HFS Considers Efforts to Reform Shareholder Proposal Process

The House Financial Services Committee considered testimony on the impact of ESG proxy proposals and recommendations to reform the shareholder proposal process.

At a hearing titled "Reforming the Proxy Process to Safeguard Investor Interests," witnesses provided the following testimony:

• National Association of Manufacturers Managing Vice President Christopher Netram. Mr. Netram called on Congress to "counter the outsized influence" of politically motivated third parties on the proxy process to (i) drive job-creating investments in the manufacturing industry and (ii) support manufacturing supply chains in local communities. Mr. Netram stated that ESG activists have no responsibility to U.S. investors and therefore are "free to pursue social and political outcomes" that are "divorced from the best interests" of shareholders.
• Boyden Gray PLLC Managing Partner Jonathan Berry. Mr. Berry argued that the current proxy process falls short of its original intended use to "provide an effective means by which public company investors can represent their interests." He pointed to a recent survey by Consumers’ Research, which found that 70 percent of retail investors intended their investment income to be used for retirement, while less than 3 percent indicated that they wanted to advance sustainability or social change goals. He stated that the SEC has allowed for the "misuse of proxy process," which now sees the majority of shareholder proposals each proxy season consisting of ESG-related issues.
• Bipartisan Policy Center Senior Policy Advisor Tim Doyle. Mr. Doyle recommended Congress focus on taking action that would ensure the accuracy of information disseminated by proxy advisors, in addition to examining the impact of what happens when such information is inaccurate. In addition, he advised Congress to consider codifying the Supreme Court's standard for disclosure, noting that this has historically been the standard adopted by the SEC. He added that by mandating a materiality standard for disclosures, it would avoid "over burdening companies with disclosing endless amounts of information that any given investor finds relevant."
• Vanderbilt University’s Owen Graduate School of Management Assistant Professor of Finance Joshua White. Dr. White emphasized the costs, both direct and indirect, that are imposed by shareholder proposals which he said could amount to an estimated $150,000 per proposal. He cautioned that the upward trend of ESG-related proposals allows special interest groups to "burden management with a significant cost" which he said is "ultimately borne by all investors." Dr. White warned of the outcomes of "robo-voting" by institutional investors who "blindly follow" proxy advisor recommendations, even when they "do not always maximize shareholder value."
• ValueEdge Advisors Vice Chair Nell Minow. Ms. Minow stated that there is no evidence that ESG-based investment decisions are based on non-financial criteria. She posited that ESG is a "reflection of the inadequacy of traditional indicators in assessing investment risk and return." She argued that while there have been no reported instances of ESG-based institutional investor decisions that have been made irrespective of financial returns, there are many cases of decisions that "favor corporate insiders due to commercial conflicts of interest with portfolio companies."

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.

• 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. ____, 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. ____, 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.