Subcommittees of the House Committee on Financial Services held two hearings on Thursday which examined the proxy voting industry.
The hearings highlighted many of the policy goals outlined by committee Republicans’ ESG Working Group June interim report, which called for requirements that proxy voting firms disclose their data and methods and only consider pecuniary factors when making recommendations.
Chief Investment Officer is owned by Institutional Shareholder Services Inc., a provider of proxy voting services.
Capital Markets Hearing
Thursday’s first hearing was held by the subcommittee on capital markets. Representative Bill Huizenga, R-Michigan, said proxy voting firms offer advice that often has political or non-financial motives, “contrary to their fiduciary duty to maximize returns” and that this amounts to an “assault on returns of actual retail investors.”
Republicans on the subcommittee repeatedly appealed to the “duopoly” of proxy services, namely ISS and Glass, Lewis & Co. LLC, and accused them of abusing their market power to steer corporate governance in their preferred political direction. Representative Ann Wagner, R-Missouri, the chair of the subcommittee, said proxy firms have “turned boardrooms into partisan battlegrounds fighting over social agendas.”
Nell Minow, a former president of ISS, was called to testify by the Democrats on the subcommittee. She argued that concerns about proxy voting services are exaggerated. She noted that shareholder resolutions are not binding, even if passed, though a board risks being unseated if it ignores them. Speaking of resolutions that take positions in favor of environmental, social and governance policies, she added that the “fossil fuel industry is against these questions; everyone else is for them.”
Representative Sean Casten, D-Illinois, argued that ESG-informed investing is smart for “long-term profitability” and pointed to recent natural disasters, such as the Canadian wildfires, as an example of the climate risk for which ESG accounts. He added that 97% of investors in the public comments for the SEC’s climate risk and greenhouse gas disclosure proposal supported the proposal and said, “This debate is settled.”
Representative Brad Sherman, D-California, added that the ESG moniker should be expanded to ESGW&C, the ‘W’ standing for “workforce” and the ‘C’ for “China.” He argued that workforce policies and exposure to the Chinese market should also be disclosed.
Oversight and Investigations Hearing
The subcommittee on oversight and investigations held a hearing on the same day and on the same subject. Steven Friedman, the general counsel of ISS, and Eric Shostal, the head of research and engagement at Glass Lewis, both testified.
The themes and talking points were similar; Representative John Rose, R-Tennessee, quipped that proxy service firms should focus on “maximizing returns. Not on identity politics or studying the weather.”
What differed from past hearings on ESG and proxy voting, however, was that representatives of the proxy voting industry were present and offered defense of their practices.
Friedman explained that approximately 80% of voting recommendations made by ISS are based on a client’s custom policy and goals, not on ISS’s benchmark voting policy, which is designed to be something of a catch-all recommendation. When asked why these custom policies are not disclosed, Friedman replied that they belong to the client and describe their specific needs and goals, which ISS then translates into proxy voting advice.
Shostal added that “nobody is required to hire a proxy advisory firm” and that asset managers may do their own research or vote counter to Glass Lewis recommendations. Shostal added that generic or non-custom policies are rather diverse. In addition to a benchmark policy, Glass Lewis maintains others for funds and managers affiliated with the Catholic Church, so that those investors can vote in accordance with their specific interests.
Tags: anti-ESG, Climate Risk, proxy voting, SEC