Congress is growing increasingly interested in the use of shareholder proposals to push corporations toward liberal or conservative policies, particularly the influence wielded over the process by advisory firms.
By buying as little as $2,000 worth of shares, investors gain the right to introduce resolutions that direct a corporate board to take a certain action. While they often fail to win enough support to pass, the measures can generate substantial media attention and often lead to change at the company regardless of their support.
And the support itself can be swayed heavily by prominent firms such as Institutional Shareholder Services and Glass Lewis & Co. that make voting recommendations widely followed by mutual funds and pensions with large holdings.
Critics say the firms are too opaque, and conservatives, in particular, blame them for a perceived increase in adoption of liberal proposals.
In response, the House of Representatives approved a bill led by Rep. Sean Duffy, R-Wis., in December 2017 to require the advisory firms to register with the Securities and Exchange Commission and highlight any potential conflict of interests.
The measure, which passed on a vote of 238-182 with support from 12 Democrats, is stalled in the Senate and a spokeswoman for the chamber’s banking committee had no update on timing for a markup of the legislation.
ISS has rejected any suggestion of pay-to-play and employs “robust policies and procedures to mitigate any potential conflicts of interest between the work ISS does for its institutional clients,” general counsel Steven Friedman said in a statement.
Glass Lewis, in a letter to Sen. Dean Heller, R-Nev., in June, said it discloses all potential conflicts of interests and “does not exert undue influence on investors.”
The SEC, meanwhile, may be preparing to act independently. The agency is set to hold a roundtable discussion on the issue on Nov. 15 after recently withdrawing two staff letters sent in 2004 that effectively backed the proxy advisory process.
When asked about Duffy’s legislation, Democratic Commissioner Robert Jackson said the SEC’s interest in the space makes it an “odd time to legislate.”
“If the Congress in its wisdom tells us that they are going to change the rules, then we’ll implement that legislation,” he told reporters. “If corporate America is worried about the amount of power that those two [proxy advisors] have, regulating them risks deepening the moat around them.”
In an interview with the Washington Examiner, Duffy attacked both the top two firms — claiming they’re “playing all sides of the field” while benefiting from a lack of transparency — and provided insight into the feedback he received from U.S. businesses concerned about the proxy system.
Q: Why did you introduce this legislation?
A: We were seeing what was going on in boardrooms across America and the influence the two proxy advisory firms were having on corporate governance. Seventy-five percent of all shareholders are institutional investors that don’t have the ability to analyze all the initiatives coming up and are relying on these organizations, relying on their votes. That is concerning to us. The conflict of interest, the proxy advisory firms representing the companies and giving them advice. Shareholder activists that are crafting proposals, they are giving them advice — and the institutional investors and how to vote their shares, they are giving them advice. They are playing all sides of the field and no one is really looking at them. There is conflict there and we need to get our hands around it.
Q: Have you talked to the SEC about the proposal?
A: I think they see some issues in this space and obviously they move slow. I think they are looking at it; I’m not sure what they are going to do. They are aware of our bill and the vote that we had. It was bipartisan. We know they are looking at this space. There are a lot of things they can do without Congress.
Q: Will you be attending the upcoming SEC roundtable?
A: I’m going to have someone there, but I don’t think I’ll make it.
Q: What has been the response to this measure?
A: The companies are like, “this is a racket, man.” These are left-leaning leaderships of companies that are very progressive. These proxy advisory firms are doing things that are contrary to growth and maximizing shareholder values to the companies, which is incredibly frustrating, especially for small companies. The proxy advisory firms are coming into these small companies and even these medium-sized companies and saying, “We can help you navigate the pain we’ve caused you, just pay us a fee.” It’s been really challenging for them to deal in this space and I think we’ve seen more energy from just the business community that thinks this is a real problem.
Q: Did you introduce this legislation in response to the growth in more liberal-leaning shareholder proposals?
A: The smaller business community, that’s where it started. The way institutional investors vote shares based on the recommendations of the proxy advisory firms, I think, is absolutely contrary to maximizing the shareholder value. And there’s a political agenda. Think about Americans across the country who invest their money with these institutional investors. I think if they were aware of how their money was being voted in the companies that their funds owned, they would be outraged by it.
Q: Did you work with any outside groups when crafting the bill?
A: No we didn’t.
Q: Which companies have you spoken with about this legislation?
A: I’ve talked to countless companies. A lot of them don’t want to be named. It’s kind of a sleeper issue. You don’t hear a lot of people talking about it unless you’re in the space. This is the most frequent issue that comes up.
Q: Are company concerns over maximizing profits driving support for this bill?
A: Yes, absolutely. You look at all the things that are happening in America, all the different bills that come up, and they choose to say, “This is important to us.”
