if you look at um at companies that have had some of these, you know, DEI proposals go through that it hasn't been bad, which is sort of the narrative I'm hearing from the other side of the aisle. Can you say a little bit about the actual research and the numbers
▶ 1:49:16Uh yes, thank you, Congressman Foster. So a a an independent study I I mentioned something specifically looking at uh shareholder access to the company proxy to nominate directors that came through the work of the New York City pension funds before I got there and independent analysis found that it added to shareholder value at the companies who adopted it potentially adding up to billions across the market and separate from that uh a group of business professors at the NYU SC Stern School
▶ 1:49:46of Business evalu valuated a thousand studies and found that 58% showed a positive relationship between environmental, social and governance efforts and corporate financial performance, 13% had neutral outcomes and only 8% had negative effects.
▶ 1:50:04Yeah. Um so so then however I I think that there should be maybe some adjustment of the threshold by what how significant an issue this is for a a reasonable number of the shareholders and are there simple tweaks? Um yes miss Keel maybe if you have are there some simple tweaks to simply increase the threshold so you have to make sure this is a major issue for more of the
▶ 1:50:28Sure. Sure. I mean, I think that would be the kind of easiest and most straightforward, right? To make sure that somebody who's submitting a proposal has the, as Mr. Copelan said, an economic skin in the game to make sure there's an alignment of interest. So, that would be, I think, the simplest, but I think there are other ideas, too, just about um the resubmission thresholds. Um, thinking about, you know, whether or not significant social policy should be something that the SEC is deciding or is that something that a company should be thinking about?
▶ 1:50:54because the reality is that they're actually already thinking about all of these political issues, the tariffs, etc. They're thinking about those issues deeply in the boardroom before these proposals even come about.
▶ 1:51:04Yeah. And so I think that also strengthening the the whole
▶ 1:51:07gentleman's time is up.
▶ 1:51:09Thank you. I yield back.
▶ 1:51:10Uh the gentleman from the great state of Georgia, Mr. Lamel, is now recognized for five minutes.
▶ 1:51:15Well, thank you, Mr. Chairman. Uh, my bill HR 3402 would amend the Exchange Act to require that institutional investment managers file an annual report showing how they voted and their alignment and consideration of proxy advisor recommendations.
▶ 1:51:29It would also require that institutional investment managers with over $100 billion in assets under management be required to clarify that shareholders are not obliged to vote every item and to conduct an economic analysis that a vote is in the investor's best economic interest. Mr. Copelan, um can you please explain the relationship between institutional investment managers and proxy advisory firms?
▶ 1:51:54In other words, why do institutional investment managers hire proxy advisory firms to start with?
▶ 1:52:02Well, because it's an extremely uh thing to vote on all these proxy ballots. I mean, controller Orlando talked about they have 10,000 or some odd investments. That's true for a a lot of these institutional investors and they don't really get a competitive advantage. It doesn't help their investment return to be a better voter. So a really large family of companies, you know, the the vanguards, the black rocks of the world, they have teams on this.
▶ 1:52:28Smaller institutional investors don't uh as a general rule or at least a lot of them don't. And so they need help to execute this. So so there is an economic rationale there. They've also been prodded that way as was discussed earlier by both do rulemaking in the Orisa context as well as by the SEC in 2003 which sort of created this demand by by for a while they're at least giving a safe harbor to rely on this investment advice.
▶ 1:52:52Okay. Can you explain what is robo voting and why is it used by institutional managers? Robo voting is is basically just a catchphrase to to discuss we're going to basically effectively outsource our voting to the proxy advisor.
▶ 1:53:08And we commissioned a study by professor Paul Rose uh in 2021 that looked at this and we found a significant percentage of the market that was doing this which is why when we studied ISS in 2012 we saw that for these preparatory shareholder proposals about 15% uh of of this the the voting total was de facto controlled by ISS.
▶ 1:53:31Okay. So instead of just taking advice from the proxy advisory firm they're just handing their vote over to them. Right. They're not making an independent
▶ 1:53:39Okay. Um, could robo voting harm the clients of institutional investment managers? Could it harm their overall
▶ 1:53:49It could. You know, the complication to this question is that for the individual firm, the answer is probably not because you're small percentage of the vote. You're not likely to have an outcome determinative vote on any of these questions. In the aggregate, it I think it harms it.
▶ 1:54:05And and and part of what it's doing there is by we're basically creating this Rockville, Maryland based business owned by the German stock market, right, is is effectively driving 15% of the vote uh for all the publicly traded companies. I mean, that's huge.
▶ 1:54:21That is huge. Um why would a disclosure requirement for large institutional investment managers concerning whether they have engaged in robo voting be useful? I think it's useful because it uh individuals and institutions that that put their money with those firms to know that that's happening, right? And it could create some push back. It's it's a softer form approach than totally banning this sort of thing.
▶ 1:54:49And there's some bills out there that are floated on that as well. I I think it's disclosure is a good disinfectant in general. And I think it's it's a a relatively soft touch approach, but one I think would be quite useful. So you you talked about the 15% being from a German-owned uh organization, right? Is that theoretically then bringing European ideas and interest and standards into the American marketplace instead of these investment managers making their own votes and decisions?
▶ 1:55:18Well, it certainly could be. That's the risk. And there's conflicts of interest in in all directions for the way ISS and and and to some degree Glass Lewis, the other big player, operate as well. I mean, there was an article in the free press just recently that Nvidia has a larger market capitalization than the entire German stock market. And yet, the German stock market owns the proxy adviser that controls 15% of the vote
▶ 1:55:40Wow, that's that's amazing. Last question. Do you have any other ideas for regulatory reforms that reduce the influence of proxy advisory firms without imposing excessive excessive cost on the institutional investment managers or stockholders?
▶ 1:55:54We have a lot. Um, you know, the time's limited to go through them all, but I I I reference in my written testimony a paper I co-authored with David Larker and Brian Tan at Stanford in 2018 that went through this as the SEC was looking at this and they did a rulemaking in 2020 and then it was partially rescended with the administration change and they've been in court and three different circuits have been appining on it. So, it's it's kind of a mess, but but which is why it'd be good for this body to act.
▶ 1:56:22Okay. Well, thank you. I yield back. gentleman yields back. I now recognize a gentleoman from the great state of Ohio, Miss Batty.
▶ 1:56:31Thank you, Mr. Chairman and ranking member. And thank you to all of the witnesses for uh being here today. I just have a couple questions that I want to try to get through. Uh Mr. Lander, as you know, many of the attacks on shareholder advocacy and and even ESG investing uh argue that these ex are extraneous, immaterial issues with no relationship to a company's bottom line.
▶ 1:56:57And I believe you are strongly uh you strongly disagree with these allegations that you are hurting companies financially. Can you explain your perspective on this? Well, first I find it especially funny when people attack ESG as not relevant to corporate governance when the G stands for governance. So, uh outlying ESG proposals but saying no, we're fine with a proposal about executive compensation or the role of the board.
▶ 1:57:26Uh I mean just read the words like that's what governance is. Attacks on ESG are attacks on corporate governance. That's what they are. And then I thought actually that uh Representative Foster made this very clear. There's no this idea that if you say pecuniary somehow you're excluding everything I don't like and only including profit makes no sense at all.
▶ 1:57:50You're evaluating risks like will there be new regulation by Congress on some area that might be affected by the business we're investing in? if um you know, we had concerns at Tesla when Elon Musk left as CEO and there was no CEO, but we also had concerns that if he was pursuing action that was going to make it harder to sell EVs uh through action he was taking here, that was going to be bad for EV sales. Well, that's pecuniary if you're a Tesla investor.
▶ 1:58:20So there is simply no way to draw a neat line. And that's the job of investors to evaluate this broad set of regulatory and operational and legal and governance and sure environmental and workplace risks. Why stop investors from getting all the information that they need to make their own decisions? If other investors don't want that information, that is fine. I'm not telling them how to invest.
▶ 1:58:46But I don't understand why members of Congress are trying to tell me how to achieve my fiduciary duty to my beneficiaries.
▶ 1:58:54Thank Thank you. And thank you uh Mr. Foster because I think that was a a good segue and allowed you to response. Let me move on. I'm going to stay with you on this next uh question. Um while numerous red state treasures and financial officers have written companies calling them to abandon working together on climate change or to end their diversity, equity, and inclusion programs.
▶ 1:59:18I understand that financial officers in blue states have also written to companies they own to invest in investment managers that they use urging them to stand firm in their support for sustainability programs citing that it also promotes long-term shareholder values. Uh I'd be interested in hearing uh your thoughts on why these financial officers are taking public stands in support of maintaining these
▶ 1:59:47Thank you. Let's just use Black Rockck for an example for a moment. So in a letter to investors several years ago, uh Chairman Fink wrote, "Climate risk is financial risk." Now, everyone knows climate risk is financial risk. You can choose to evaluate it as you see fit. You can have a different political point of view on it, but of course, climate risk is financial risk.
▶ 2:00:08who might be uh a utility company and if there's more wildfires in your area, you might be accused of causing them or you might have to move your infrastructure to address them. So, that doesn't seem like a complicated or political statement. And yet, red state treasures declared war on Black Rockck and threatened to uh divest or hold them accountable legally if they didn't back off of the simple idea that climate risk is financial risk.
▶ 2:00:33And I'm sad to say that what that has led to is a walk back of voting for proposals simply to provide disclosure. The proposal I mentioned that JP Morgan Chase ultimately agreed to, Black Rockck did not vote for at other companies, denying its customers and other investors simple disclosure.
▶ 2:00:54Okay. Thank you. And Mr. Chair, I yield
▶ 2:00:58Gentle lady yields. The gentleman from Ohio, Mr. Davidson, who is also the chair of the subcommittee on national security, elicit finance, and international financial institutions, is now recognized for 5 minutes.
▶ 2:01:09Uh, thank you, chairman. As chairman of the national security subcommittee, CPHAS and its screening authorities grab my attention. Foreign investments that could threaten our national security are supposed to get scrutiny. In the case of ISS and Glass Lewis, both foreignowned companies with an extremely outsiz impact on proxy voting in our capital markets, they haven't been subjected to CPHAS review.
▶ 2:01:33ISS uh founded in the United States back in 1985 is now majority owned by Germany's Deutsch Bor Deutsch Boris Group, the powerhouse behind Frankfurt's Stock Exchange. That's a foreignowned entity calling shots in how America's institutional investors vote trillions of dollars worth of US shares.
▶ 2:01:53On May 10th, 2024, my colleagues, Congressman Andy Bar and Congressman Brian Style, urged Treasury Secretary Secretary Janet Yelen to have CPHAS review this acquisition. And here we are over a year later picking up the pieces from the previous administration. Then there's Glass Lewis. started in San Francisco in 2003 but snapped up in 2021 by Pelaton uh Pelaton Capital Management, a Toronto-based private equity firm.
▶ 2:02:22ISS and Glass Lewis aren't small outfits. Together, they dominate of the proxy advisory space, influencing votes on everything from board elections to ESG mandates that shape corporate policies and significantly influence America's capital markets.
▶ 2:02:40In a world where we're laser focused on foreign influence and critical sectors like tech and infrastructure, why aren't we prop properly screening foreign companies that control corporate governance in our country? Could these ties inject biases, say European style green mandates or Canadian anti-growth policies into US boardrooms, undermining American competitiveness?
▶ 2:03:04We need transparency and safeguards to ensure these firms aren't advancing agendas that put foreign interests ahead of American shareholders. Look, the shareholder proposal process under rule 14A or 14A88 was meant to give real shareholders a say in how companies they own or run, holding boards accountable and driving long-term value for America's retail investors who are saving for retirement.
▶ 2:03:29But under the B administration and SEC chairman Gary Gensler, it's been turned into a playground for activists and special interest outfits shoving their ideology and political crusades down the throats of companies that just want to focus on growing their business and raising capital. Why go public in America when you can dodge this regulatory circus? Congress has to get in the game with real reforms to rule 14A 8, jack up ownership thresholds.
▶ 2:03:58So you've got actual skin in the game and a holding period. Beef up exclusions for this irrelevant ordinary business meddling and slam the door on submission on resubmissions for proposals that keep bombing us at the ballot box. All propped up by two proxy advisory kingpins. And speaking of those kingpins, ISS and Glass Lewis with their 97% strangle hold on the market.
▶ 2:04:23They're the real enablers here, steering institutional votes like puppets without a shred of accountability or transparency. Their recommendations are really activism masquerading as advice to turbocharging robo voting. And it's time to break this duopoly and let free markets actually work. Mr. Mueller, you've seen thousands of proposals up close. Why has the number of social and environmental ones exploded and why do they mostly fail but keep coming back?
▶ 2:04:56Um the the factors here are really the the professionalization of the shareholder proposal process. There are the adviserss out there deemed representatives that are out marketing themselves and saying we will handle the shareholder proposal process. You can sit back and we'll uh submit this proposal. And they're not just asking for information. They're trying to influence outcomes and saying this is, you know, this is what we've done.
▶ 2:05:23With their effort to influence those outcomes, do you worry about, you know, threats to American interests or even national security?
▶ 2:05:30Certainly, I do because they are focusing on one aspect of a company's operations. The management who also has fiduciary duties to all the shareholders to all shareholders know the company best. They, as Mrs. Ke has has said, have often already considered these issues. They're often addressing the issues the way they view best for all shareholders.
▶ 2:05:56Thank you so much, Mrs. Ke. I'd love to talk to you about your work at Exxon. And, you know, in their case, Black Rockck voted shares that seem to conflict with Exxon's interest, but certainly advance Black Rockcks. And so, we have a large range of uh questions that I'll address for the record. And uh I have some for you, too. Mr. Mr. Copeland, my time's expired and I yield.
▶ 2:06:15Gentleman yields back. The gentleman from Illinois, Mr. Casten, is now recognized for five minutes.
▶ 2:06:20Thank you, Mr. Chairman. Thanks to our witnesses and I I want to just preface this by acknowledging that I'm going to be a little bit pedantic. Um, but this conversation is I'm trying to find a polite way to say this. It's really We let's just acknowledge some things that I should not be debated, but I can't believe we're suggesting they're not true. Shareholders are actually the people who own companies. The executives of a company serve at their pleasure.
▶ 2:06:50They are tasked to carry out the will of those shareholders. They are custodians of shareholders investment, but they are not actually the people in charge. And shareholders are not monolithic in terms of their interest, in terms of how they define value. Hearing my colleagues say the only thing that matters is shareholder value. What the hell does that mean? Maybe I'm a shareholder who thinks that a company's free cash flow should go to paying dividends. Maybe I'm a shareholder who thinks that value would be maximized if we reinvested that cash flow.
▶ 2:07:19Maybe I'm a shareholder in Kodak who thinks we should be pivoting to digital photography because you're committed to a technology that isn't going to survive. Maybe I'm a shareholder in a car company who thinks we should be pivoting to EVs. It doesn't matter whether you're right. You have different opinions about value. And the way that companies adjudicate those disputes is to have a high functioning board, executives who are competent, people who surface their opinions. We try to resolve them in some collaborative fashion.
▶ 2:07:48And if you can't resolve them in some collaborative fashion, ultimately you go to a majority vote. This is not freaking complicated. now, the idea that some voters are more worthy of having their opinions heard than others, some voters, only the ones we agree with, understand what value is, I guess that's on brand for the party of January 6th, but that's not actually the way that you make good decisions,
▶ 2:08:19I say this not as a member of Congress. I say this as someone who spent 16 years as a CEO who ran a company where I was a minor minority investor because I didn't have the couple hundred million dollars we needed. So we had a bunch of other money that came in and sometimes I disagreed with our investors. Sometimes I persuaded them of my opinion. Sometimes they won. Sometimes I won. I maintain I was probably right more often than I won. But it didn't matter. I didn't have the votes.
▶ 2:08:44And our board understood and I understood that sometimes my economic interests were at odds with the shareholders. Right now I could have come to Washington and said that as a activist for the interests of minorities I will come here and represent our nation's poor underappreciated CEOs. But I don't think that's actually the way economy works. So So Mr.
▶ 2:09:05Miller, I guess, do you agree that there are conflicts of interests and that um I don't know like you know when Enron collapsed was a part of that because of board oversight failures and conflicts of interest with management just yes or
▶ 2:09:19Okay. Um and do you agree that it's important for boards to have independent directors who are distinct from from
▶ 2:09:27Okay. Good. We're in So does the New York Stock Exchange. So does NASDAQ. That all makes a lot of sense. Um, Miss Kil, would you agree that transparency and executive compensation is a good thing to have in corporate structures?
▶ 2:09:38Would you agree that shareholders should have a say on board of directors
▶ 2:09:44Um, under the DoddFrank Act, are companies legally required to act in response to a shareholder vote on executive compensation?
▶ 2:09:51No, they're not. They're just they're non-binding advisory opinions. In general, are companies legally required to take action on shareholder proxies?
▶ 2:09:59Uh, technically no, but effectively yes. Well, according to your firm said, quote, "shareholder proposals are typically advisory in nature and not binding in a corporation."
▶ 2:10:08That's technically
▶ 2:10:09that is all my experience. That is that is the law. We're talking about the law. We're not talking about technically. We're talking about should we change the law and we are in agreement that the law does not actually say these proposals are binding. The law says they are advisory. They get factored in and then we have a high functioning board. M you know, Mr. Copeland, you had said earlier that uh I think you you had a just on public choice theory and that Congress proves that you shouldn't just decide things by majority vote. That's not how boards work.
▶ 2:10:38We, as we just established, the law says that these are advisory opinions. So, we're sitting here having this whole conversation about a boogeyman who doesn't exist. This conversation is about do shareholders have rights? Do shareholders own companies? And do they have any rights to express their opinions of value in corporate Mr. Lander, you want to add anything here? Am I missing anything as as the as as a fiduciary?
▶ 2:11:08That was very well said.
▶ 2:11:12I hope our next hearing is not dump. Yield back.
▶ 2:11:16The gentleman yields. The gentleman from Tennessee, Mr. Rose, is now recognized for five minutes. Um, I want to thank Chairman Hill and Ranking Member Waters for holding this hearing and thank you to our witnesses for taking time out of your schedules to be with us today. Uh, Mrs. Ke, I wonder if you might like to uh, uh, expand on the response there to Mr. Casten about the nature of the issue.
▶ 2:11:43So, so it's correct that most of the shareholder proposals and the seon pay are technically non-binding, but the reality of how companies are dealing with these is that um if they were to pass, there would be immense pressure and most of that is coming from the proxy advisors actually.
▶ 2:11:58So, if you were to the company were to pass a or if the shareholders were to vote in favor of one of these shareholder proposals, which is admittedly pretty rare, um companies, even if they thought it was a bad idea for the company, would feel this inherent pressure and tension and grapple with the the impact, which would be votes against their directors from the proxy advisor's recommendations.
▶ 2:12:18Thank you. I appreciate that. Mr. Mueller. Uh, how transparent is the SEC's no action process and are the are there consistent principles or do outcomes shift from year to year?
▶ 2:12:31Thank you. Um, if I can just add to the last response, I want to note that um, under Glass Lewis's proxy voting policies, if a proposal gets a vote above 30%, not a majority, then the board is expected to take some type of action or risk having Glass Lewis recommend votes the following year. So, some of what we're hearing is not how it operates in in the real world. Um the SEC's proxy rules have really shift shifted over time.
▶ 2:13:01Uh shifted with the political winds. Um as Miss Mrs. Keel has said, uh they use vague terms that are open to interpretation and really um um complicate and make the the process more expensive for both proponents and
▶ 2:13:19Thank you. I appreciate that insight. And so um Mrs. Kale, back to you. Can you please explain why it would be useful to raise the resubmissions thresholds that are currently in rule 14A8 I12?
▶ 2:13:34Sure. So, you know, I think there's a we use the word shareholder democracy a lot and wanting to protect shareholder rights. And I think, you know, the recent mission threshold is so important because if if shareholders vote against something nine to one, nine against, you know, one four and we let the proposal go back on the ballot the very next year, I mean, what does it mean to have a voice, right, for those nine shareholders who voted against it? Why are we putting it back on the ballot when it was very clear that there was not support for this?
▶ 2:14:03So I think that's the kind of the first the first point is really respecting a shareholders's vote. Um the other thing that I think we need to really think about carefully as we you know consider whether to revise the standard is what does it mean to be substantially sim similar subject matter. So it's not just the number of the threshold it's how it's applied. What is the scope? Is it a carbon copy? Is it a general topic? Um that's something that we would need a lot more clarity on because right now the SEC applies it so narrowly.
▶ 2:14:30Sure. And I think as a shareholder who actually reads these things and tries to be thoughtful in my responses, um I think we all have to acknowledge that when we ignore that the that the shareholders have rendered a verdict, if you will, uh yet it comes back, the inevitable uh inclination is to think, okay, this issue must have more support than it appears to, right?
▶ 2:14:56I mean, that's just kind of a natural human response is that something that keeps getting put back in front of you um is going to, you know, kind of persuade if for no other reason that it's that it's present. Do you agree with that?
▶ 2:15:11Does the and does the and does the outcome in these things reflect that kind of natural human tendency?
▶ 2:15:18Yeah, absolutely. It puts a magnifying glass on the issues and that's the point of my testimony of that you get to basically buy this megaphone and this platform to put forward these you know you know sometimes important issues but not necessarily relevant to a company and I think that it can kind of distort what companies are should be really focused on
▶ 2:15:35and Mrs. kill again. Do do the procedural requirements for a company to exclude a proposal create an excessive and expensive burden even for proposals that are clearly non-material? Can you can can you explain why this is?
▶ 2:15:49Absolutely. So there are three things. One would be um fear of the proxy advisors, right? So if you don't if you know for a fact that a a proposal is not accurate, maybe they didn't have enough shares, they missed the deadline, some sort of, you know, clear procedural deficiency, companies will still go ask the SEC for their official no action relief because the prox they're afraid that the proxy adviserss are not going to, you know, are going to vote against their directors for not doing so.
▶ 2:16:13And they're also afraid of the shareholders themselves and bringing some sort of litigation and joining their annual meeting, which would be an absolute disaster kind of in in corporate corporate world. Um, and then they're afraid of making the headlines, right? If you go against the grain and do something that's different, um, could be
▶ 2:16:29Thank you. My time is expired. I yield
▶ 2:16:34The gentleoman from Massachusetts, Miss Presley, is recognized for five minutes.
▶ 2:16:39Thank you. Diversity, equity, and inclusion matter. Diversity means all people, veterans, LGBTQ, uh, women, rural communities, black people. Equity means fair access to opportunities, and inclusion means having a real pathway to the American dream.
▶ 2:17:01No executive order from Donald Trump is going to change that, and certainly no legislation from my Republican colleagues will, but that does not stop them from trying. Republicans are proposing bills that would make it harder or even impossible for shareholders to increase transparency around diversity, hiring, and inclusive workplaces. Shareholders want this information because study after study has affirmed that diverse teams create more money for companies.
▶ 2:17:31They're more innovative and are better and faster at making decisions. Diversity, equity, and inclusion is good for business and it is good for the economy. Mr. Mueller, does Gibson Dun and Crutcher value the practice of diversity and inclusion? And just a simple yes or no.
▶ 2:17:54Thank you, Mr. Chair. I would like to enter into the record this web page from Gibson Dunn entitled diversity and inclusion.
▶ 2:18:07Without objection.
▶ 2:18:08Mrs. Keale, you are a partner at Jones Day. Does your firm value the practice of diversity and inclusion? Just a simple yes or no.
▶ 2:18:20Thank you, Mr. Chair. I would like to enter into the record this web page from Jones Day entitled inclusion.
▶ 2:18:27Without objection.
▶ 2:18:29Controller Lander, do you as New York City controller value the practicy practice of diversity and inclusion in your office?
▶ 2:18:40Thank you. Thank you for your express commitment today. I also want to commend you on your statement in February pushing back against Trump's attacks on DEI. And I would like to enter that statement into the record
▶ 2:18:52without objection.
▶ 2:18:54Now, it is really wonderful to see this type of agreement, bipartisan agreement by Republican and Democratic witnesses here today. However, the fact remains that the fiscally irresponsible policies from the White House, Republicans in Congress are pushing people out of the workforce. Unemployment is on the rise and black women are bearing the brunt of the job losses. But what else is new? We bear the brunt of everything. Black workers are the last hired and the first fired. The alarming spike in black women's unemployment is the canary in the coal mine.
▶ 2:19:24A devastating warning of where our economy is headed. That is exactly why I wrote a letter to Federal Reserve Chair Jerome Powell calling on the Fed to do its job and honor their statutory mandate to promote maximum employment and address this crisis for black women. But it's not just the Fed who must take action. The SEC must too.
▶ 2:19:49Controller Lander, do the Republicans proposed changes to SEC rules help or hurt transparency for shareholders?
▶ 2:19:58They hurt transparency for shareholders.
▶ 2:20:01Thank you. We need policies that empower shareholders and protect investors. Diversity, equity, and inclusion matter. It's good for business. It's good for families. It's good for the economy and the data supports it. I yield back.
▶ 2:20:20The gentle lady yields. The gentleoman from Michigan, the Republican conference chair, Miss Mlan, is now recognized for five minutes.
▶ 2:20:27Thank you, Mr. Chairman. I just want to make sure I'm in the right hearing. We're at We're here to talk about proxy Mike. Okay. Just making sure. All right. Let's let me start by saying this. This is my um kind of stance opinion and I'd like to have a conversation around it. Um I it seems to me that two proxy for firms should not be deciding how trillions of dollars in shareholders votes are cast.
▶ 2:20:59Would you agree with that? Anyone disagree with that? Thank you. Yet today, every American thinks they're investing in the market, but their votes are actually being hijacked and dictated by unelected, foreign proxy advisors. This is not, in my opinion, shareholder democracy.
▶ 2:21:25Instead, it's concentrated power that is unchecked and it undermines the integrity of our capital markets. I believe proxy advisors should stick to providing what they do best, research, right? They were designed, they were their job, their goal is research. They should stick to their job research, right?
▶ 2:21:54I don't believe they should act as shadow regulators of corporate I don't know if I'm going to get a bunch of disagreement there, but does anyone disagree with that premise that they should not act as a a a shadow
▶ 2:22:14They they neither regulate nor dictate.
▶ 2:22:17But you would agree with my premise that they shouldn't act as shadow regulators, correct? Or do you disagree with my premise? say neither regulate nor
▶ 2:22:26So that's a great answer to a question sir I didn't ask. Are you disagreeing with my premise or are you agreeing with my premise?
▶ 2:22:34You said they were dictating to shareholders how they vote and they don't shareholders how they vote.
▶ 2:22:39So let me rephrase it sir.
▶ 2:22:41Okay. I believe that proxy advisors should stick to providing research and not act as shadow regulators of corporate America. Would you agree or disagree with that statement? It's a really simple question.
▶ 2:22:58I agree and they don't.
▶ 2:22:59Thank you very much. Mr. Copelan, would you agree proxy advisors, unaccountable, unelected firms have too much power and direction of the US public companies? Would you agree or disagree?
▶ 2:23:13Can you expand on why?
▶ 2:23:16Because effectively we're talking about controlling, you know, 20 25% of the shareholder votes. Uh they're they're non-transparent. They're non-regulated. They're non-American in ownership. Uh
▶ 2:23:32wait, they're non-American? Wow. I wonder if they have any alterior motives. I'm sorry, sir.
▶ 2:23:37Yeah. and one's owned by the German stock market and the other's owned by a Canadian uh private equity firm and they're they're deciding huge chunks of the vote in our stock market.
▶ 2:23:46Thank you. Doesn't that mean that millions of American votes are being hijacked by foreign proxy adviserss? I mean, could one come to that conclusion and not by the Americans who actually own the shares?
▶ 2:24:00Well, I mean, hijacked may be a strong word, but but I do think that de facto they're controlling it. They're controlling it because they're given that authority by a number of institutional investors. Not the New York City funds, not Black Rockck, but a lot of institutional investors are giving them that authority. And so there is a disconnect between the ownership rights. I'm really glad to hear a bunch of people talking about shareholder rights here, but there's a disconnect between those shareholder ownership rights and the actual execution of these votes in practice.
▶ 2:24:29Amen to that. My question is, isn't that a betrayal of the fiduciary duty
▶ 2:24:38on behalf of the institutional investor? it's it's debatable. I mean, at the end of the day, uh, they're they're trying to execute these votes at low cost. Um, I think it would be helpful to clarify, I mean, the SEC's done this in its own guidance, but it'd be helpful to clarify that that these institute officers are not required to vote at all. Um, but they're trying to do this. They don't get an advantage from it.
▶ 2:25:05Um, it's they don't get a it's an infantessimal almost disadvantage from being a bad voter. So, they're they're sort of discharging it. And there are no fiduciary duties. Let's be clear for these proxy advisors.
▶ 2:25:16Interesting. There's no I just want to be clear. There's no fiduciary duties, responsibilities by the proxy adviserss
▶ 2:25:23that would be paused for
▶ 2:25:24aside from basic anti-fraud. No.
▶ 2:25:27Yeah. Very interesting. Don't you think, Mr. Chairman? I'm sorry, but I am out of time. Thank you for your witnesses. Thank you for your time.
▶ 2:25:34The gentleoman uh yields back and the gentleoman from Texas, Miss Garcia, is recognized for five minutes.
▶ 2:25:42Thank you to all the witnesses for being here this morning. And I want to give a special welcome to um the comproller because as a former elected city controller in Houston, I know the role, I know the the business and I know how busy you are, but thank you for taking the time for being here. And I also want to personally thank you for standing tall uh with the immigrants showing up to court in immigration court in New York. Like you, I've done that, too.
▶ 2:26:10have gone to visit our our Houston immigration courts and it is just shameful uh what the current felon in the White House is doing to keep people from their day in court. Uh so thank you for that too.
▶ 2:26:22Thank you.
▶ 2:26:22But tell me this kind of silencing and criminalization of almost everything. I mean I I I'm I'm where Mr. CH Casten is. It's like why are we going through all this? You know, why are we spending so much time on something when frankly all these lawyers at the table could just advise your clients to go private? If you don't want to deal with pesky shareholders, then go private. Then you don't have to worry about it. But no, they want it both ways.
▶ 2:26:53They want the dollars, they want the investment, and they want the control. But why is Wall Street just trying to push shareholders out? I mean, what are are these companies not rich enough?
▶ 2:27:04Uh, the companies are doing well. The CEOs are doing well. I thought $56 billion was an extremely excessive CEO compensation. I never would have dreamed they would propose a trillion dollar of executive compensation. It boggles the mind. Uh, but I
▶ 2:27:21Can you just repeat that? I think everybody who's watching needs to understand that the number of zeros involved in that when when people are just worried about the cost of housing, the cost of healthcare, and the cost of even buying pens and pencils for their kids to go back to school.
▶ 2:27:36Yeah. So, this is a a board. So Elon Musk sought a pay package of $56 billion, which was by enormous amounts the largest CEO executive compensation ever, even though he wasn't working full-time at the company, which any board would expect their CEO to work full-time at the company for $560,000, much less for 56 billion. Uh there was some objection from uh investors. So they redomiciled the company in Texas.
▶ 2:28:05They are seeking to prevent shareholders from bringing shareholder resolutions. They are seeking to prevent shareholders from bringing securities litigation if their rights are violated. And now they are proposing to give him a $1 trillion payout, which I can only believe is like both to enrich him, but also to stick it in the eye of every hardworking person in America.
▶ 2:28:28Well, I think it does. And you know, it's not a bad part-time job. Where where do I sign up? you know, um, and it it just baffles me that that things like a a a shareholder proposal uh to to make make to to get a report on the use of child labor law would be considered, you know, outrageous or a proposal for a company to conduct a health care health and safety audit regarding employee working conditions. I mean, I' I've seen so many of these.
▶ 2:28:55I mean, I the words that are being used at this hearing, activists, out of control. I mean, if shareholders can't have a voice because they've invested in a company, well, then who can? Because again, if you really don't like the pesky investor, and I'm calling them pesky in a very gentle, dear way, um, then go private. And there's an exception for all this, isn't there?
▶ 2:29:22That things that are seen as harmful disruptions that discro distract from the core business. And I really, you know, the economic relevance exclusion, I mean, who decides what's relevant or not?
▶ 2:29:35So, the SEC sides with management 68% of the time when management objects to shareholder proposals. So, I would think if anything uh the balance might be tipped a bit in the favor of shareholders, not further to their CEOs.
▶ 2:29:53Yes. I certainly would consider if a business was starting in Houston in a floodprone area close to the waters, you know, they should disclose and really reconsider uh and would support a proposal for them to reconsider if we know that Houston gets hurricanes and floods and it's something also that they should disclose in their IPO, shouldn't
▶ 2:30:16Of course.
▶ 2:30:17It so that's to me just makes common sense. All of the almost all of this is about disclosure. Even on DEI, you know, we brought resolutions asking people to disclose their EEO1s which they're already giving to the government. So give them to shareholders. Well, most now do disclose the matrix you use for determining who's on your board. Um the idea that that is overreach when it's simple investment uh simple information investors use, I don't understand.
▶ 2:30:47Gentleoman's time is expire.
▶ 2:30:48Thank you, Mr. Chairman. I yield back. The gentleman from South Carolina, Mr. Timmans, is recognized for five minutes.
▶ 2:30:54Thank you, Mr. Chairman. Today's discussion focuses on critical issues of transparency, market competition, and what can only be described as the swinging of the political pendulum in regulatory policy. The proxy advisory industry is effectively dominated by a foreign duopoly that controls approximately 97% of the market. That level of concentration creates systemic challenges for corporate governance and shareholder engagement.
▶ 2:31:15Since 2003, SEC rulemakings on proxy advisors have shifted significantly from one administration to the next, reflecting broader political and regulatory swings. In addition to these concerns, I want to focus today on a growing and often overlooked risk, the potential for foreign influence in US public companies made possible by this proxy advisor duopoly. When two firms wield this much power with so little transparency, the risk is not just economic, it's also a national security concern.
▶ 2:31:44These firms frequently push ESG-driven proposals that may align more with left-leaning political agendas than with shareholder value or the long-term health of American businesses. Mr. Copelan, do proxy advisory firms have clients with ties to foreign governments, sovereign wealth funds, or politically motivated international organizations? And if so, how transparent is that relationship to the companies they influence?
▶ 2:32:07They they have some relationship, right? Right. I mean I mean uh the Norwegian sovereign wealth fund for instance is very active in influencing this you know they they they dialogue they colloquy with these proxy advisory firms. It's it's not very transparent though. So it's hard to give definitive answers um on exactly who might be influencing.
▶ 2:32:25Thank you for that. What are the current consequences of this lack of transparency and disclosure?
▶ 2:32:31Well, I think it's it's it's hard for regulators to to to know what's happening. It's hard for investors uh necessarily to know what's happening. And there was only a couple of these. I mean, the reality is these they're they're not that big of businesses. They they they're valued high, but it's but it's probably not just based on their cash flow. It's probably based on the control that they exert over the market. Um and you know, we know that because from time to time they've been subsidiaries of publicly owned companies.
▶ 2:32:57So we know that for instance, you know, 15 years ago, it was reported at from MSCI that ISS in its proxy advisory business got 11.5 million in in uh profits. I mean, that's a lot of money, but it's not a lot of money compared to 15% of the stock market.
▶ 2:33:14Thank you for that. I want to turn briefly to the business model of large proxy advisory firms and the conflicts of interest that result. Firms like ISS not only issue proxy recommendations, but also sell consulting services to the same companies they evaluate, including through their ESG corporate rating service. This creates a financial incentive to issue recommendations that could drive more business, raising serious concerns about the objectivity of their guidance.
▶ 2:33:38In addition, some proxy advisers are affiliated with advocacy organizations that actively promote specific shareholder proposals often align with particular political or ideological agendas. When the same firms are both shaping and scoring these proposals, it becomes difficult to separate impartial analysis from activism. That is a problem for transparency, for market fairness, and for the long-term interests of American investors.
▶ 2:34:02Miss Keel, could you walk us through an example of this conflict of interest in practice and discuss the negative consequences that result for both the corporation and everyday share
▶ 2:34:12Sure. So I think one important thing to address first especially on the um influence from abroad is that they you know they definitely they're incorporating European standards of investing into the the standards that they are then imposing in the recommendations that they give to companies directly. So in Europe they have an idea of uh double materiality. It's this idea that we can consider what's material to us and also to the outside world. That's just not the standard in the US.
▶ 2:34:38So it is applying an entirely different investment theory essentially of materiality to US companies. And so from a conflict perspective uh companies are subscribing to the services that tell them to do this and if they do not comply the implicit threat is we will vote against your directors. So they're stuck between this rock and a hard place. They have to hire them and they have to do what they
▶ 2:34:59These are the same Europeans that shut down all of their nuclear power facilities because they were not clean and now buy dirty Russian oil. Interesting. Um, as a follow-up to that, do you believe the SEC has the tools it needs to address this kind of conflict of interest or should Congress consider additional steps to ensure proxy advisors remain neutral and accountable to shareholders?
▶ 2:35:18There there definitely needs to be some sort of um regulation at federal level would be great. Um, you know, they fought tooth and nail against some really common sense uh regulatory, you know, oversight which would have just simply had them, you know, not make false and misleading statements, right? And so that is what they were so against. So I think we need some explicit acknowledgement of the
▶ 2:35:38Thank you for that. The proxy advisory industry holds too much influence with too little accountability. The absence of transparency, the potential for foreign involvement and the presence of clear conflicts of interest create serious risk for public companies and for the strength of our capital markets. I am out of time and I yield back, Mr. Chairman. Thank you.
▶ 2:35:55The gentleman yields back. Uh the gentleman from California, Mr. Licardo, is recognized for five minutes. Thank you, Mr. Chair. Uh, I appreciate all the testimony of the witnesses, particularly the written testimony. Mr. Miller, I very much appreciate you going through in detail uh much of the existing regulation.
▶ 2:36:16I I I wanted to refer first to Miss Kil's examples that were raised during uh her both your testimony today and in your written statements with regard to several proxy proposals relating to things like reproductive rights, geopolitical issues in China, gun sale regulation, Bitcoin investment. How many of those were actually adopted?
▶ 2:36:39Um I don't have the exact passage rates, but I'm guessing of them. That's my guess. Yes.
▶ 2:36:44Okay. So, so none of them were correct to your knowledge were actually approved and and in fact there are criteria that exist already exclude proposals like these most
▶ 2:36:56prominently that laden to economic relevance under 148 I5 ordinary business can mitigate micromanaging and so forth and so I I certainly appreciate that there is time expended and and I think that issue has been raised and a lot of resources expended. But fundamentally, the rules already exist to exclude many irrelevant proxy proposals.
▶ 2:37:24And in fact, the SEC appears to uphold management's decision to exclude them 68% of the time, according to Mr. Lander. So, help me understand better what we're doing here. If the rules uh, why should Congress get involved if rules already exist to exclude irrelevant proposals?
▶ 2:37:48So happy to take that one. Um, you know, it's not required to go to the SEC for no action relief, but it's become the thing that companies do. And so to deviate from that, um, there's even an example from a long time ago before my time where a company said, I'm just just going to notify the SEC of an exclusion. and the SEC said, you know, you've got to go through the normal process, even though it's not required and even though it's just guidance, it's not law. But there's this feeling among public companies that you don't want to rock the boat, right?
▶ 2:38:16It's it's not um it can be intimidating to make headlines. It can be intimidating to um uh instigate scrutiny from the proxy advisers because the stakes are so high. So they will just fall back on this um you know reliance on this system because you know that's what people are used to and and the alternative is it's the unknown is too scary.
▶ 2:38:39I I can appreciate the point. I've been in public life for a long time. It's just the fact that executives are uncomfortable uh doesn't feel like that's enough um to justify congressional action here. And I guess what I'm particularly concerned about Mr.
▶ 2:38:55Miller, I I appreciate very much both your and Miss Ke's uh excellent written statements, but what I'm particularly concerned about is narrowing uh the definition of relevance to the point where very relevant considerations would be included. For example, on page 14, your written statement, you refer to the proxy proposal requesting JP Morgan Chase to disclose clean energy supply financing ratios and that is the financing of energy generation, renewables versus fossil fuels.
▶ 2:39:23Now, I know there's a wide variety of opinions here about climate change in this room and perhaps in America. Um, but don't you agree that it would be critical for a lot of investors to understand how JP Morgan's executives have internalized the litigation risks, the regulatory risk, the long-term risk of how it's deciding to finance energy
▶ 2:39:52Sure. Um the the issue on that is that uh and I cannot comment on what JP Morgan was doing, but many of the other banks were already disclosing information about what they were doing with financing fossil fuel and uh and and non-carbon energy sources. And so the proposal was not so much about, hey, let's increase the disclosure.
▶ 2:40:16It was like the proposal was we want you to do it this way, not the way that management thinks it's best to communicate with the
▶ 2:40:26Okay. So, you don't disagree that disclosure itself may be quite relevant in that context because after all, Black Rockck uh in its 2021 global insurance report consulted 362 insurance company executives uh and 95% of them confirmed the climate risk would have a significant impact on their portfolio construction over the next two years. So this is a relevant consideration. Is that right? Yes, it is. Okay.
▶ 2:40:50I just want to make sure here in Congress we don't decide to start excluding very relevant uh from whatever we define to be appropriate proxy proposals. I I think the issue is what is relevant and when under for slab 14L in the Ginsler administration the first year that came out um all gentleman the proposals were excluded.
▶ 2:41:15Thank you.
▶ 2:41:16The gentleman from Pennsylvania, Mr. Muer is now recognized for five minutes.
▶ 2:41:19Thank you, Mr. Chairman. Thank you to our witnesses very much. Last Congress, this committee pushed back against Biden regulators who imposed ESG mandates that elevate social or political agendas above material business decisions. This was most evident in the previous SEC's climate rule. Republicans were largely successful in restoring materiality and the guiding principle in disclosures and the shareholder proposal process.
▶ 2:41:42However, proxy advisory firms through their concentrated influence often function as de facto regulators by recommending ESG votes for shareholders when voting on board decisions. It's not about being against ESG as an investment choice. If individual investors want to prioritize environmental, social or governance factors, that's their freedom. What we do is oppose it.
▶ 2:42:06What we oppose is when these ideological views are mandated when investors are forced to comply with burdensome regulations that prioritize political ideology over sound financial decisions. So m Mr. Mueller. Uh, uh, Chairman Gensler, the SEC, uh, under Chairman Gensler, the SEC issued staff legal bulletin 14L, which required companies to include shareholder proposals on broad societal issues, even if they were immaterial to the company.
▶ 2:42:33What effect, in your view, did that shift have on companies and their shareholders? um it resulted in a lot of wasted effort by both the companies um handling these shareholder proposals and by shareholders at large who had to review and vote on these proposals and overwhelmingly voted against them. They said they were a waste of time. Thank you.
▶ 2:42:57uh from your perspective uh advising large companies as you do, what are the costs in terms of time and resources that you just alluded to for companies to respond to such proposals that have no material connection to its line of business?
▶ 2:43:13Yes. And uh both my written testimony and Mrs. Gil's testimony lays out all the actions that that is um uh that that are borne by that. And again, it's important to bear in mind this may be a shareholder who has only owned $2,000 worth of stock. I I you know, bless those shareholders.
▶ 2:43:33It's good to have small shareholders, but when they are putting all that burden on the company at large, it's you have to question whether that's a rational system.
▶ 2:43:44Okay. Thank you, Mrs. Ke. When the SEC refuses to block an ASG proposal for being immaterial, courts courts often treat that refusal as a green light. Doesn't that combined with proxy advisors recommending yes votes turn immaterial proposals into mandates in
▶ 2:44:04Yes. I mean, I I I think when when you do not get or whatever the SEC says is how um all of the different stakeholders really interpret whether or not the proposal should be included or excluded, especially the proxy advisors. So, if if you were to go against what the proxy advisers recommend, I mean, there would there would be major consequences. Um and I think it's relevant that what Mr. Mueller has said before is that there's a 30% threshold that Glass Lewis imposes.
▶ 2:44:30So if a proposal gets 30% support, they expect you to publicly address how you have how you've engaged with shareholders on the particular proposal. I think it's also kind of interesting that the shareholder proxies influence. We hear some numbers like 20. I commonly see the number 30% of what they control for a company. It really depends from company to company, but those numbers are suspiciously similar.
▶ 2:44:54Okay, great. Thank you. Um uh Mr. Keel, you've advised companies facing ESG lawsuits. Do boards feel pressured or even threatened to engage with ESG proposals even when their shareholders have rejected them?
▶ 2:45:07Um absolutely. I mean but the real issue that I would like to also highlight which I've said earlier which is boards are grappling with these issues in the boardroom every single not every single day but at every meeting right these are um important topics when you see news about the tariffs or you see news about environmental issues these are raised in the boardroom absent exactly the what the proposal is putting forth
▶ 2:45:31right thank you Mr. Copeland. Proxy advisory firms like ISS and Glass Lewis often recommend yes votes on ESG proposals even when those proposals aren't material um and shareholders repeatedly reject them. Doesn't that amount to an ESG mandate in disguise
▶ 2:45:48effectively because of the way they treat this uh as as we've heard during this hearing? You know, they'll they'll uh no vote directors if you even though it's a advisory proposal. They'll no vote directors if they don't reply. sometimes even for minority votes where a majority of shareholders say no, they'll they'll no vote directors if the company doesn't respond.
▶ 2:46:07And my understanding is the uh the performance isn't that much worse off, but the idea of mandating and the problems that it causes is uh is
▶ 2:46:22Gentleman has expired.
▶ 2:46:24My my time is expired. I yield back, Mr.
▶ 2:46:26The gentleman from Texas, Mr. Green, is recognized for five minutes.
▶ 2:46:29Thank you, Mr. Chairman, I thank the ranking member and the witnesses for Mr. Lander, I'd like to visit with you for just a moment if I may please. Um, there are some CEOs who make more in a day than some of their employees will make in a year.
▶ 2:46:53There seems to be a belief among many those who are wealthy need more to do more and the poor can do more with less.
▶ 2:47:07Is it material for the shareholders to want to see a living wage paid to employees and for those shareholders to insist upon that by using the limited amount of authority that they have to have a a living wage for people who are working and making it possible for CEOs to make these huge salaries.
▶ 2:47:36You just talked about the possibility now of a trillion dollar that's trillion dollar salary. I mean that's more than the mind can imagine. Your thoughts please.
▶ 2:47:48Yeah. So I'll start from the people that whose money I'm managing and who I represent. They are teachers and school crossing guards and secretaries and public hospital nurses and cops and firefighters and sanitation workers. like hard working people who largely because they organized in a union secured retirement security. They're not making a lot of money every year, but we guarantee them this retirement security. So, they're paying attention to how their money is invested.
▶ 2:48:19And what they mostly have the right to for me and as fiduciary duty is to make sure that it's invested well with good riskadjusted returns. They know that companies will do better if those companies have good workforce management and live up to their own policies. So many of the companies that we invest in uh have policies that they respect the rights of those workers to organize a union to seek to bargain collectively uh and to have good workforce management uh uh practices.
▶ 2:48:48So I'll give the example on climate policies. It tends to be that
▶ 2:48:52So talk to me about the the living wage.
▶ 2:48:54Yeah. Well, what I was going to say there is all five of our funds, including the the police pension fund and the firefighter pension fund, often vote uh for shareholder proposals, asking companies, as they did at Starbucks, where we brought a proposal. We had heard that there were issues of workforce management, refusal to allow people to organize and bargain collectively.
▶ 2:49:17Um, so we brought a proposal and 52% of investors voted in favor of asking Starbucks to do an independent assessment of its workforce practices, including its adherence to international labor rights standards. And then the company agreed to do so and provided that assessment to its investors, including those teachers and cops and firefighters that I represent. That's all we're talking about here at its most aggressive.
▶ 2:49:47Usually those proposals don't get a majority. In this one case where they did, it resulted in a corporate assessment of its workforce policies so that investors could make wise decisions going forward. I'm I'm going to take it that you believe that it is acceptable for the shareholders to push um inquiries that would uh lead to a living wage being paid to
▶ 2:50:18workers.
▶ 2:50:19So let me distinguish at the policy level. I'm a big advocate of living wage policies broadly across the economy and have advocated for them as law in New York City and nationally. As an investor, I have fiduciary duty to focus on riskadjusted returns to shareholders. And so I focus on workforce issues broadly because if you emiserate your workforce and you have such rapid turnover as Amazon does for example that's a risk not only to the work
▶ 2:50:48I agree and let me investors this as as we close this when when we're making these decisions to pay the CEOs
▶ 2:50:56billions we don't seem to get into the question of how this is going to have this level of adversity as relates to the business model that that the company has. But when we talk about the people who are making $7.25 an hour or some amount of money that CEOs will give us a tip uh as they leave a restaurant, it becomes a big issue.
▶ 2:51:24Uh we we we seem to think that the poor can do more with less and the wealthy, they need more to do more. I yield back.
▶ 2:51:34Gentleman yields back. The gentleoman from California, Miss Kim, is now recognized for five minutes.
▶ 2:51:44Welcome witnesses. Thank you so much for being here. You know, in California, our drivers, custodians, local law enforcement, and other public employees rely upon the California public employees retirement system to manage their pensions and ensure that they can have a comfortable retirement.
▶ 2:52:03Unfortunately, rather than being focused on securing the highest possible return for its members, Kelpers has been focused on left-wing politics and supporting changes to force companies to adopt these ESG initiatives. One way that we have seen companies forced away from focusing on their products and services is by burdening companies through the shareholder proposal process. I want to ask my question to uh Miss Kil.
▶ 2:52:33Uh what are the steps that a company takes when it receive a shareholder process?
▶ 2:52:39Sure. So proposal.
▶ 2:52:40Sure. So first it will decide whether is actually substantially implemented already, whether it's considered it. It'll then go into whether investors have raised this as a particular issue that they actually care about. And then it'll assess what is the harm that could come from this. Right? It's a risk mitigation analysis at the end of the day. So, is it going to jeopardize legal privilege? Is it going to disclose some sensitive competitive information? Is it going to disclose sensitive employee information, which is what a lot of the reports would request.
▶ 2:53:09Um, is it legal? There are examples of shareholder proposals being put forth that are would, if they were to be implemented, would actually be illegal. We've seen this in the insurance industry and with respect to diversity and equity and inclusion proposals. And then lastly, you have to evaluate whether it's actually going to harm the company, right? So then there are examples of proposals that are effectively trying to hurt a business. Uh one example would be to a pharmaceutical company asking them to stop issuing patents or or do reduce patents.
▶ 2:53:37Another example would be asking an energy or oil and gas company to reduce scope 3 emissions since that would require them to reduce the the sale of of their actual products. what are the costs that uh companies are burdened with when dealing with shareholder proposals that may not be relevant to the business activity. So I think what you know there are costs that the SEC has said it's you know maybe upwards of a $150,000.
▶ 2:54:04There have been other studies that put that at um a top of you know 600,000 but I think that that's actually you know it's nice to have those dollars and cents but it's really the intangible energy and effort that goes into these that is is really hard to quantify. So that analysis that I went through that's that's just a kind of drop in the bucket in terms of the focus.
▶ 2:54:22Mr. Mhler, can you talk about if um the investors are the ones that uh bear the burden of the cost and consequences of non-material shareholder proposals? Can you talk about that too?
▶ 2:54:35Yes. So they be bear those expenses and um typically vote down these proposals. Particularly in recent years as the proposals have gotten more extreme, more prescriptive, the votes are dropping down and sharehold and large shareholders are coming to the company saying why are we even having to deal with this? Um and so um they're not happy either.
▶ 2:55:01Let me talk about another issue. uh companies, they want to be focused on delivering great products or services and continuing to innovate. Uh but when they spend thousands of hours attempting to deal with their shareholder proposal regarding whether they will go from plastic straws in their cafeteria to paper straws, that is vital time and resources that's taken away from improving the business and customer experience.
▶ 2:55:29and kelpers should return to being focused on his stewardship of the retirement of my constituents and not supporting a leftwing political agenda. So another concern I have is um with the dual pole in the proxy advisory market and ISS and G Lewis's lack of economic analysis.
▶ 2:55:48Uh so in July of 2023 uh ISS testified that the firm does not generally conduct an economic analysis before providing a vote recommendation and last year investment stewardship global head of ISS has stated that CNBC uh I on that CNBC uh interview that the firm leaves the investment thesis up to the investors. So I want to ask you a question Mr. Mhler.
▶ 2:56:13Have you observed anything that would lead you to believe that ISS or Glass Louise evaluates the specifics of each shareholder proposal at each company?
▶ 2:56:24No, there's nothing in their um voting recommendations report suggesting that they're evaluating other than intangible speculative risks.
▶ 2:56:35Okay. You know when economic analysis is not the guiding principle of shareholder proposals then it leaves one to question whether the guiding principle what the guiding principle is. So uh
▶ 2:56:47the general lady's time is expired.
▶ 2:56:49Oh can I just finish my sentence? Um
▶ 2:56:51go ahead.
▶ 2:56:52The takeaway that I'm left with is that personal and political bias are what guide the recommendations of Glass Louise and ISS. So it is also concerning to me that is and Glass Louise appear to have a significant conflict of interest and I just wanted to share that and put it on the record the concerns I have.
▶ 2:57:12Gentle lady yields. The gentleman from New York, Mr. Richard Torres is now recognized for 5 minutes.
▶ 2:57:18Thank you, Mr. Chair. Um, Republicans often accuse Democrats of quote politicizing capitalism. So I have a simple question for the controller. Who's the most efficient allocator of capital, Donald Trump or the free
▶ 2:57:31The free market.
▶ 2:57:32Okay. Because Republicans believe the answer to that question is Donald Trump. So, it sounds to me like you're much more capitalist than your Republican critics. Republicans have no objections to socialism so long as it's Donald Trump doing the socializing. A wise person once said, "If you don't have a seat at the table, then you're probably on the menu." And Rule 14A88 ensures that shareholders have a seat at the table. promotes the democratization of corporate governance. It brings checks and balances, accountability, and transparency where none would otherwise exist.
▶ 2:58:03The purpose of securities law, as I understand it, is to correct information asymmetries and to level the playing field between issuers and investors. Mr. U controller Lander, do you worry, as I do, that the stopwing act would undermine the very purpose of securities law and radically restrict the flow of material information to
▶ 2:58:22Yes, I do. And Republicans often accuse cities like ours, like New York, of quote woke investing. What were the most recent performance returns of the New York City pension system?
▶ 2:58:33Let me get the numbers. We just announced at June 30th that for the year ending June 30th, we had uh one-year returns of 10.3% exceeding the state standard of 7% and saving uh about $2 billion for taxpayers. So you save $2 billion for taxpayers. And so under your financial stewardship, New York City has shown that it is possible to do well and to do good at the same time.
▶ 2:59:01That shareholder value and social responsibility can be mutually ex uh reinforcing. Now under the Stopwoke Investing Act, the word material is radically redefined. It will no longer include quote any portion of financial risk that primarily relates to events that involve a high degree of uncertainty regarding might what occur in the long-term future. And so with that definition in mind, I I want to present the following hypothetical to you.
▶ 2:59:28I I sit on the China committee and we in Congress have a bipartisan concern about rising tensions in the Taiwan Strait. So suppose I were a shareholder of the Taiwan manufacturing semiconductor company and I had a desire to file a shareholder proposal asking the company to disclose the possible impacts that an amphibious invasion would have on the advanced semiconductor supply chain in Taiwan.
▶ 2:59:52It would seem to me that under the stopwoke Investing Act, my proposal would not qualify as material because it involves a high degree of uncertainty regarding what may occur in the long-term future. So let that sink in for a moment. an existential risk to the world's most critical and fragile supply chain would not qualify as material under the stopwoke investing act. Is there any universe in which that makes sense to you as a fiduciary?
▶ 3:00:19Investing is assessing risks exactly like this one and I agree as I read the bill it would not allow you to ask a company where you were an investor to assess and disclose that risk to you.
▶ 3:00:32Okay. Well, look, the cruel almost Orwellian irony of this legislation is that the most material risk that a company can face, whether it be climate change or war, would no longer qualify as material under the law. And that to me makes a mockery of securities law. So, I'm pleased as a as a pensioner in the New York City system, I'm pleased with the 10% returns, please doubling down on your winning strategy. I I'll I'll yield back. Thank you.
▶ 3:00:56The gentleman yields. The gentleman from Tennessee, Mr. Ogles, is now recognized for 5 minutes.
▶ 3:01:01Thank you, Mr. chairman and thank you to the witnesses. I know it's been a long morning or now into the afternoon. Two proxy advisory firms mostly through three index funds are driving corporate governance across the entire economy. No one elected these firms yet they wield incredible power. And to borrow a phrase from the progressives, they do it with other people's money. Mr. Copeland.
▶ 3:01:25If black rock and state street are v voting tens of billions in retirement assets, most of it from ordinary Americans who never opted into ESG activism. Do you see that as a distortion of shareholder Would you agree Congress needs to explore ways to restore some voice to the ultimate beneficiaries, the retirees and workers, instead of leaving it all to intermediaries and adviserss?
▶ 3:01:56thank you. The first amendment doesn't let the government force people to take political positions, but through rule but though rule 14 A through8 activist shareholders are forcing companies into political speech as the price of being public. That's compelled speech by another name. Mr. Mueller, do you agree that many of these proposals are not about material business issues, but for about forcing company companies to take sides on divisive social debates?
▶ 3:02:25of say that.
▶ 3:02:26Mr. Copelan, you raised first amendment concerns in your testimony. Would you expand on how compelled corporate speech under 14A-8 mirrors the kinds of unconstitutional compelled speech that the courts have struck down?
▶ 3:02:39Yes. Yes. I mean, effectively, these companies are being required to put on their proxy ballots uh political statements that are drafted from people like in the New York City controllers's office, right? And and and um you know, that that clearly runs a foul of a lot of compelled speech doctrine. I mean, there's there's there's some uncertainty about how this applies in the securities. What what's unambiguous is that the way this is operating in practice, there's viewpoint discrimination.
▶ 3:03:08And I pointed that in my my testimony where the National Center for Public Policy Research litigated this uh in into the uh fifth circuit uh and it was you know mooded etc. But but there there are uh there was a situation where you know that the SEC staff said you had to include on your proxy ballot a shareholder proposal talking about equal employment opportunity for sex orientation and gender identity.
▶ 3:03:35And the exact same language was used by a conservative group uh as a shareholder proposal saying viewpoint and ideology and it said no you can exclude that and a no action letter was was granted. I mean that that's that's the sort of thing that should be troubling. It's a first amendment issue.
▶ 3:03:50That's right.
▶ 3:03:51Well again this gets back to the idea that you know it's more about compelling political speech versus getting back to the basics of you know the actuial component. Most retirees in Tennessee just want their pensions and 401k to be safe, but they don't sign up to be to subsidize culture war battles. Yet, the proxies diverse corporate resources uh diverts resources away from shareholder value and onto politics.
▶ 3:04:17Miss Kill, you gave the example of one shareholder forcing a company into expensive proxy fights over issues like DEI or gun policies. From a fidiciary duty standpoint, isn't that effectively transferring wealth from retirees to
▶ 3:04:33Yes. Well, yeah. Depends on whether it passes in the implementation.
▶ 3:04:36Sure. Sure. Absolutely. Um,
▶ 3:04:37but the intent would be
▶ 3:04:39Yeah. So, I think it's asking it it's a question of our I think maybe a good example for this would be kind of climate targets for example, right? come, you know, proposals. They're asking companies, you know, a pizza company that I order my Friday night pizza from to impose scope three climate targets. And so, it's kind of hard to see the relevance to certain of these companies. And um it ultimately kind of feels like an unsanctioned tax really.
▶ 3:05:03And um I have more questions. I'm running out of time. I want to go back to this idea. Miss Ke and Mr. Mueller, you you both commented on the technically versus effectively with some of these proposals. So my colleague on the other side, you know, technically was correct, but when you get back to the boardroom and how it's issued in the markets, please expand or put a fine point on technically versus effectively.
▶ 3:05:27Sure. Um, companies don't want to be out there publicly opposing their shareholders. They want to be focusing on business and not being dragged into political debates. And so even um oftentimes the vote is irrelevant. The pro the shareholder has gotten the issue into the proxy statement has forced the company to make a statement about it.
▶ 3:05:56Um and the shareholder doesn't really care what the vote is. They've achieved their purpose. Um and that's that's really kind of effective res gentleman's time is expired.
▶ 3:06:08Thank you, Mr. Chairman. I yield back.
▶ 3:06:10The gentleman from Michigan, you're recognized for five minutes.
▶ 3:06:14Thank you, Mr. Chair. Um, thank you all so much for being here. You know, I I just left um a number of uh advocates or maybe my colleagues like to call them activists uh around the housing crisis. Uh it was powerful speeches about just how terrible uh the and and horrific the housing crisises across our country. And you know, I'm getting back from there and I'm thinking, well, I'm on financial services committee. Somehow we're going to be able to address the housing crisis. No, that's not what we're doing here.
▶ 3:06:44Uh then I thought, okay, well, you know, the president is shamelessly using his office uh for vast personal gain. I mean, I think he's doubled his uh net worth since uh last year, mainly through cryptocurrency and cryptocr. Um, and I'm just saying this because I'm like, why are we having this hearing? I always like to kind of dig deeper.
▶ 3:07:09And then I found out, oh well, the anti-ESG, which for my residents listening, it means environmental, social governance. These are many of my colleagues will call activists because they have social causes and they want to make sure their money is not going to something they don't support. And it's because it's funded by big mega donors, uh, the fossil fuel industry. It's true. You all know it. Uh and finger, you know, figures like uh Leonard Leo and Peter Teal. I mean, Mr.
▶ 3:07:37Copelan, Manhattan Institute, and I I would like to submit for the record a fact sheet on the Manhattan Institute from the Center for Justice and Democracy.
▶ 3:07:44Without objection.
▶ 3:07:45Thank you. You know, I think what $1.5 million from Exxon Mobile and three million from the Koch brothers. You know, how do we how the public take that seriously when I have a community in Wayne County that hasn't met Clean Air Act standards in years where our kids are literally being poisoned? They can't develop. Their brains cannot develop if they're being poisoned. Um, I say this because we're here because of mega donors.
▶ 3:08:13We're here to talk about this whole anti-ESG, whatever they want to call movement. And you know, this issue to me is fabricated. Um but the stakes are real in regards to people having disclosure and transparency. Um the retirement savings of hardworking families are on the line and so you know Mr. Lander can you discuss you know the issues here?
▶ 3:08:36I mean, I'm a person that does deeply care about the climate crisis and um and how the risk to executive compensation and that shareholder proposals can force companies, you know, to disclose uh that and why those issues uh should be in an interest for investors.
▶ 3:08:53I mean, I do think it's extraordinary that what's being demonized is the simple effort to disclose the basic risks that a company is facing. uh and we've heard this a few times today in ways that are so obviously relevant to the shareholders of that company. Of course, there's a broader set of questions that are critical here, but for many companies, their exposure to climate risk is a simple and straightforward issue.
▶ 3:09:20Yes, if you have most of your book of financing for fossil fuel financing, an investor might say, I think it would make sense to have more exposure uh to renewable energy and investment. And you could decide, do I want to keep investing here? Do I not want to keep investing here? And have that basic information. That's what's being demonized, not any requiring of changes, not dictating, not regulating.
▶ 3:09:45I mean, they really want to muzzle people's first amendment speech. I know you all don't see it that way. Do it all you want. You're getting funded by people. I mean, come on. I'm looking at you all and I'm telling you, I don't the 12 congressional district residents are. And if they want more disclosure and transparency, then they deserve it. Then what's the problem? I mean, somebody said that none of these even proposals pass. But you're all here because of Peter Teal and Leonard Leo. You all know it.
▶ 3:10:15That's exactly why we're here because they donate to my colleagues. This is why we're here. We're not Nobody cares about what's going on with housing. Nobody cares about the fact that I have I'm literally fighting for Head Start program dollars. That's what people care about. And I'm not, this is not like a political, this is me, the girl from Southwest Detroit looking at this growing up in the back shadow of the only oil petroleum refinery in the in the state of Michigan, Marathon Oil.
▶ 3:10:44And you're telling me that if a teacher and others that are concerned about this, that live in that neighbor can't have transparency and disclosures, can't have a say. But see, they call them activists because they politically disagree with them and it's supposed to be like most of them were activists before they got here. They were they might have been activists on issues that I I may disagree with, but I respectfully disagree because I'm like that's your that's your that's your right to disagree. So, chairman, I just I wish we could do more on housing.
▶ 3:11:14We could do more on
▶ 3:11:16corruption and I look forward to that. Thank you,
▶ 3:11:18gentlemen from Iowa, Mr. Nun, you're recognized for five minutes. Well, thank you, Chairman Hill, and thank you for all of you joining us here today. I will say that inflation and rising costs is directly impacting people in the heart of the heartland, including in my home state of Iowa. So, as opposed to just talking about it, let's get after doing something about it. This situation was made worse by proxy advisor firms and their robo voting that put millions of Americans 401k and pensions at risk.
▶ 3:11:44This is happening as half of Ians rely on some type of retirement account to pay for their future, their kids, 429's programs, or simply to buy a home. So, let's get to it. Mr. Copeland, are you aware that only two firms control approximately 97% of the proxy advisory market? And how does this effective duopoly really limit investors choices? Yes, I mean the percentage may or may not be exactly that, but it's a massive percentage.
▶ 3:12:13Over 90% of of of uh voting is controlled by the two foreign own firms uh Glass Lewis and ISS. And uh you know, how does it limit choices? I mean, listen, it's it's it's it's a hard market to break into because it's not a big market where you're going to get venture capital throwing money in it. There's not a huge amount of money in it. they they they're they're paid a premium because people want control over the voting, not because it's a great business model.
▶ 3:12:40Uh but but it also makes it very subject to capture for that reason because it's it's it's not a a business that could get a lot of public buyback. No, no individuals hiring ISS or Glass Lewis. Um, and so they can be sort of captured by these activist forces, the professional activist forces, and they make more money when they're more supportive of this environmental and social activism because the companies pay them to leave them alone, etc., etc. So, and you're absolutely right here. These are both foreign entities influencing a US market.
▶ 3:13:11Mr. Miller, uh, if investors are 20% more likely to oppose a management simply because proxy advisors recommend it, it doesn't show that these firms wield disproportionate power over the overall investor. Would you agree with
▶ 3:13:26Yes, I do. And it's not it's not just correlation. There's evidence of causation. Um, when these firms flip their votes, occasionally they do it. It's rare, but you see that 20% flip right away.
▶ 3:13:39All right. So now that we've kind of laid the base ground for this, let's consider the influence of proxy firms over voting outcomes. I think you would agree, as you just highlighted, that the practice of robo voting, especially um how robo voting works is not only troubling, but where investors automatically adopt a proxy advisor's recommendation, silences the first amendment rights of our retirees. I've got a bill out there. It's called Protecting American Savings Act.
▶ 3:14:05It requires the SEC to finalize rules prohibiting the use of robo voting with respect to votes related to proxy advisors. So, Mr. Copeland, I'm going to come back to you on this. Do you think this would help restore accountability of fund managers, many of them are handling trillions of dollars in retirement savings?
▶ 3:14:22Yes. Um, as Mr. Complain said many particularly for many of the smaller administrators there's no motivation for them to take the time to do an independent review and analysis and actually exercise their fiduciary duties before voting. um instead they have blind reliance on the proxy advisory
▶ 3:14:42and I would highlight here it also ensures that um this voting is optional which is important to protect uh you know our shareholders particularly our retirees from being dragged into these often very social focused political fights and allows them to just really focus on getting their retirement
▶ 3:15:01you think that's very important to do statutoily I mean the SEC's move that way in guidance but these these proxy adviserss came about in part because first the DO and then the SEC said well well you've got a fiduciary duty to vote here's a safe harbor and it really empowered these firms and so now while they've clarified this this could always swing back it could always change so I think making it clear in statute would be very useful Mr.
▶ 3:15:24Chair, I'd like to be able to submit for the record the letter here to the American Securities Association that details uh proxy power proposal abuse and the reform rules that we could go that complement the bill.
▶ 3:15:34Without objection,
▶ 3:15:36I'd like to just end now uh quickly talking about the SEC rules. Former Secretary Ginsler expanded the definition of solicitation to cover proxy voting advice. Normally, solicitation means directly asking someone for their vote. Ginsler went further. He said even research or recommendations from proxy advisers should count. So just the thought process versus the actual. Mr. Coleman, do you believe that the SEC exceeded their authority by going from um asking for it to just implying that people should be able to do this?
▶ 3:16:07Yeah, I mean the DC certainly certain certainly just said that um
▶ 3:16:11when they struck it down, you're exactly right. But but but you know it's it be that's why it's important for this body to act in this space I think because I do think that the proxy advisory firm should be regulated in some form.
▶ 3:16:21Yeah absolutely. Thank you Mr. Chair. Uh would yield back the remainder of my
▶ 3:16:25Gentleman from Iowa yields back. The gentleman from New Jersey Mr. Godheimer you recognize four or five minutes.
▶ 3:16:29Thank you Mr. Chairman. Uh Mr. Lander if I can direct a few questions to you and thank you for being here today. Uh the phrase globalizing into is an anti-Semitic slogan that refers to a wave of terror that killed more than a thousand Jews. Mr. Lander, Mr. Mandami recently said he'll quote discourage the use of the phrase globalizing, but has refused to condemn it as anti-Semitic rhetoric.
▶ 3:16:51You've also failed to outright condemn this phrase as anti-semitic and a blatant call for violence against Jewish people, which is obviously surprising given that anti-semitic violence, as you know, is at an all-time high in this country, including in New York and New Jersey where I'm from. I just want to know if you condemn the phrase globalizing fat as a call to violence against Jewish people.
▶ 3:17:09Uh I've made very clear on occasions that um when I hear that phrase, what's ringing in my ears uh is violence against Jews in the second inifatada and unfortunately here in the United States
▶ 3:17:25So you condemn the phrase? it's like a yes or no question. You're either for it or against it. If you I mean it's given what you said I assume
▶ 3:17:34I make clear that I I think when people use it they are saying open season against Jews.
▶ 3:17:41So we should make do everything we can to get people to stop using that phrase.
▶ 3:17:50Law against the phrase. I I guess what I would say when you say everything we can do I make clear how I feel about it and what I what I think when I hear it. Would I want a law saying it was banned? I would not.
▶ 3:18:03So that you think we should allow that and you think we should discourage it or condemn it? What do you think we should do on that phrase? You just don't want anyone can you won't even condemn the phrase. Even if you say we shouldn't have a law, do you condemn the phrase globalizing antifa?
▶ 3:18:17I mean, I've made very clear how I feel.
▶ 3:18:20It's just a yes or no, man. It's not that hard. But when you say anything we could do, are you saying that you think there should be legislation that would
▶ 3:18:27this question sir?
▶ 3:18:29The question is do you condemn the phrase globaliz? It's a tell me what you mean by condemn.
▶ 3:18:35You don't know what the word condemn
▶ 3:18:37You're very
▶ 3:18:37I'm afraid it means I think there should be legislation making it illegal to say. And I hate it. I like it. I don't like how it sounds. If I condemn, you mean I would support legislation making it illegal to say I
▶ 3:18:51I condemnal. I condemn lots of things.
▶ 3:18:54Do I think it's awful and I wish people wouldn't say it, then I condemn it. And if you mean, do I think it should be made illegal by legislation, then no.
▶ 3:19:03Got it. So I I sounds like I heard you say you condemn it. You personally condemn it. You would not say it. You think it shouldn't be said. I
▶ 3:19:12I would prefer people not say it. Okay, Mr. Lander, it's it's surprising you're advocating for free market policies and good corporate governance, which I support. Do you believe the government should be running grocery stores in New York City? Um I I am supporting as you know uh Assembly Member Mani and he is supporting five pilot grocery stores throughout the burrows uh in order to address grocery store costs by
▶ 3:19:38So you think government run stores exempt from property taxes and rent? You're not worried they're going to hurt small businesses like local grocery stores that are owned by longtime residents and immigrants and others because they'd have to compete with the the government run ones. I I mean we don't have enough information to know what the shape or the form of those stores would be and how competition uh would take place. I love my local bodega. I love my local grocery store. Yes, they are owned by immigrants. I want to see them thrive.
▶ 3:20:06Right? It'd be tough if they were competing against socialist driven.
▶ 3:20:09But then we have many places in New York City that are food deserts and have no good grocery store providing decent, nutritious, affordable food. And in those places, I don't see any harm offering addition. could have incentives like we've had incentives in other places to encourage.
▶ 3:20:23We have incentives. We have a program called the fresh program in New York City which my office audited and found that it's a pretty ineffective in uh
▶ 3:20:31Got it. But having the government going into run a grocery store is what you think is the solution
▶ 3:20:36in places where there currently are no grocery stores that are deserts.
▶ 3:20:41What would be the harm?
▶ 3:20:43Um I want to just talk about people from New Jersey who commute into New York to work to see doctors to spend money and contribute to the economy. We'd love to have them.
▶ 3:20:50Um, no, it's great that you love them. I mean, you obviously supported the congestion tax which is hurting them. Um, and the MTA, as you know, just recently announced that they will be increasing subway fairs, the very mode of transportation you are suggesting commuters take instead of driving, which is part of what it's encouraged. Do you support those price increases at the
▶ 3:21:05Uh, I support congestion pricing. As you know, we want to welcome folks from the at the MTA. Do you support those?
▶ 3:21:14I I don't support increase at the MTA.
▶ 3:21:16Okay. Right. because I worry that nickels and dimes, folks, it hurts a lot of people just like supporting a BDS movement would do the same thing and going after Israeli bonds and encouraging investment um which would would really hurt the economy of New York. And with that, uh thank you very very much and Sha Tova
▶ 3:21:33Sha Tova
▶ 3:21:34Joan yields the chair of our subcommittee on capital markets, Miss Wagner from Missouri, you're recognized for five minutes.
▶ 3:21:41Yes. Thank you, Mr. Chairman. And uh I want to make clear to my friend Mr. Godheimer that I absolutely condemn the phrase globalize the antifatada. So, as I know you do, too. Now, to the topic at hand. Uh, Mr. Mueller, there you are. Okay. I reviewed your firm's August 8th, 2025 report on the most recent shareholder proposal season.
▶ 3:22:05It caught my eye that 37 companies received a nearly identical proposal from the same proponent and that these proposals made up 18% of all successful no action requests this prior year. These numbers seem absolutely staggering to me. Uh so I want to dig in a little bit more. Can you tell me briefly uh a little bit about this proponent?
▶ 3:22:32for example, what did his proposal ask that each company do 37 times?
▶ 3:22:39Yes. He uh this was an individual named Chris Mueller, no relation. Um and he submitted three different types of proposals, all really addressing very technical issue about ownership of stock certificates in a certificate form instead of owning them through your bank or brokerage firm.
▶ 3:22:57Was he selling something?
▶ 3:22:59Um I'm sorry. Was he advocating on behalf of of something?
▶ 3:23:04It was not clear um why he was doing this. And he he typically owned very little stock in
▶ 3:23:10Yeah. How how many shares of each company did the proponent typically own?
▶ 3:23:13In most of them, he only owned one or two shares.
▶ 3:23:16Yeah. So, to be clear, the proponent only had one share of each company. This typically would not meet the rule 1488 ownership threshold. Correct.
▶ 3:23:28That's correct. And you're right that those companies still had to go through all the process that you do.
▶ 3:23:33So given that the proponent did not meet the ownership threshold, did companies ask the proponent to withdraw his
▶ 3:23:40What did he say?
▶ 3:23:41Yes, many uh many of my clients did. We always try to negotiate and engage with the shareholder proponent. And um typically his response was, well, if you do what I ask, then I'll withdraw my
▶ 3:23:54Well, if you do what I ask, wow, sounds like blackmail to me. To your knowledge, did some companies simply cave to his demand to purchase the software that he was pitching?
▶ 3:24:05I'm not aware of any of my clients that did. He did say that some clients companies did, but I don't
▶ 3:24:11Some did. Okay.
▶ 3:24:12There's no trans.
▶ 3:24:12I'm glad none of your clients did, but uh some certainly have. Uh if it was so clear that his proposal could be why did companies need to submit no action letters to the SEC? because they did and how do proxy advisory firms play a role in this?
▶ 3:24:32Yes. So the proxy advisory firms have um both of them have policies that if a company excludes a shareholder proposal from their proxy statement without having either a court opinion or an SEC no action letter that they will view that as bad governance uh regardless of the circumstances and will recommend votes against the directors. Well, while this is just one one of many examples, it clearly demonstrates, Mr.
▶ 3:25:00Chairman, just how broken our shareholder proposal process is. And under this flawed system, companies are often forced to waste valuable time and resources, finding proposals that are irrelevant to the company's bottom line, hurting investors and workers alike. Mr.
▶ 3:25:21Mueller, in your firsthand experience dealing with activist proposals and the bureaucratic hurdles that they create, what changes do you think are necessary to fix the system and ensure that investors investors again investors interests are put first?
▶ 3:25:38Sure. There's a number of helpful proposals in in the legislation, but raising the threshold um that a shareholder has to meet. Um certainly Mr. Landers has skin in the game, but not all of them do. Um eliminating um or raising the resubmission thresholds. And really, there's also a problem with just serial proponents. There are shareholder proponents that um will drop a proposal at a company every year. It may not be the same proposal.
▶ 3:26:09Um but they're just after some other game.
▶ 3:26:12And I thank you. And I'm sure there's others. I'd like you to submit them for the record. I'm I'm I'm proud to have my legislation, the Corporate Governance Examination Act, included as one of the bills the committee is considering in this hearing today. It requires the SEC to conduct a study at least every 5 years on the shareholder proposal and proxy processes.
▶ 3:26:31And this is then going to make sure that the process becomes unnecessary, doesn't become politicized and will help to inform both Congress and the SEC on changes that might be needed to ensure that we put investors first. I thank you, Mr. Chairman, and I yield back my time.
▶ 3:26:48Gentleman yields back. The gentleman from Florida, Mr. Donalds, you're recognized for five minutes.
▶ 3:26:52Uh, thank you, Chairman. Uh, it's good to be here. Was said earlier in this committee actually a couple of things. um that a lot of members were activists in their way to be coming to Capitol Hill. Um I was an activist locally in my community before I came to Capitol Hill.
▶ 3:27:07The thing we always advocated for was uh free markets um the United States Constitution and we didn't want to have um outside groups wielding this nefarious power to try to shift the very fabric of our capitalist system um underneath our noses. And it looks like what these proxy advisory firms have been doing is that very thing.
▶ 3:27:28They've been using um our system of free information as a way to shift the very nature of free market competitive uh economics um and actually substitute that with nefarious counterculturals countercultural socialistic policies that are not in the best interest of the United States. ESG policy is very indicative of that fact. And so this is a hearing that in my view is long overdue. Mr.
▶ 3:27:56Copelan, can you elaborate on how activists have hijacked a proxy proposal process to push left-wing ideology through corporations?
▶ 3:28:05Yes. Uh a very small percentage of of shareholders are introducing virtually all of these uh shareholder proposals. They're corporate gadlies. There's a guy John Chaveetan who this year gave himself uh proposed one-third of all shareholder proposals. Then you've got uh social investing funds with an express purpose that's that's different uh from just maximizing share value that introduce a lot of these proposals.
▶ 3:28:34And the other the other block are really labor affiliated funds. They could be private labor unions like the contractors union. They could be public pension funds for for public employees such as the New York City funds that that uh Comproller Lander works on and and that that's really who supports all these proposals. None of the other other uh uh institutional investors that are simply focused on the markets do that. Now, some of them vote for them
▶ 3:29:00uh in part because the proxy advisers are are directing them to telling them to and they they defer to those proxy advisors or in part because they're passive index funds and they've been captured. They they've gotten a little better in the last year. Uh but but they've historically uh gone for this. But you know, they don't really have skin in the game in any of these companies because they're just mirroring the stock market.
▶ 3:29:20No, I agree with you. And I I found like some of those funds, social advice, social impact funds. The performance is actually worse uh than funds that are actually looking for value, which is a detriment to the shareholders across the board. Uh Mrs. Heel. Do proxy proxy advisory firms have fiduciary duties to the companies or shareholders that they are advising?
▶ 3:29:42They do not have any fiduciary duties to the companies that they are advising and they're imposing these standards on and you know kind of an implicit threat to follow their regulations. Um some of them ISS does have a fiduciary duty to its clients because it's regulated under the investment advisor act but Glass Lewis is not. Um, so I think that's an important distinction because it, you know, they do the exact same thing. And so it's a query in my mind as to why one of them is is is regulated. And I should also mention that it's a very very light touch regulation.
▶ 3:30:11Um, but it doesn't really make any sense that one would be regulated and one is not.
▶ 3:30:15Okay. You know, this hearing got really interesting a little bit ago with uh my colleague from New Jersey. So Mr. Lander, I have to come to you. You're the controller of the city of New York. Um, you talked about the proposal by Mr. Mdani for government-run uh, grocery stores. Do you think that's a viable proposal for the people of the city of New York?
▶ 3:30:37Uh, all around the country, there are quite a few places where there are publicly owned grocery stores designed to offer healthy, nutritious, affordable food in food deserts where people have no other options that is working in red and blue states around the country.
▶ 3:30:52Mr. Lander, you do realize that these grocery stores have less product available. The food is not nearly as good. Some of them shut down. The standards in them are quite frankly disgusting. Do you think it's in the interest of the people of New York to open this up? And by the way, I'm from Brooklyn, New York. So, I've grown up in the city.
▶ 3:31:11I'm I'm so glad to hear it. But if you were in if you grew up in low-income neighborhoods in Brooklyn,
▶ 3:31:16sir, I grew up in Crown Heights, Brooklyn, a low-income neighborhood. Then you would have seen that many of the private owned stores nearby had low quality and high prices the business of distributing food when I was a kid. The city of New York used to distribute food. They got out of that business. They did when I was a kid.
▶ 3:31:32We still provide a whole lot of free meals in our summer camp programs in our after school programs and in our schools that enormous number of low-income and working-class families rely on. That is
▶ 3:31:42We're claiming my time yet. Last question for you. Can you condemn the phrase global antifile?
▶ 3:31:50I made real clear. If you mean I don't think people should say it, I condemn it. If you want to make it condemn and send people to jail for saying it,
▶ 3:31:57gentlemen's time.
▶ 3:31:59This is why the city of New York is going down the toilet. I
▶ 3:32:02It's doing great. Thank you. Come back and visit.
▶ 3:32:04Time is expired. Thank you.
▶ 3:32:07Now, the gentleman from Wisconsin, Mr. Style, who chairs our digital assets, financial technology, and AI subcommittee is recognized for five minutes. Thank you very much, Chairman Hill, and thank you for holding today's hearing. Uh, this is a really important topic that we need to discuss, but it tells you a lot about the state of the Democratic Party where their witness has to come and defend governmentrun grocery stores. Tells you a lot about the state of the Democratic party.
▶ 3:32:34But let's let's dive into proxy adviserss because I think that is one of the biggest unknown ch unknown challenges that we face. The proxy advisor duopoly run by foreignowned operations as highlighted by Mr.
▶ 3:32:48Copelan that is not properly regulated as highlighted by Miss Keel sets us up for an opportunity to stop the abuse that's been occurring in Americans retirement accounts their 401ks and their pension plans which have been weaponized to deliver a political agenda rather than to prepare them successfully for retirement.
▶ 3:33:10I in particular want to talk about potential conflicts of interest and whether or not that conflict exists inside ISS in Glass Lewis who are providing two key services at the same time and claiming that there's not a conflict on one side of the ledger. They're advising asset managers about the underlying shareholder proposal votes. Is that correct, Mr. Copelan?
▶ 3:33:34Yes. And on the other side, are they also providing advice and consent to the companies that they're advising upon?
▶ 3:33:42So they're being paid on one side by asset managers to review proposals that will directly impact management and on the other side they're being paid by management to provide consulting services. Is that right?
▶ 3:33:55That seems like a conflict of interest,
▶ 3:33:58It does to me. And so one of the best ways that we address conflicts of interest is we disclose information to the public. Sunlight is often the best disinfectant. And so it would be rational to me that the Securities and Exchange Commission would come in and force ISS and Glass Lewis to disclose any conflicts of interest when they're on both sides of the ledger. Do you agree that that's a reasonable proposal, Mr. Copeland?
▶ 3:34:22It's reasonable to me. And does does the Securities Exchange Commission require this type of disclosure? doesn't. Um there were efforts made. So in 2020,
▶ 3:34:35there were there were there were efforts made, right? And you come in and we have a proposal that then is struck down by by Chairman Gensler. But you could come in under this securities and exchange commission in and the in Atkins and the team at the SEC could come in and force those disclosures be by assessing less Lewis ultimately, right? It's been it's been litigated in court and courts are are coming down in slightly different ways.
▶ 3:35:00I mean, I think it's why this this body ought to act probably because you ought to make clear uh that that proxy advisors, you've got a I think you've got a bill in here that would have them be registered, right, with the SEC.
▶ 3:35:12My bill does does exactly that. And so, Miss Ke, where your comment that only ISS has some basic level of of regulator regulation on them. Glass Lewis is pretty much outside the structure. You would encourage the the Congress to pass legislation that puts both of them uh under a regulatory environment. And there's Securities and Exchange Commission, right?
▶ 3:35:31Absolutely. I think that would be welcome to have um regulation at the federal level.
▶ 3:35:35And Mr. Mueller, you would agree?
▶ 3:35:38What What do you think the risk is, Mr. Mueller, to folks that are saving for retirement? People that have funds uh that are ultimately uh being voted on by these large asset managers as they prepare for retirement, could be in a 401k, uh could be part of a pension plan. um that the underlying vote on shareholder proposals is being driven by two proxy advisors, one uh ISS and both Glass Lewis, which are owned by entities outside the United States.
▶ 3:36:07What does that say to Americans saving for retirement? Well, the the concern is whether Americans can trust that their uh votes are being used productively or whether they're being used to help enrich these two firms with their advisory services.
▶ 3:36:22And have we seen instances of that? Have you seen, for example, oil companies being told to stop producing fossil fuels or have you seen a um an insurance company being told to price uh insurance based on race, which is obviously illegal? Have we seen these types of recommendations by this duopoly? We've seen them supporting shareholder proposals that has to interfere with the company's business. Yes.
▶ 3:36:46So not in the best interest of Americans who are trying to prepare and save for retirement. Instead, we've seen it hijacked by a duopoly, foreignowned entities, not disclosing conflicts of interest. This seems incredibly problematic. We have an opportunity to act here. I've had legislation that I've introduced Cong time and time again. It's time that we move this all the way across the line.
▶ 3:37:07The Securities and Exchange Commission comes in, ends this duopoly, and finally stands up for the American people who are working their tails off to save for retirement so that their retirement funds are not being hijacked to deliver the political agenda. These proxy advisors yield back.
▶ 3:37:21Gentleman yields back. The gentleman from New York, Mr. Garbrino, the chair of the House's Homeland Security Committee. You're recognized for five
▶ 3:37:31Uh, thank you very much, uh, Mr. Chairman. I thank the witnesses for being here today. Uh urgent reform is necessary for the shareholder proposal process. What once was a mechanism for de dem democratizing shareholder oversight has been increasingly utilized by activist shareholders to push niche policy objectives that do not align with maximizing shareholder value.
▶ 3:37:53This untethered activism diverts significant resources and management attention from fundamental business matters thereby undermining market efficiency and discouraging firms from becoming publicly traded. Mr. Copeland, do companies feel that they have to hold votes on certain proposals for fear of public scrutiny?
▶ 3:38:13Yes, under the current rules.
▶ 3:38:15So, what are some of the ramifications that they are they're afraid of?
▶ 3:38:20Well, you know, things can be misported in the press. uh the proxy advisory firms can treat these advisory or predatory proposals as effectively binding and and vote against their directors. Uh if the company doesn't act if the board doesn't say with our fiduciary duty, we disagree. Uh they could be asked to violate that or or we're going to vote no on your directors next time as a proxy advisor. And they'll do that.
▶ 3:38:46You Glass Lewis expressly does it when 70% of the shareholders vote no on the proposal. I mean, that's insane.
▶ 3:38:54It's It's definitely insane. Goes after what these directors are supposed to be doing, what the company is supposed to be doing for their shareholders. Uh, under former SEC chair Gensler, uh, thank god he's gone. Uh, changes to proxy rules made it easier for special interest groups to include politically motivated shareholder proposals in annual annual statements, reversing prior reforms.
▶ 3:39:16From 2020 to 2024, the total number of proposals grew with environmental and social proposals on topics such as climate change, DEI, human rights, and lobbying seeing a 59% increase and becoming a dominant part of the shareholder landscape. Mr. Copeland, is the I mean this is an obvious answer uh I think, but uh is the shareholder proposal process being abused by these special interest groups?
▶ 3:39:45Yes. So go I want you to go on record and talk about some of the examples uh that have for this abuse.
▶ 3:39:52Yes. I mean we and I've pointed to these for years where you know a a a shareholder will buy a small amount of shares uh you know for instance an animal rights group like PETA and Levis and talk about like leather patches on the jeans and get on the agenda with with small amounts uh of shares on this.
▶ 3:40:13When you say small, what do you mean?
▶ 3:40:14Yeah. a few thousand dollars. Yeah. Which which would be enough to get uh over the threshold. I mean, if the thresholds go up, they'll get a little
▶ 3:40:22Um we actually found we did we commissioned a study when uh Comproller Landers uh predecessor Scott Stringer launched his boardroom accountability project and really I mean as as Representative Velasco said, you know, the New York City pension funds have been playing politics for years uh with with corporate proxies, but he really ratcheted up to another level. So we commissioned a study by Tracy White at University of Tennessee and found not only a negative association in terms of share value with the environmental and social activism that uh public pension funds were engaging in.
▶ 3:40:51But we found they typically invested less relative to other companies in the companies they were engaging with. So they weren't really putting their money where their mouth was. They were buying enough stock uh in these companies but not as much. So um we've seen individual shareholders make a living out of this. I mean, the late Evelyn Davis was one of the early corporate gadflies. She used to make $600,000 a year selling a 12-page booklet to corporate CEOs, and you had to buy two, and she charged like $650 per booklet.
▶ 3:41:20Um, basically because they wanted to stay in her good graces. They didn't want her to target them. I mean, it's it's rife with abuse.
▶ 3:41:27Absolutely. And and what's even worse is I think a lot of these proposals less than 30% uh of participation vote totals indicates that this is out of step with most shareholders. Um switching gears a little, investment advisors rely on proxy advising firms to help meet their fiduciary duty by providing research, voting guidelines, and support for thousands of votes each year.
▶ 3:41:51While we can all acknowledge all a need for reform, we must also take into account the costs that come with the legislations for advisers of all sizes. How can Congress scope and regulators ensure reforms preserve the independence and availability of these services without adding costs or barriers uh that impair advisers abilities to vote for their clients?
▶ 3:42:11Well, I think the collocical we had with Representative Style a minute ago was was instructive. I mean, I think they should be registered. I think they should have oversight. Um, I think there should be disclosure. I think there should be disclosure on the institutional investor side. If they're utilizing the services, certainly if they're robo voting the services, uh, if they're just deferring to the proxy advisor, all of these things could help.
▶ 3:42:35Thank you. I'm I yield back. Thank you.
▶ 3:42:37Gentleman yields back. Gentleman from Wisconsin. Mr. Fischer, you're recognized for five minutes.
▶ 3:42:42Thank you, Mr. Chair. I'd first like to ask unanimous consent to submit a letter titled proxy power and proposal abuse to the record.
▶ 3:42:52Without objection.
▶ 3:42:55Uh thank you gentlemen for being here and Mrs. Frell Keel. Thank you. um uh trying not to be redundant, but I wanted to go back something and say it kind of just in black and white, and that is ISS and Glass Lewis leverage their control of the proxy advisory market to encourage us companies to purchase their consulting services. That's happening.
▶ 3:43:23Creating that appearance and and doing so, it may help to avoid the negative voting recommendations. But Mr. Mueller, in your experience working with public companies, what risks do you see when proxy advisory firms issue voting recommendations while also selling consulting and advocacy
▶ 3:43:46Well, I'll address three real quickly. I mean, first, it encourages the firms to have a lack of transparency so that you have to buy their services to know how they're going to recommend on something. And it also encourages kind of a check the box approach by the proxy advisory firms because they do maintain an ethical wall. But if both sides of that wall have the same checklist, then that wall doesn't matter. Um there's still a conflict of interest.
▶ 3:44:13And then of course um shareholders and companies are the ones that are suffering from the from the votes. um their the customers of ISS, as we've heard, may not have the economic um incentive to um exercise a lot of scrutiny on those voting recommendations, but they're not the ones that are hurt. It's the shareholders at large and the companies that suffer from the voting recommendations.
▶ 3:44:40So, in your estimation, is there any way for this to be um kind of shifted or changed in a way that would eliminate the conflict, or is the only way to really get rid of this the way we're addressing this with legislation, which is to simply sever the ability to do that to to get rid of the conflict.
▶ 3:45:00There should certainly be regulation because right now the SEC has its u has its arms tied behind its back on this. And yes, they should certainly evaluate. I mean, certainly, for example, audit firms are not allowed to both audit a client and give certain consulting services to those clients. It's just an irreconcilable conflict and is prohibited and that may be the solution
▶ 3:45:27Mr. Copeland uh turning to you based on your research and the analysis of the shareholder proposal process. Can you discuss how recurring or the uh duplicative proposals affect the efficiency and the clarity of the proxy materials that people are receiving um ve very often and and in a way that sometimes is nonchalant. It's it's simply mailed to them and uh they're
▶ 3:45:53Yeah. It's it's it's can be hard to figure out. I mean, if you've got two proposals on similar subject matter, uh, you know, are you going to really tease those apart? Well, and then what if what if shareholders vote yes on one and no on another and it's sort of ambiguous or there's conflicts. The recurring issue because the resubmission thresholds have traditionally been so low. U, proponents can get these on the ballot year after year after year after year.
▶ 3:46:18and the proxy advisers take the odd position that if if it fails year after year after year after year and then one year it it it it gets a majority, they've got to act on that or we may vote against your directors, uh even though it could potentially flip back the next year. So, it's it's it's kind of a mess. Uh, I didn't put much in this testimony about it, but I put a lot more in my 2016 testimony and in comment letters to the SEC in 2020 and 2022 on this issue, and they're they're all referenced in my written testimony.
▶ 3:46:48Yeah. So, do you currently believe the thresholds for resubmitting the failed proposals, which is kind of a whole other area. Um, you didn't get the outcome you wanted, so you simply bring it back again, maybe with different verbiage, right? could be different, could be the same verbiage. If if if if it hits above those relatively modest thresholds, they can keep doing it year after year. So, if you get a proxy advisory firm that likes it, it's going to stay on the ballot in perpetuity effectively.
▶ 3:47:18Uh even if people continue, even if the vast majority of shareholders vote vote against it year after year.
▶ 3:47:23Thank you, chairman. I yield back.
▶ 3:47:27Gentleman yields back. The gentleman from Nebraska, the chair of our housing and insurance subcommittee, Mr. Flood, you're recognized for five minutes.
▶ 3:47:34Thank you, Mr. Chairman. Uh, as we've talked about today, we have an increasingly alarming problem as it relates to shareholder proposals in this country. 62%. That's the number I want you to remember. In 2024, environmental and social proposals made up 62% of total shareholder proposals, according to a report from ISS corporate. Think about that. More than 60% of shareholder proposals last year were related to environmental and social topics.
▶ 3:48:05That's a really staggering total and it's one that should alarm everybody on this committee. We have activists treating public companies as their own personal forum for social and environmental change. And quite frankly, it's a waste of time and it's a waste of money and it's ultimately sucking productivity out of our economy and into organizations that seek to perpetuate endless social and cultural war in corporate America.
▶ 3:48:34Something that I don't think proponents of progressive social and environmental shareholder proposals fully understand is that with the door open to political shareholder proposals, we're now seeing politically motivated shareholder proposals coming from now both directions. According to a Financial Times article from last week, US shareholders did not pass a single environmental shareholder proposal in 2025.
▶ 3:49:02On the other hand, anti-ESG proposals are incre increasing in frequency. According to a recent study, anti-ESG proposals increased, get this, from 23 to 24 in the 500 largest US public companies by revenue. So, if we don't act, I fear we're seeing the beginning of what's likely to become a pattern. In years when the cultural momentum is moving to the left, we have a surge of environmental and social proposals.
▶ 3:49:30And in years when we have a cultural movement to the right, we're going to see more anti-ESG shareholder proposals. The end result is that we never actually address the underlying issue of activist shareholder proposals. Instead, these investors will use our public companies as a political football and we will see them whipssaw from one set of cultural objectives to another. Mrs.
▶ 3:49:52Keel, in your testimony, you highlighted one example of a shareholder proposal that would have asked a store that sells hammers and nails to make a public statement on abortion. Let's use that particular proposal as an example. What kinds of costs would the company incur on a single proposal like that in terms of money, employee time, and legal
▶ 3:50:14Sure. So when you think about how a company would analyze that coming in, they would have to think about um their internal policies, procedures, how they're currently addressing these, you know, issues of healthcare with their own employees. What sort of information would they have to disclose with what this report is requesting of them? But I think the bigger point maybe is the is the intangible kind of cost, right, of taking a stance on something that is so polarizing and personal.
▶ 3:50:36And so they're being asked to come out and make a stance take a stance on something that you know employees c customers suppliers everyone's going to have a different view and it's really has nothing to do with the business and so query why they're having to address it in their proxy statement.
▶ 3:50:50I appreciate that. You know think about a steel worker in my hometown. Believe it or not we make steel in the middle of the prairie in Northfor Nebraska. Their retirement is underpinned by mutual funds investments in public companies. They go to work every day and they watch that balance and they want to know that if America's booming, so are they. But instead, some activist shareholder gets in there and starts messing with that steel worker's future and their balance. And I I think you make a very good point there.
▶ 3:51:20I think it's important to highlight these are frivolous proposals that are not victimless and they aren't costless. These activists are using our capital markets to play these games. Uh, I'd like to speak briefly on the proxy advisor firms and their extreme power in this story. In an article recently published by the Financial Times, I was struck by a quote about the proxy advisor firm ISS.
▶ 3:51:41Mark Lindseay of Jasper Street, uh, which is a firm that advises public companies or shareholder proposals, said the following when asked why zero environmental shareholder proposals passed this year. He said, quote, "Every environmental proposal that has passed had ISS as a supporter, and this year, no proposals have ISS as a supporter." Mr. Copelan, can you speak to the weight of an ISS recommendation in the result of shareholder proposals?
▶ 3:52:11Studies vary on it. We did one in 2012 and and what we found using the data set we were looking at was that an ISS uh was about a 15 percentage point bump in favor of a of a shareholder proposal. I've seen higher estimates, I've seen lower estimates. Um it probably depends a lot on company size uh in terms of of of how much delegation to ISS there'd be on the part of the institutional
▶ 3:52:36I appreciate that. And with that, I yield back.
▶ 3:52:39Gentleman yields back. Gentleman from Indiana, Mr. Stman, you're recognized for 5 minutes.
▶ 3:52:44Thank you, Mr. Chairman. The shareholder proposal process we're discussing today was originally designed to give investors a voice in the companies they are shareholders of. But today, the process has been hijacked. A small group of activists will buy just enough shares to qualify under the law, then flood companies with radical social and political proposals that have nothing to do with profits, jobs, or innovation.
▶ 3:53:08Instead, they force businesses into costly and divisive debates on things like climate change, DEI, abortion, and gender ideology. And it's not just companies on Wall Street in the crosshairs. It's businesses across the country, including those in Indiana that are targets as well.
▶ 3:53:28Cumins, headquartered in Columbus, Indiana, was the target of a resolution demanding that it tie its executive pay to unrealistic climate targets that would destroy its business. Eli Liy, another Indiana based company activist, demanded that it divert critical resources towards a report on DEI hiring quotas instead of focusing on its core mission of developing life-saving medications. These activists are not hiding the ball either.
▶ 3:53:59Groups like As You Sew flaunt their proposals on their website, and I encourage those watching at home to look for themselves and see how extreme these proposals truly are. Here's one for Amazon in which activists successfully pressured the company into hiring an expensive law firm to conduct a full-fledged racial equality audit. In fact, over 30 American companies ranging from Uber to Chipotle have been pressured into similar audits.
▶ 3:54:29Here's another for Coca-Cola that demanded they study how to increase abortion access for their employees. Here's a similar proposal for McDonald's that asked the company to explore gender affirming care for employees children. Since the barriers to entry are so low, all it takes is a few thousand dollars for these activists to propose these radical ideas and have them included for a vote. Thank you all for being here today.
▶ 3:54:57Miss Keel, I know you spent a lot of time working with companies that receive these type of proposals. How difficult is it for companies to combat these proposals and what are the costs for those that choose to do so?
▶ 3:55:10Sure. So there are a few different ways you can go about it and I think um one important word to focus on is combat, right? I don't I don't think it necessarily it would be ideal, right, if we weren't thinking of it in that direction and instead we were able to think of it as are we deciding what's material to our investors and what we're going to put on our proxy statement. Are we exercising a legal right by going to court and trying to understand the application of these rules? I would not consider those combative. I would understand those explain those as exercising one's legal rights.
▶ 3:55:38But yeah, it's inordinately expensive both in terms of legal fees, but then also in terms of making the headlines, right, and and navigating the discussions with your shareholders and customers and suppliers. That's um very taxing on
▶ 3:55:49Are you seeing a lot of activity in relation to this sort of action and uh investors that are pushing companies has just calmed down a little bit or we still seeing quite a bit of activity?
▶ 3:56:00It's heightened more than ever and I think we see that because we see both left and right activists, right? And to Mr. Copan's point, you know, we'll see that on the same proxy statement, a prodei proposal and an anti-Dei one, and a company can be a bit stuck in the middle, if you will, on how to address
▶ 3:56:16Yeah, Mr. Copelan, I've got a question for you. Something we've heard about today is the need for more transparency from proxy advisory firms. And there's little doubt about the influence these firms have over the outcomes of proxy voting and their lack of transparency. And it's certainly caused for concern. Just two proxy advisory advisor firms, ISS and Glass Lewis, control 90% of the market, yet lack any sort of meaningful oversight. As a result, we've have little information about the independence of their recommendations or potential bias.
▶ 3:56:47Do these proxy firms tend to favor certain types of proposals? And also specifically, do they give more support to leftleaning ESG and DEI proposals than do proposals that might reflect conservative
▶ 3:57:00Historically, yes. Right. I mean they as has been mentioned there was sort of a pullback this year uh from ISS on on some of his recommendations but historically uh we've seen upwards of 70% upwards of 50% upwards of 30% of various sort of left-leaning ENS infllected proposals and essentially never support for more free market or or conservative proposals on the other
▶ 3:57:26Yeah. Very good. Thank you, Mr. Chairman, for having this hearing today. I've seen this, you know, uh, up close and personal in some of the companies and my private uh, activity before and and it can cause real problems. So, thank you for bringing awareness to this and I appreciate the the witness's testimony as well. I'll yield back.
▶ 3:57:43Thank you. The gentleman yields back. The gentleman from New York, Mr. Lawler, you're recognized for five minutes.
▶ 3:57:48Thank you, Mr. Chairman. Mr. Lander, the New York State Controller, Tom Denapoli, just put out a report that 1.2 2 billion in taxpayer money was spent provi paying for health care premiums for Medicaid recipients who no longer live in New York State. Have you seen that report?
▶ 3:58:06I have not reviewed that report.
▶ 3:58:09Are you going to review that report?
▶ 3:58:10I'm absolutely going to review that report. We cannot afford to be uh and I assume you're representing it accurately doing anything like that.
▶ 3:58:17This is Tom Dapoli's own
▶ 3:58:19I believe you. I just haven't had the chance to to
▶ 3:58:21Okay. So you will be evaluating the impact on New York City. Absolutely.
▶ 3:58:25Okay. Do you support the use of taxpayer money that has been used over the last few years in New York to provide health care for illegal immigrants?
▶ 3:58:36Um where I mean the short answer is yes. Where folks are undocumented but they are working in New York City. It is so much better to for them to have access to primary health care uh than it is for them to wind up in emergency rooms in ways that bear much greater costs. So, so you just distinguish if they're working. If they're not working, do you support the use of taxpayer money to provide free health care for illegal immigrants that are not working?
▶ 3:59:05I mean, the primary care approach is what we generally try to use through our federally qualified health centers. If someone is brought to an emergency room, do I think that their life should be saved rather than worrying about their immigration status or how they pay for their healthare? I do certainly that is the law and hospitals do provide that
▶ 3:59:25But specifically in New York, billions of dollars of taxpayer money has been used to provide free housing, clothing, food, education, and health care to illegal immigrants. regardless of whether or not they are working or not. And we have seen obviously in New York City in particular, the city of which you are the controller, billions of dollars of taxpayer money being used.
▶ 3:59:50Do you support the use of those funds to provide free health care to illegal immigrants? That's what I'm asking. It's yes or no.
▶ 3:59:57And I answered yes. Billions of dollars being generated by folks who are undocumented in taxes and revenue for New York City and New York State as well. There's no question that immigrants contribute greatly to our economy. The issue here has been, as you well know, in New York, okay, hundreds of thousands of migrants coming into the city. The city has crippled under the weight of that cost.
▶ 4:00:21Okay? Those are the words of the mayor. Those are the words of
▶ 4:00:25I have financial oversight. I can tell the words of the elected officials in New York City that New York City voters duly elected. Now, you called yourself in 2016 a Brooklyn Jewish Democratic And so, my question to you is
▶ 4:00:41in that article, just to be clear,
▶ 4:00:43and my question to you is,
▶ 4:00:45what is your relationship with the Working Families Party of New York and the Democratic Socialists of America New York City chapter?
▶ 4:00:54Uh, of the Working Families Party, I am a member and a donor of the Democratic Socialist of America. I am not a member or a donor.
▶ 4:01:02Do you support the DSA of New York City?
▶ 4:01:05I'm not a member or a donor to the DSA of New York City.
▶ 4:01:10There is a lot of overlap between the DSA of New York City and the WFP of New York. Do you support the work of the DSA of New York City?
▶ 4:01:20There are things they have proposed that I have supported like raising the minimum wage and there are things they have proposed that I do not support like
▶ 4:01:28Okay. So, with respect to BDS, and I'm glad you brought that up, uh, the DSA of New York City just adopted a resolution as part of this national convention. They want to expel members who do not comply with their extremist views and specifically anyone who supports Israel's right to defend themselves. Do you oppose that position in their platform? Yes. Okay.
▶ 4:01:56Zoran Mandami, who you support for mayor, uh is fully endorsed and embraced by the DSA of New York City, and in fact just the other day said that Israeli bond investments violate New York City values. Do you agree with your endorsed candidate for mayor that Israeli bond investments violate New York City values? So, I am the fiduciary for New York City's investments and I make those decisions based on that fiduciary obligation.
▶ 4:02:26Uh, first I'll broadly say I don't support BDS. As I said, uh, New York City's pension funds under my watch have over 300 million uh, dollars invested in Israeli companies. We do not have Israeli bonds because we do not broadly have foreign bonds in other countries in Canada or England or France. Um, and
▶ 4:02:46do you think Israeli bond investments violate New York City values? Do you agree with Zoran Mandami?
▶ 4:02:53My job as controller is not to assess.
▶ 4:02:56It's a pretty It's a pretty straightforward that you as controller should have duty to figure out best risk adjustment time. So you slightly support I did not think that the Israeli bonds that were held in the
▶ 4:03:11The time has expired. I'm sorry. You can continue this uh uh in writing at the request of Congressman Lawler
▶ 4:03:20or after the meeting in the hallway. Um we now recognize the gentleman from Montana, Mr. Downing. You're recognized for five minutes.
▶ 4:03:28Thank you, Mr. Chair, and thank you to the witnesses here. you know, as a former commissioner of securities, uh, I had, you know, certain interactions with the, uh, former administration of the SEC, Gary Gendler, and, uh, when he would bring things down such as, uh, you know, rule promulgation, non-mandatory climate disclosures, and some other things, I would reach out to him and say, "My job as the commissioner of securities is to protect investors. Your job is to protect investors.
▶ 4:03:56Let's both stay in our lanes here." And that was a a common uh, refrain there. And uh another short story is I was also the commissioner of insurance and uh I had a meeting with a reinsurance group uh who I won't name here talking about the risk that they were pulling out of they're pulling out of uh oil and gas.
▶ 4:04:16They were pulling out of they said animal rights issues and some other things and that kind of raised my interest and I uh said hey I come from a state where we have more cows than people and we plan on eating them. Is that going to be a problem? And their response was we're not sure.
▶ 4:04:31And so fast forward a little bit, I had under the condition of confidentiality a reinsurance group come up to me telling me about their um uh their their shareholders, their proxy votes, and they said, "We are being pressured to take these positions on ESG issues that we do not believe are in the interest of our business." And that really caught my attention. So all of this stuff that I'm dealing with as a commissioner of securities and insurance is coming from something that has another goal.
▶ 4:05:01And my theory there was that, you know, folks that didn't like certain industries, that didn't like oil and gas, didn't like agriculture, whatever it is they didn't like, couldn't shut it down from the front door. So they were trying to come from the back door and make sure you didn't have access to capital markets and make sure you didn't have access to insurance. And so I'm going to start here on uh proxy advisors. Thank you for bearing with me on that. Um, today we have a duopoly with ISS and and Glass Lewis making up 97% of the proxy advisory market.
▶ 4:05:28And often it seems like these firms care more about pushing a social and environmental agenda on public companies than doing what is best for their shareholders. In fact, proxy advisor firms have no legal obligation to act in the best interest of their shareholders despite having enormous sway. I'm going to start with Mr. Copeland. How does this lack of a fiduciary duty for proxy advisory firms impact the quality and the objectivity of their recommendations?
▶ 4:05:55Well, I mean it has to. There's really no check on them. Uh they can say to some degree whatever they want. I mean they you know there there's going to be anti- fraud uh repercussions they could face etc. But but um you know it's not a clear fiduciary situation, right? Right. I mean, they're they're contracted with with other fiduciaries, right? But it's but so it's it's tricky, but but it certainly affects the quality.
▶ 4:06:19Yeah. It really is a shame that the previous administration focused on the needs of activists rather than the needs of everyday investors. And the SEC under the previous leadership essentially encouraged activists to force companies to consider and adopt policy changes that Joe Biden and the Democrats could not get through Congress. Thankfully, SEC Chair Paul Atkins has already rescended some of these decisions that permitted the worst abuses of the shareholder proposal process. Um, I'm going to move on to Mrs. Keel.
▶ 4:06:49In June, the DC District Court upheld the SEC's 2020 amendments to rule 148-8, which set eligibility requirements for submitting shareholder proposals in proxy statements. The court found that the SEC acted appropriately in updating the rules to increase ownership thresholds and support levels required for proposal resubmission. Do you think the SEC should consider raising the current submission and resubmission thresholds
▶ 4:07:16I definitely do. Um, from an ownership standpoint, you know, I think it's important in a lot of areas of securities, we really try to align the people with influence with the an economic interest and skin in the game. So we do that for directors, we do that for um you know the kind of real activists, not the you know the activists that we're talking about today. We do that for employees and executive officers. Um but here we don't really have that any economic alignment there to kind of safeguard against somebody you know exploiting it with their own interests.
▶ 4:07:45On the resubmission thresholds definitely um I think that when we ignore the majority of a shareholders vote on something it's really ignoring their voice. And so if we're talking about shareholder democracy, you know, we really should respect what they have to say.
▶ 4:07:59Right. Thank you. And and shifting gears a little bit, you know, you know, there's obviously costs in terms of time, resources, legal fees, and responding to engaging with shareholder holder proposals. Do you have any thoughts on whether these costs increased during the Biden administration and roughly by how much?
▶ 4:08:17I don't have a dollar amount but I would say that the cost is um indirect really because it was been it's been the you know the pressure on the companies to adopt these disclosure standards and you know one statistic I found you know is that it would take you know about half a million dollars to do a sustainability
▶ 4:08:33Gentleman's time's expired.
▶ 4:08:35Uh thank you Mr. Chair I yield. Thank
▶ 4:08:37Gentleman yields back. Gentleoman from South Texas Miss Dela Cruz you're recognized for five minutes.
▶ 4:08:45Thank you Mr. Mr. Chairman, and thank you to all of our witnesses for being here today. As a South Texas member of Congress, I come from a district where we are hardworking, bluecollar, entrepreneurial, and really Most people I know walking into my local grocery store and um familiar faces.
▶ 4:09:10I can tell you that the money that they earn and that they invest, they want to know that that money is growing for their future, for their family's future, and not to promote a political agenda.
▶ 4:09:27So, I'm grateful for you all to be here today to discuss this important issue because there are some activists that are using this system to advance their agendas rather than maximize shareholder value for our constituents. That being said, Miss Keel, I think for some people back home, it's hard to understand what the rule really is.
▶ 4:09:56and just the basics of it, how it impacts. So, if you were talking to my person in rural Texas, could you give us some basic information about this rule and how it greatly impacts their life in George West, Texas?
▶ 4:10:14Sure. So, the rule basically was, you know, came into effect in the 1940s. Um, and the purpose of it was to bring uh matters of concern to their fellow stockholders. So it's meant to bring um have stockholders have access you know to management but over the over the years what we've seen is that it's not really bringing matters of concern to their fellow stockholders. It's bringing matters that are concerning to them and you know very narrowly just them.
▶ 4:10:42So right now we'll see lots of um shareholder activists from both the left and the right will submit proposals relating to all sorts of issues. Some are governance, um, some are compensation, and then we have a lot of proposals on what we call the E and the S, so the environmental and the social. Um, and those are going to be addressing, you know, highly politicized topics that, you know, reasonable minds can certainly disagree on.
▶ 4:11:05Um, and so once they submit those to a company, a company will be obligated to consider that and put it on its proxy statement unless it can um, unless it decides to exclude it. And then there's an entire process for having that for going through that process. So you mentioned that these are activists from the far right and the far left that there is an issue here that we need to address and that issue needs to be rational guard rails to put in place.
▶ 4:11:35So this should really not even be a partisan issue. This should be a common sense issue. What guard rails could you share with my constituents listening today that would be very effective? Sure. or the simplest one is really a threshold um of ownership, right?
▶ 4:11:52To ensure that there's some sort of alignment that somebody is not just buying $2,000 worth worth of stock, which is not to say that that's not a lot of money, but to be able to influence um the policy of a Fortune 500 company for that amount is there there's a big a big gulf there.
▶ 4:12:08Um so I think that that's what would be the most important thing is that they as shareholders and the pension funds um the 401ks that they've worked so hard with you know they want people to be bringing uh proposals of value to the stockholders that they can consider interesting ideas not um ideological agendas that are narrowly uh sometimes tenuously would be maybe a generous word connected to a company.
▶ 4:12:32So what I hear is ownership is vital to having a voice and putting your opinion into the agenda and into the future proposals. Is that
▶ 4:12:43Yes. Now, thank you. I thought that your written testimony, especially your explanation on the company intake and response process to shareholder proposals was helpful in showing just how costly and timeconsuming they can be. Can you please briefly walk us through this response process?
▶ 4:13:03Sure. When someone gets a proposal, you know, first they're going to say if they've ever actually already addressed it. In many instances, they will have already considered it. But if not, they're going to really have to think, a company will have to think about how it could impact the company. A lot of potential harms here. Legal privilege, disclosing confidential information, disclosing strategies, disclosing um sensitive information for employees. Um sometimes it won't even be legal, right? So they have to analyze that.
▶ 4:13:27Um, and then they have to analyze whether it would harm the business or whether there would be a, you know, cost benefit having to understand what that connection is and whether it merits the
▶ 4:13:37Thank you. I yield back.
▶ 4:13:39The gentleoman yields back. I want to thank our panel for their testimony today, for the great interaction with all of our members on both sides of the aisle. Without objection, all members will have five legislative days to submit additional written questions to the witnesses to the chair. Questions will be forwarded to the witnesses for your response. Witnesses, we invite you to respond no later than October 15 of 2025. This hearing is adjourned.