April 3, 2019
This week, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on the “The Application of Environmental, Social, and Governance Principles in Investing and the Role of Asset Managers, Proxy Advisors, and Other Intermediaries.” The committee heard from three witnesses: The Honorable Phil Gramm, a former U.S. Senator; James R. Copeland, Senior Fellow and Director of Legal Policy at the Manhattan Institute; and John Streur, President and Chief Executive Officer at Calvert Research and Management.
In his opening statement, Committee Chairman Mike Crapo echoed the concerns of Securities and Exchange Commission (SEC) Chairman Jay Clayton which included a greater understanding of the proxy system and process as a whole.
“Regardless of the tool retail investors chose for investing their hard-earned money, it’s critical that they have a voice in investment decisions that are being made. Whether it is a company’s use of a proxy advisory firm or an asset manager’s decision-making policy, the retail investor should have a clear understanding of the decisions that are being made, which ultimately represent their shares.”
Predictably, reforming the shareholder proposal process was a major topic of discussion, as the number of Environmental, Social and Governance (ESG) proposals has skyrocketed in the last few years. To combat this influx, Copeland discussed the need to raise the proposal submission thresholds . At present, a proposal only has to receive three percent of the vote to be allowed on the ballot the following year. What’s worse – research has shown that proxy firms are elongating the life of these “zombie proposals,” by recommending votes for them. Copeland noted that the current rule has also not been revisited in 20 years and is being taken advantage of by activists and other interest groups.
Hon. Gramm, who is now a visiting scholar at the American Enterprise Institute, didn’t mince words when discussing his opinion that the current system is failing Main Street investors:
“I think the plain truth is that all over America this process is being abused. People are buying a small number of token shares to force corporate board meetings, to deal with issues that have nothing to do with the company, and they are using up valuable time and they often end up being bought off. So I think to suggest that there’s nothing wrong with the system is absurd, unless your objective is to see the corporate system literally tied up in knots for no productive purpose, but the purpose is to create the prosperity we enjoy.”
To close the hearing, Senator Toomey (R-PA) expressed his admiration for America’s markets, but also voiced concerns about their ability to serve the interests of retail investors. He called on the SEC to take action in three areas: Raise the threshold for shareholder proposals; address conflicts of interests of proxy advisors; and lastly, establish a “clear and unequivocal explication requirement” of institutional investors, mutual funds and pension funds to uphold their fiduciary duty to their investors. He concluded the hearing stating:
“It has long seemed to me that one of the crown jewels of the greatest free enterprise system in the world has been our capital markets, which are big and broad and liquid and increasingly, in recent decades, democratized in certain ways that didn’t look plausible decades ago… One of the real-world consequences to the delays of private companies going public is the small investor never gets a chance for the huge upside that often comes in high growth companies. This is, I think, a huge problem. I think ESG activism is contributing to companies choosing to stay private longer than they otherwise would and that is depriving retail investors.
[…] I’m urging the SEC to take all three of these steps as quickly as they can and certainly in time for these new rules to be in effective for the next proxy season.”
Yesterday’s hearing highlighted Congress’ concern for Main Street investors and a desire to ensure the proxy system serves their best interests. Witnesses and senators alike made it clear that the current system is not serving these interests and that reform in the proxy advisory space must be addressed.