HFS Committee Hears Criticism of SEC Policy on ESG Proxies

The House Financial Services Committee considered testimony from witnesses advocating against the inclusion of ESG proposals or non-material economic matters in the shareholder-proposal process.

At a hearing entitled "Protecting Investor Interests: Examining Environmental and Social Policy in Financial Regulation," the following witnesses testified:

• Manhattan Institute Senior Fellow & Director James Copland. Mr. Copeland criticized changes to the shareholder-proposal process in the past decade for (i) "stray[ing] far" from its "principal legal purpose" to ensure adequate, non-deceptive shareholder proposals, (ii) being utilized almost exclusively by a small number of investors that are focused on issues other than maximizing share value and (iii) allowing such investors to "influence corporate behavior to the detriment of the average diversified shareholder." Mr. Copeland also attributed the "explosive recent growth" in shareholder proposals to SEC Legal Bulletin No. 14L, stating that the bulletin had undercut longstanding guidance that shareholder proposals must be material to a company's business. Mr. Copeland noted that this change has forced issuers to include on their proxy ballots "any shareholder proposal related to issues of ‘social policy significance,’" even if they are economically immaterial.
• American Enterprise Institute Senior Fellow Benjamin Zycher. Mr. Zycher also condemned changes to the shareholder-proposal process, calling the politicization of corporate management decisions a "perverse trend." He advised Congress to pursue legislation that will prevent proxy advisors from making politically motivated choices and to make clear that "only under new legislation can regulatory efforts to force reductions in [greenhouse gas] emissions be justified."
• Mayer Brown Special Counsel Lawrence Cunningham. Mr. Cunningham argued the need for revisions to Exchange Act Rule 14a-8 ("Shareholder proposals") by pointing to companies’ willingness to negotiate settlements to get proposals that are "unfocused on shareholder value," off of the ballot. He recommended changes that would (i) heighten eligibility requirements for shareholders and (ii) tighten rules regarding submission of "repeat, duplicative or moot proposals."
• Society for Corporate Governance Vice President Ted Allen. Mr. Allen agreed with the other witnesses that investors should not be forced to vote on matters that are "not significantly related to the business of the issuer" and emphasized that many ESG-related proposals could raise "contentious policy issues" that may be better addressed through traditional governmental means, such as through Congress or state legislatures.

In addition, the following legislative proposals were examined:

• H.R. ____, to authorize the exclusion of shareholder proposals from proxy or consent solicitation material if such proposals are substantially similar to previously included proposals.

• H.R. ____, to authorize the exclusion of shareholder proposals from proxy or consent solicitation material if such proposals substantially implement, substantially duplicate or are substantially similar to previously included proposals.

• H.R. ____, to authorize the exclusion of shareholder proposals from proxy or consent solicitation material if the subject matter of the shareholder proposal is environmental, social, or political.

• H.R. ____, to clarify that an issuer may exclude a shareholder proposal pursuant to section 240.14a-8(i) of title 17, Code of Federal Regulations, without regard to whether such proposal relates to a significant social policy issue.

• H.R. ____, to amend the Securities Exchange Act of 1934 to prohibit the Securities and Exchange Commission from compelling the discussion of shareholder proposals or proxy or consent solicitation materials, and for other purposes.

• H.R. ____, to require the Securities and Exchange Commission to conduct a study of certain issues with respect to shareholder proposals, proxy advisory firms and the proxy process, and for other purposes.

• H.R. ____, to amend the Securities Exchange Act of 1934 to provide for the registration of proxy advisory firms, and for other purposes.

• H.R. ____, to amend the Securities Exchange Act of 1934 to provide for liability for certain failures to disclose material information in connection with proxy voting advice, and for other purposes.

• H.R. ____, to amend the Securities Exchange Act of 1934 to provide for duties of certain investment advisors, asset managers, and pension funds with respect to voting on shareholder proposals, and for other purposes.

• H.R. ____, to amend the Securities Exchange Act of 1934 to prohibit "robovoting" with respect to votes related to proxy or consent solicitation materials, and for other purposes.

• H.R. ____, to amend the Investment Advisers Act of 1940 with respect to proxy voting of passively managed funds, and for other purposes.

• H.R. ____, to require the Comptroller General of the United States to conduct a study on the detrimental impact of the Directive on Corporate Sustainability Due Diligence and the Corporate Sustainability Reporting Directive on United States companies, and for other purposes.

• H.R. ____, the "International Regulatory Transparency and Accountability Act."

• H.R. ____, the "Mandatory Materiality Requirement Act of 2022."

• H.R. ____, to amend the Securities Exchange Act of 1934 to require the Securities and Exchange Commission to disclose and report on non-material disclosure mandates, and for other purposes.

• H.R. ____, the "Public Company Advisory Committee Act of 2023."

• H.R. ____, to amend the Investment Advisers Act of 1940 to specify requirements concerning the consideration of pecuniary and non-pecuniary factors, to require the Securities and Exchange Commission to conduct a study on climate change and other environmental disclosures in the municipal bond market, and to require the Securities and Exchange Commission to conduct a study on the solicitation of municipal securities business.

• H.R. 2743, the "Fair Access to Banking Act."