HFS Considers Efforts to Reform Proxy Advisory System

The House Financial Services Committee considered testimony on the "growing influence" of proxy advisory firms and current efforts to reform the proxy advisory system.

At a hearing entitled "Oversight of the Proxy Advisory Industry," the following witnesses testified:

• Institutional Shareholder Services ("ISS") General Counsel, Steven Friedman. Mr. Friedman underscored the importance of safeguarding the "independence, quality, affordability, and timeliness" of proxy analysis for the benefit of investors. But he argued that calls to reform the proxy advisory system are "unfounded." He said that many of the proposed reforms are from companies that ISS and other proxy advisers review, rather than from institutional investors. He noted that many proposals seek to move the proxy adviser-client relationship away from the fiduciary relationship under the Advisers Act, in order to make the advisers accountable to corporate issuers, sometimes through mandatory pre-clearance of proxy reports with company executives.
• Glass Lewis Senior Vice President for Research and Engagement, Eric Shostal. Mr. Shostal disagreed with provisions under the "ESG Working Group’s Preliminary Report" which he said would "revive the failed idea" of an SEC rulemaking that would mandate proxy advisory firms to share draft reports with issuers before they are released. He criticized the Preliminary Report’s "vague claim" regarding concerns of the "detrimental impact of inaccurate information and incomplete analyses provided by proxy advisory firms."
• Columbia Business School Professor Shiva Rajgopal. Mr. Rajgopal shared "substantial doubt" with regard to claims by opponents that proxy advisers assume that "management always works to maximize shareholder value." Mr. Rajgopal said that proxy advisers are "still more deferential to management than warranted" and supported requiring proxy advisers to register with the SEC. He stated that any regulatory action in addition to registration "makes proxy voting more onerous," and would be a step backward in terms of holding corporate managers accountable.