Exposing the Proxy Advisory Cartel: How ISS & Glass Lewis Influence Markets

1[House Hearing, 119 Congress]2[From the U.S. Government Publishing Office]34                  EXPOSING THE PROXY ADVISORY CARTEL:5                HOW ISS & GLASS LEWIS INFLUENCE MARKETS67=======================================================================89                                HEARING1011                               before the1213                    SUBCOMMITTEE ON CAPITAL MARKETS1415                                 of the1617                    COMMITTEE ON FINANCIAL SERVICES1819                     U.S. HOUSE OF REPRESENTATIVES2021                    ONE HUNDRED NINETEENTH CONGRESS2223                             FIRST SESSION2425                               __________2627                             APRIL 29, 20252829                               __________3031                           Serial No. 119-173233       Printed for the use of the Committee on Financial Services3435                 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]3637                            www.govinfo.gov3839                               ______4041                 U.S. GOVERNMENT PUBLISHING OFFICE424360-549 PDF                WASHINGTON : 20254445                 HOUSE COMMITTEE ON FINANCIAL SERVICES4647                    FRENCH HILL, Arkansas, Chairman4849BILL HUIZENGA, Michigan, Vice        MAXINE WATERS, California, Ranking50    Chairman                             Member51FRANK D. LUCAS, Oklahoma             SYLVIA R. GARCIA, Texas, Vice52PETE SESSIONS, Texas                     Ranking Member53ANN WAGNER, Missouri                 NYDIA M. VELAZQUEZ, New York54ANDY BARR, Kentucky                  BRAD SHERMAN, California55ROGER WILLIAMS, Texas                GREGORY W. MEEKS, New York56TOM EMMER, Minnesota                 DAVID SCOTT, Georgia57BARRY LOUDERMILK, Georgia            STEPHEN F. LYNCH, Massachusetts58WARREN DAVIDSON, Ohio                AL GREEN, Texas59JOHN W. ROSE, Tennessee              EMANUEL CLEAVER, Missouri60BRYAN STEIL, Wisconsin               JAMES A. HIMES, Connecticut61WILLIAM R. TIMMONS, IV, South        BILL FOSTER, Illinois62    Carolina                         JOYCE BEATTY, Ohio63MARLIN STUTZMAN, Indiana             JUAN VARGAS, California64RALPH NORMAN, South Carolina         JOSH GOTTHEIMER, New Jersey65DANIEL MEUSER, Pennsylvania          VICENTE GONZALEZ, Texas66YOUNG KIM, California                SEAN CASTEN, Illinois67BYRON DONALDS, Florida               AYANNA PRESSLEY, Massachusetts68ANDREW R. GARBARINO, New York        RASHIDA TLAIB, Michigan69SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York70MIKE FLOOD, Nebraska                 NIKEMA WILLIAMS, Georgia71MICHAEL LAWLER, New York             BRITTANY PETTERSEN, Colorado72MONICA DE LA CRUZ, Texas             CLEO FIELDS, Louisiana73ANDREW OGLES, Tennessee              JANELLE BYNUM, Oregon74ZACHARY NUNN, Iowa                   SAM LICCARDO, California75LISA McCLAIN, Michigan76MARIA SALAZAR, Florida77TROY DOWNING, Montana78MIKE HARIDOPOLOS, Florida79TIM MOORE, North Carolina8081                      Ben Johnson, Staff Director8283                                 ------8485                    SUBCOMMITTEE ON CAPITAL MARKETS8687                     ANN WAGNER, Missouri, Chairman8889ANDREW R. GARBARINO, New York,       BRAD SHERMAN, California,90    Vice Chairman                        Ranking Member91FRANK D. LUCAS, Oklahoma             DAVID SCOTT, Georgia92PETE SESSIONS, Texas                 GREGORY W. MEEKS, New York93WARREN DAVIDSON, Ohio                JUAN VARGAS, California94BRYAN STEIL, Wisconsin               JOSH GOTTHEIMER, New Jersey95MARLIN STUTZMAN, Indiana             VICENTE GONZALEZ, Texas96MICHAEL LAWLER, New York             SEAN CASTEN, Illinois97ANDREW OGLES, Tennessee              EMANUEL CLEAVER II, Missouri98ZACHARY NUNN, Iowa                   STEPHEN F. LYNCH, Massachusetts99LISA McCLAIN, Michigan               CLEO FIELDS, Louisiana100MARIA SALAZAR, Florida               JANELLE BYNUM, Oregon101TROY DOWNING, Montana102MIKE HARIDOPOLOS, Florida103104                         C  O  N  T  E  N  T  S105106                              ----------107108                        Tuesday, April 29, 2025109                           OPENING STATEMENTS110111                                                                   Page112Hon. Ann Wagner, Chairwoman of the Subcommittee on Capital113  Markets, a U.S. Representative from Missouri...................     1114Hon. Brad Sherman, Ranking Member of the Subcommittee on Capital115  Markets, a U.S. Representative from California.................     2116117                               STATEMENTS118119Hon. French Hill, Chairman of the Committee on Financial120  Services, a U.S. Representative from Arkansas..................     4121Hon. Maxine Waters, Ranking Member of the Committee on Financial122  Services, a U.S. Representative from California................     4123124                               WITNESSES125126Mr. Charles Crain, Managing Vice President, Policy, National127  Association of Manufacturers (NAM).............................     5128    Prepared Statement...........................................     7129Ms. Elizabeth Ising, Partner, Gibson Dunn........................    16130    Prepared Statement...........................................    18131Mr. Paul Rose, Dean, School of Law, Case Western Reserve132  University.....................................................    29133    Prepared Statement...........................................    31134Mr. Paul Washington, President and CEO, Society for Corporate135  Governance.....................................................    34136    Prepared Statement...........................................    36137Ms. Nell Minow, Vice Chair, ValueEdge Advisors...................    52138    Prepared Statement...........................................    54139140                                APPENDIX141142                   MATERIALS SUBMITTED FOR THE RECORD143144Hon. Troy Downing:145    Egan-Jones Proxy Services....................................    84146147                 RESPONSES TO QUESTIONS FOR THE RECORD148149Written responses to questions for the record from Representative150  Maxine Waters151    Mr. Charles Crain............................................    89152    Mr. Paul Rose................................................    90153    Ms. Nell Minow...............................................    91154155                              LEGISLATION156157H.R. ------, a bill to amend the Securities Exchange Act of 1934158  to provide for the registration of proxy advisory firms........    92159H.R. ------, a bill to amend the Securities Exchange Act of 1934160  to provide for liability for certain failures to disclose161  material information or making of material misstatements.......   116162H.R. ------, a bill to amend the Securities Exchange Act of 1934163  to require certain disclosures by institutional investment164  managers in connection with proxy advisory firms...............   118165H.R. ------, a bill to amend the Securities Exchange Act of 1934166  to provide for certain requirements related to proxy voting....   124167H.R. ------, a bill to amend the Securities Exchange Act of 1934168  to require the Securities and Exchange Commission to study169  certain issues with respect to shareholder proposals, proxy170  advisory firms, and the proxy process..........................   127171H.R. ------, the Stopping Proxy Advisor Racketeering Act.........   132172173                  EXPOSING THE PROXY ADVISORY CARTEL:174                HOW ISS & GLASS LEWIS INFLUENCE MARKETS175176                              ----------177178                        Tuesday, April 29, 2025179180             U.S. House of Representatives,181                   Subcommittee on Capital Markets,182                           Committee on Financial Services,183                                                    Washington, DC.184185    The subcommittee met, pursuant to notice, at 2:32 p.m., in186room 2128, Rayburn House Office Building, Hon. Ann Wagner187[chairwoman of the subcommittee] presiding.188    Present: Representatives Wagner, Hill, Lucas, Sessions,189Davidson, Steil, Stutzman, McClain, Salazar, Downing,190Haridopolos, Sherman, Waters, Vargas, Casten, and Bynum.191    Chairwoman Wagner. The Subcommittee on Capital Markets will192come to order.193    Without objection, the chair is authorized to declare a194recess of the committee at any time but will not.195    This hearing is titled, ``Exposing the Proxy Advisory196Cartel: How ISS & Glass Lewis Influence Markets.''197    Without objection, all members will have 5 legislative days198within which to submit extraneous materials to the chair for199inclusion in the record.200    I now recognize myself for 4 minutes for an opening201statement.202203    OPENING STATEMENT OF HON. ANN WAGNER, CHAIRWOMAN OF THE204  SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM205                            MISSOURI206207    Good afternoon, everyone. I want to thank our witnesses and208all those in attendance for joining us for today's hearing on a209critical yet underexamined issue in our capital markets: the210outsized influence and unchecked power of proxy advisory firms,211particularly Institutional Shareholder Services, ISS, and Glass212Lewis.213    This hearing is part of an ongoing effort by this214subcommittee to shine a light on how the proxy of process is215functioning and, in many ways, failing today's markets.216    The purpose of this hearing is to examine the role,217practices, and market influence of proxy advisory firms on218corporate governance practices, investor returns, and broader219market outcomes. We will also use today's hearing to assess220transparency, accountability, potential conflicts of interest,221and the overall impact of proxy advisory firms on the222functioning and fairness of capital markets.223    Two firms, ISS and Glass Lewis, control 97 percent of the224proxy advisory market. That concentration alone would warrant225scrutiny, but more troubling is how their influence goes far226beyond research. They now routinely dictate outcomes of227shareholder votes.228    When ISS or Glass Lewis recommend voting against a229director, their clients are over 30 percent more likely to230follow suit than nonclients. Their platforms even prepopulate231voting recommendations, contributing to what has become known232as robo-voting, a troubling abdication of fiduciary233responsibility.234    These firms are not neutral observers. They are for-profit235businesses that often sell consulting services to the very236companies they evaluate, sometimes with clear conflicts of237interest.238    ISS, for instance, simultaneously rates and advises239companies on its own environmental, social, and governance240(ESG) metrics. Last year, after ExxonMobil sought judicial241relief from an activist campaign that included Glass Lewis as a242member, Glass Lewis then recommended that its clients vote243against one of the ExxonMobil's own directors.244    Let's be clear. This is not about silencing shareholders.245It is about ensuring that the proxy process advances long-term246investor value, not narrow political agendas.247    We have seen a surge in shareholder proposals that are248ideological in nature but marginal in economic relevance. Costs249associated with responding to these proposals with both direct250and indirect are climbing into the hundreds of millions of251dollars annually and ultimately fall on ordinary investors.252    The Securities Exchange Commission (SEC) must reassert its253role in ensuring the system is fair, is transparent, and is254accountable. That is why last month Chairman Hill, and I sent a255letter to then-acting Chairman Uyeda, commending the Commission256for rescinding Staff Legal Bulletin No. 14L, but also urging257the SEC to go further by restoring the original intent of rule25814a-8, eliminating the significant policy exception and259enhancing oversight of proxy advisory firms.260    These reforms are critical to safeguarding retail261investors, refocusing the proxy process on long-term value262creation, and restoring trust in our capital markets. Our263capital markets work best when participants are guided by264economic rationale, not political pressure. I look forward to a265robust and thoughtful discussion today on how we can bring266greater accountability to proxy advisors and strengthen the267integrity of the shareholder voting process.268    The chair now recognizes the ranking member of the269subcommittee, the gentleman from California, Mr. Sherman, for 4270minutes for his opening statement.271272 OPENING STATEMENT OF HON. BRAD SHERMAN, RANKING MEMBER OF THE273  SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM274                           CALIFORNIA275276    Mr. Sherman. These firms have clients who pay them, those277are the investors, the capitalists, who make our capitalism278work. The question is whether we are going to deprive them of279the advice that they want and that they pay for.280    There is no barrier to entry to third, fourth, or fifth281companies getting into this and, as a matter of fact, Vivek282Ramaswamy has entered this market, and I can be confident that283when he does, he will not be providing woke advice.284    The argument here is between Ronald Reagan and Leon285Trotsky. There are those who think that the commanding heights286of the economy should be controlled by the party line, and287there are others who believe that investors, because it is288their money, should actually control what the companies that289they own do.290    We have before us bills that would require that investment291advisory firms--that proxy advisory firms only give advice on292what maximizes profit and to tell the eco investors, ``Go to293hell.''294    What does that mean? That means that if there is a proposal295on the ballot that the company get involved in the pornography296industry, investment advisors will be required by law passed by297the Republicans to say, yes, go into that business because it298is profitable. If you deny the rights of liberals to get advice299on how they can invest in companies that do not engage in slave300labor, in companies that do not ruin the environment, then your301own voters must be deprived of investment advice on how to302avoid investing in pornography.303    Now, since I represent the San Fernando Valley, maybe that304is a good district issue for me, but it is not for you.305    Investors ought to get the advice they want from the people306they select to get that advice. They should be able to invest307in mutual funds that seek to maximize profit or to maximize308profit but no fossil fuels, or maximize profit, no pornographic309movies. Instead, the most powerful people in the country, those310who control thousand or so giants on Wall Street, do not want311the investors to control the company. They think the small312clique of managers should control the company.313    How dare anybody who is just a mere owner suggest a change314in company policy, let alone demand a vote on it, let alone let315people get advice on how to vote.316    This is not a war on the proxy advisors. This is a war on317the idea that the people whose money it is get to make the318decision.319    What religious tradition teaches us that anyone with money320must exclusively make all their decisions on how to make more321money? I think there are some religious traditions that would322say, invest your money to help the poor. Invest your money to323help the planet. Maybe even invest your money to promote324traditional family values and to instead say, no, let325management do what they want, and do not allow--this is a326country of the First Amendment--do not allow anyone to advise327you to do the contrary.328    I do not know why we are having this hearing. I do not know329why we are opposing the idea that those with the capital get to330control the companies they own, and I certainly do not know331why--because I know none of you represent the San Fernando332Valley--why you have a pro-pornography agenda here.333    I yield back.334    Chairwoman Wagner. I wish I could use the chairman's335minutes, but I shall not.336    The chair recognizes the chairman of the full committee,337Mr. Hill, for 1 minute.338339  STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON340    FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS341342    Chairman Hill. Thank you, Chair Wagner. Thank you for our343panel today. I want to--appreciate Chair Wagner's consistent344leadership over many years on examining the proxy advisory345firms and their outsized influence over our public markets.346    Today, ISS and Glass Lewis shape the outcomes of347shareholder votes across the market, especially as large index348funds often vote in lockstep with their recommendations. In my349view, that is not just advice; it is intimidating de facto350control.351    Even more troubling, companies are frequently reporting352factual errors in proxy reports and are rarely given a chance353to correct them before votes are cast. We need greater354transparency, due process, and oversight to ensure that proxy355voting remains accountable to the shareholders, not outsourced356to this largely unregulated duopoly.357    I look forward to our discussion today, and I yield back.358    Chairwoman Wagner. The chairman yields back.359    The chair recognizes the ranking member of the full360committee, Ms. Waters, for 1 minute.361362    STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE363  COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM364                           CALIFORNIA365366    Ms. Waters. Thank you very much.367    This hearing is titled, ``Exposing the Proxy Advisory368Cartel,'' but there is a very real cartel happening right in369front of our faces: Donald J. Trump and associates. The370President and his family have made millions off the Trump meme371coin to date, and they just even made more with his372announcement of a private dinner for top owners of the coin.373    That is not all. The President has pumped the stock of his374media company, promoted Elon Musk's failing car company on the375White House lawn, and is providing his billionaire friends with376insider tips to take advantage of the chaos he is causing in377the stock market.378    Our committee should be focused on this blatant financial379corruption. With that, we ignore it at our peril. I yield back380the balance of my time.381    Chairwoman Wagner. The gentlelady yields back.382    Today we welcome the testimony of Charles Crain.383    Mr. Crain is the Managing Vice President of Policy at the384National Association of Manufacturers, NAM.385    Elizabeth Ising: Ms. Ising is a Partner at Gibson Dunn &386Crutcher LLP. She serves as the firm's Co-Chair of Securities387Regulation and Corporate Governance Practice.388    Paul Rose: Professor Rose is a Dean and a Professor of Law389at Case Western Reserve University School of Law.390    Paul Washington: Mr. Washington is the President and CEO of391the Society for Corporate Governance. He is former Deputy392General Counsel and Corporate Secretary of Time Warner Inc.393    Nell Minow: Ms. Minow is a Vice Chair of ValueEdge394Advisors, and she is the former President of ISS.395    We thank each of you for taking your time to be here today.396Each of you will be recognized for 5 minutes to give an oral397presentation of your testimony. Without objection, your written398statements will be made part of the record.399    Mr. Crain, you are now recognized for 5 minutes for your400oral presentation.401402 STATEMENT OF CHARLES CRAIN, MANAGING VICE PRESIDENT, POLICY,403             NATIONAL ASSOCIATION OF MANUFACTURERS404405    Mr. Crain. Thank you, Chair Wagner, Ranking Member Sherman,406as well as Chairman Hill and Ranking Member Waters.407    My name is Charles Crain, as the chair said, and I am the408Managing Vice President of Policy for the National Association409of Manufacturers.410    Proxy advisory firms have had a significant and damaging411impact on manufacturers, manufacturing workers, and main street412investors. These firms' outsized influence and their413problematic business practices dictate corporate decisions, and414they endanger shareholder returns.415    First and foremost, proxy firms operate with glaring and416often undisclosed conflicts of interest. For example, ISS'417consulting service has been known to use the negative vote418recommendations from its proxy voting service as a way to drum419up business.420    Proxy firms are also unwilling to allow companies to review421their draft reports, and they are resistant to correcting the422mistakes and misunderstandings that imbue their final423recommendations. Those recommendations are often based on a one424size fits all view of how public companies should be run. In425other words, proxy firms' benchmark policies enforce their426beliefs about corporate governance, executive compensation,427and, increasingly, environmental and social topics.428    Now, despite these obvious flaws, proxy firms still control429a significant share of investors' proxy votes. That means they430have significant sway over important corporate decisions. The431SEC, under both parties, has investigated these issues over the432course of more than a decade, finally adopting a proxy firm433rule back in 2020.434    This subcommittee has played a critical important role as435well with hearings and legislation designed to shine a light436and ultimately to reign in proxy firms. Despite this clear437momentum for reform from both Congress and the SEC, proxy firms438remain stubbornly unregulated to the detriment of public439companies and their investors.440    The SEC's 2020 rule has spent 5 years hung up in court. The441NAM has had to defend that rule across three separate court442cases, one of which, in fact, has oral arguments scheduled for443this coming Friday.444    This delay is despite the fact that the 2020 rule was a445significant compromise as compared to the SEC's 2019 proposal.446In fact, manufacturers continue to believe that critical447provisions from that 2019 proposal, such as draft review, would448be important reforms to adopt today.449    Proxy firms, of course, would prefer zero SEC or450congressional oversight. ISS is now claiming in court that the451SEC lacks a statutory authority to regulate proxy voting advice452at all.453    Now, the Exchange Act is actually quite clear that the SEC454does have the authority to regulate proxy voting advice, but455there may come a time for Congress to reiterate that directive,456either to remind the court of Congress' unambiguous statutory457intent or to reverse an errant court decision.458    Even assuming, though, that the NAM is successful in459defending the SEC's authority, there is more work still to be460done. That is why we appreciate that Congress and members of461this committee have offered commonsense reforms that would462institute much needed guardrails for the proxy firms. These six463bills would prioritize main street investors' retirement464security over the proxy firms' agendas.465    First, Congressman Steil's bill, which would create a466comprehensive registration regime for proxy firms. It would467increase SEC oversight, company engagement and transparency,468while minimizing conflicts of interest and errors.469    Mr. Steil also has a separate bill that would ensure that470the proxy firms remain subject to any fraud liability.471    Congressman Fitzgerald has introduced legislation to ban472certain conflicts of interest.473    Congressman Nunn has a bill that would target robo-voting,474which is a common practice that disenfranchises Main Street475investors as well as institutional investors.476    Congressman Loudermilk has a bill that would focus on the477fiduciary duties of those institutional investors.478    Finally, Chair Wagner's legislation would direct the SEC to479conduct a comprehensive study of the proxy process, including480the damaging role that proxy firms can play.481    The time to act on these bills is now. Awareness of the482risks that proxy firms pose is far more widespread than it was483back in 2010 when the SEC started looking into this issue, and484both Congress and the SEC now have a clear understanding of485what must be done. Policymakers must preserve the SEC's486existing authority over proxy firms while also instituting487further guardrails that address the firms' conflicts, their488errors, their robo-voting, their one size fits all standards,489their ESG agendas, and more. Manufacturers and Main Street490investors are counting on it.491    Thank you.492493    [The prepared statement of Mr. Crain follows:]494495[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]496497    Chairwoman Wagner. Thank you, Mr. Crain.498    Ms. Ising, you are now recognized for 5 minutes for your499oral presentation.500501       STATEMENT OF ELIZABETH ISING, PARTNER, GIBSON DUNN502503    Ms. Ising. Thank you for the invitation to testify today. I504appreciate the opportunity to share with you my observations on505the significant influence of proxy advisory firms and the need506to regulate them. My observations are based on 25 years of507practicing as a Securities and Corporate Governance Lawyer.508    Proxy advisors play an important role and have considerable509influence in the U.S. proxy system. Shareholders rely on the510U.S. proxy system to exercise their corporate voting rights,511and public companies rely on it to obtain approval of important512corporate governance matters, many of which facilitate capital513formation and foster long-term shareholder value.514    The U.S. proxy system and many of its participants are515regulated. The key exception is proxy advisory firms. Yet516Institutional Shareholder Services and Glass Lewis, the two517major firms, exercise significant influence over voting on518thousands of proxy proposals every year and lack fiduciary519duties to consider what is in the best interest of companies520and their shareholders. I want to highlight several concerns521that demonstrate the need to subject proxy advisors to522reasonable, commonsense regulation.523    First, the consulting services offered by the proxy524advisory firms call into question the objectivity and525reliability of their recommendations. ISS and Glass Lewis sell526advisory service to public companies regarding the very same527matters in which they make voting recommendations, using opaque528voting policies and analytical tools that are available only to529their consultants. Notably, before it even began offering530consulting services to companies, even Glass Lewis publicly531stated that these services create conflicts. Proxy advisors532also benefit from other conflicts. The number of proxy533proposals has increased approximately 730 percent at Russell5343000 companies since 2000.535    More proposals mean that investors with large portfolios536need more support from proxy advisors. Yet it is these firms537that are encouraging additional proposals for, by example,538encouraging annual say-on-pay votes even though the Dodd-Frank539Act requires those votes only every 3 years.540    Next, there are significant concerns about errors in proxy541advisory reports, and often the burden is on public companies542to scramble to correct the records since they cannot preview543these firms' analyses.544    For example, one company's Glass Lewis report stated that545the board did not oversee cyber security risk. The company546pointed Glass Lewis to their SEC filing with the section titled547``Oversight of Cyber Security,'' but Glass Lewis did not revise548its report. For these reasons, proxy advisors should face549potential liability for making materially false or misleading550statements.551    Proxy advisory firms also encourage robo-voting, which is552when an investor follows a firm's voting recommendations553without independently assessing it. Proxy advisors may say that554they are just implementing their client's voting guidelines,555but that does not explain certain investors repeatedly voting556lockstep with the firms or saying that they cannot override557those firms' recommendations.558    In addition, the firms' voting guidelines include numerous559case-by-case policies where voting recommendations are not560based on objective standards, making it important for the561firms' clients to understand the underlying rationale of those562recommendations. Yet, there is often a flood of votes that563mirror each firms' recommendations that come in almost564immediately after their release.565    Another concern is that proxy advisory firms' voting566policies are based on unfounded biases and presumptions. For567example, both proxy advisors generally oppose supermajority568voting requirements because, in the words of Glass Lewis, they,569quote, can enable a small group of shareholders to overrule the570will of majority shareholders. Yet, each proxy advisory firm571has so-called board accountability policies that expect572companies to achieve supermajority approval on say-on-pay573proposals. Glass Lewis expects board responsiveness unless a574company receives a supermajority vote against the shareholder575proposal.576    These policies enable small groups of shareholders to drive577major changes at public companies even though a majority of578shares voted in support of existing practices. As a result, ISS579and Glass Lewis push public companies to expend resources to580support actions not supported by the majority.581    ISS and Glass Lewis also essentially act as regulators. By582way of example, unlike the New York Stock Exchange and National583Association of Securities Dealers Automated Quotations584(NASDAQ), who have developed director independent standards,585ISS considers a director to not be independent if a director of586an employee--is an employee of an organization that provides587the company with just over $10,000 in consulting services.588Interestingly, ISS would fail its very own independence test at589companies where it provides both consulting services and issues590voting recommendations.591    Finally, proxy advisors make materiality determinations592without a cost-benefit analysis and often without considering593the company's circumstances. For example, Glass Lewis recently594stated that measures related to human capital management are595financially material for all companies. Under the SEC's well-596developed legal standards for materiality, that is not597accurate.598    In conclusion, proxy advisory firms directly impact proxy599voting decisions and voting outcomes, and thus, Congress and600the SEC should adopt commonsense regulation of these firms to601protect the integrity of U.S. proxy systems and capital602markets.603    Thank you for inviting me to testify.604605    [The prepared statement of Ms. Ising follows:]606607[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]608609    Chairwoman Wagner. Thank you, Ms. Ising.610    Now, Mr.--Professor, I should say, Rose, you are now611recognized for 5 minutes for your oral presentation.612613   STATEMENT OF PAUL ROSE, DEAN, SCHOOL OF LAW, CASE WESTERN614                       RESERVE UNIVERSITY615616    Mr. Rose. Thanks, Chair Wagner and members of the617committee, for the opportunity to testify on an issue that I618have been studying for over 20 years, the concentrated and619largely unregulated power of proxy advisory firms in U.S.620capital markets.621    Proxy advisory recommendations can swing vote outcomes and622shift corporate governance, yet they operate without fiduciary623obligations, with limited transparency and minimal624accountability. Today, two firms, ISS and Glass Lewis, dominate625over 90 percent of the proxy advisor market.626    Importantly, this dominance is not a natural result of627investor demand. It is, in large part, a byproduct of628regulatory design, specifically the SEC's adoption of rule629206(4)-6 under the Investment Advisers Act of 1940. This rule630adopted in 2003 required investment advisors to adopt proxy631voting policies and procedures and devote client securities in632their best interest.633    The SEC then issued no-action letters suggesting that634advisors could fulfill these duties by relying on independent635third-party proxy advisors. By the time the SEC withdrew these636letters in 2018, the proxy advisory industry had grown637significantly. Rule 206(4)-6 transformed an internal fiduciary638duty into an external compliance function, fueling the growth639of ISS and Glass Lewis into de facto gatekeepers.640    Many institutional investors now outsource their voting641decisions to these firms. Some of these investors now engage in642robo-voting, mechanically following proxy advisors'643recommendations without independent analysis.644    In 2020, over 100 institutional investors, managing a645combined 5 trillion, voted in near total alignment with ISS or646Glass Lewis. Robo-voting may be attractive from a cost-647efficiency standpoint, but it compromises fiduciary648responsibilities. It removes independent judgment from649governance decisions and reduces diversity in shareholder650viewpoints.651    Structural conflicts of interest further complicate the652role of proxy advisors. ISS now only provides recommendations653but sells governance consulting services to the very companies654it evaluates. This dual role represents a fundamental conflict.655How can a firm offer objective assessments while advising those656same issuers? We typically do not allow such conflicts in657financial services. Auditors, for example, have long been658prohibited from conflicting activities under Sarbanes-Oxley.659    Market concentration exacerbates the problem. With only two660dominant firms, companies have little recourse if they disagree661with recommendations. The market lacks meaningful competition,662making transparency all the more essential.663    Proxy advisors often promote uniform governance practices664across industries, ignoring the unique needs of individual665firms. A one size fits all approach may penalize innovative or666long-term strategies, and very little evidence supports the667idea that proxy advisors' specific governance recommendations668improve returns or help companies avoid scandal.669    In 2020, the SEC adopted reforms requiring proxy advisors670to disclose conflicts of interest, allowing issuers to review671proxy advice before meetings, and reaffirm that proxy advice672constitutes a solicitation under Federal securities laws. These673reforms were carefully developed over a decade, across two674administrations, to promote transparency and fairness. Yet in6752021, the SEC suspended enforcement and announced plans to676revise the rule before full implementation. In my view, this677regularity whiplash creates uncertainty. It signals that public678input can be ignored, and it erodes trust in the commission.679    Again, I wish to stress that the modern proxy advisory680industry has not grown out of market innovation but instead out681of regulatory incentives. Even if proxy advisors perform a682useful function, why should we not hold them to fiduciary683standards and protect investors against conflicts of interest684as we do for other major market actors? By imposing685accountability and oversight, Congress can ensure proxy686advisors serve as responsible facilitators of informed687shareholder participation rather than unregulated gatekeepers688of corporate governance.689    Thank you.690691    [The prepared statement of Mr. Rose follows:]692693[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]694695    Chairwoman Wagner. Thank you, Professor Rose.696    Mr. Washington, you are now recognized for 5 minutes for697your oral presentation.698699 STATEMENT OF PAUL WASHINGTON, PRESIDENT AND CEO, SOCIETY FOR700                      CORPORATE GOVERNANCE701702    Mr. Washington. Good afternoon, Chair Wagner, Ranking703Member Sherman, members of the subcommittee. My name is Paul704Washington. I am President and CEO of the Society for Corporate705Governance.706    The Society is a nonpartisan, nonprofit organization of707governance professionals who serve approximately 1,000 public708and private companies of almost every size in industry across709our country. We advocate for policies that promote effective710governance, appropriate disclosure, and capital formation, and711we appreciate the opportunity to present our views on proxy712advisory firms today.713    Proxy advisory firms play an influential role in capital714markets by advising investors on how they should vote, as715indicated in numerous studies submitted in our written716testimony. The firms' impact is twofold. First, they can717determine the outcome of votes where shareholders have decision718making power. Second, even when shareholder votes are merely719advisory, as is the case with companies' say-on-pay proposals720or many shareholder proposals, they often affect board decision721making.722    In addition to providing voting recommendations to723investors, the proxy advisory firms also own and control724software platforms that send votes by investors to the725tabulators for shareholder meetings. In some cases, the726advisory firms decide how to vote and submit the balance for727their clients, and they offer, as has been mentioned, other728services to investors and corporate clients.729    Importantly, the influence of proxy advisory firms is730likely only to increase. A number of large U.S. asset managers731are implementing programs that will allow their upstream732clients to decide how to vote their shares rather than having733the asset manager make that determination. In some cases, the734voting options provided to those upstream clients are based on735the proxy advisory firms' own policies or recommendations,736thereby effectively increasing the influence of these firms.737    The Society supports what we term the ``light touch''738regulation of the proxy advisory firms. Institutional investors739cast votes on tens of thousands of items each year, and the740Society fully supports investors' ability to enlist outside741assistance in deciding how to vote and in casting votes. At the742same time, we believe regulation can, first, help ensure that743shareholders are provided with accurate information by the744proxy advisory firms before casting votes, and second, increase745transparency regarding proxy advisory firms, thereby enhancing746confidence in the system.747    Let me address four areas of reform.748    First, as a threshold matter, legislation may be needed to749address the SEC's jurisdiction. For many years, as you know,750the SEC has considered the activities of proxy advisory firms751to be within the scope of proxy solicitation and therefore752subject to the Commission's rules. As you know, ISS has753challenged the SEC's interpretation in a lawsuit in Federal754district court, which is on appeal to the D.C. Circuit. If ISS755prevails and it is determined that the SEC lacks authority to756regulate proxy advisory firms, Congress should move quickly to757enact legislation to confirm the SEC's authority.758    Second, and quite importantly, the Society supports759requiring proxy advisory firms to provide advanced copies of760their reports to companies on a complimentary basis with a761reasonable amount of time for companies to identify any762factual, analytical, or other errors. In addition, proxy763advisors should provide clients with a hyperlink to the764company's response to the advisory firm's analysis and765recommendations.766    Given the more than 25,000 valid items on Russell 3000767companies each year, it is inevitable that proxy advisory firms768will have some factual errors. Numerous studies confirm that769these errors occur.770    An advance review and common process would permit a company771to review and correct any factual, inaccurate information. This772practice would also be consistent with ISS' prior practice in773the United States, its current practice outside the United774States, and the SEC's 2019 proposed rule.775    Next, we support increased disclosure of the empirical776basis for proxy advisory firms' voting policies. This is777critical because institutional investors with fiduciary duties778to their shareholder clients rely to varying degrees on proxy779advisory recommendations. Second, as more retail investors780participate in client-directed voting programs, in which their781votes follow proxy advisor recommendations, those retail782investors should know whether and to what extent the783recommendations have a solid empirical foundation.784    We also believe that proxy advisor firms should, at a785minimum, provide increased information regarding actual or786potential conflicts of interest that arise from their multiple787roles.788    Finally, the Society also supports the regulation of789automated voting, sometimes called robo-voting. This automated790voting outsourcing is of particular concern because, as noted791above, the proxy advisory voting policies may not have an792empirical basis.793    We appreciate the legislation that the subcommittee is794considering, and we stand ready to work with you as you refine795the legislation.796    Thank you very much for the opportunity to appear before797you this afternoon.798799    [The prepared statement of Mr. Washington follows:]800801[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]802803    Chairwoman Wagner. Thank you, Mr. Washington.804    Ms. Minow, you are now recognized for 5 minutes for your805oral presentation.806807    STATEMENT OF NELL MINOW, VICE CHAIR, VALUEEDGE ADVISORS808809    Ms. Minow. Thank you, Madam Chairman and members of the810committee.811    I am a graduate of the University of Chicago which taught812me a lot about free markets, and I am the Founder or Co-Founder813of five startups, three which have been sold, and we have814created hundreds of jobs. I am here on behalf of the people815capitalism is named after, the capitalists, the providers of816capital, and on behalf of the shareholders.817    I worked in the Antitrust Division of the Justice818Department during the Reagan Administration, so I am aware that819the elements of a cartel are collusion on pricing and imposing820barriers to entry on the market for competitors. Neither of821those are present here, and that is why I am using the word822``cartel'' in quote marks because it just does not apply at823all.824    As for entering the market, there have been some that have825tried and failed. There was a really good one started by a826former SEC commissioner, but nobody bought the product because827it was funded by the business roundtable, and they were828suspicious of it.829    There have been a couple in the last couple of years, as830Mr. Sherman said, that sell themselves as the anti-woke. There831are also proxy advisors outside the United States that cover832U.S. companies and make their services available.833    I could start a new one tomorrow but if you impose new834rules, if you impose new restrictions, you are making it harder835for new people to enter this business and compete with ISS and836Glass Lewis.837    Proxy advisory services are purchased exclusively and838voluntarily by the most sophisticated financial professionals839in the world, almost all of them also fiduciaries and subject840to the strictest legal standard that has ever been developed.841No one has to purchase their services, and no one has to follow842their advice.843    If indeed they are as influential as the snowflakes over844here are saying, then they should be popping champagne corks,845because over 90 percent of the recommendations of the proxy846advisor services are to vote as management recommends. I do not847know anybody who understands voting better than the members of848this committee and the members of this House. You would be849overjoyed to get 96 percent of the vote, which is what the850unopposed directors get when ISS recommends a vote in favor.851    On the 4 percent where ISS parts from the recommendations852of management, the data shows very clearly that the fiduciary853financial professionals read the analysis and make their own854decisions. In my opinion, the single most outrageous item that855has ever been on a proxy is the $58 billion pay package for856Elon Musk at Tesla. ISS recommended a vote against. It got a857strong majority vote in favor.858    I have a lot of data in my submission about the number of859votes that go contrary--cast by clients of the proxy advisors860that go contrary to their recommendations, as well as data861about the different recommendations that ISS and Glass Lewis862have, showing, again, that there is no collusion, and many863people do subscribe to both.864    Despite proxy advisory firm recommendations, the clients865often vote in favor or vote against. The shareholders of Tesla866also voted in favor of the move from Delaware to Texas, which I867thought was wrong. ISS supported it, and it got enormous868majority.869    This is a kill the messenger approach. You have the870absolute ultimate example of the free market here. The reason871the proxy advisory services started--and I was there when they872did, and I helped to start one--is that there was documentation873that investment managers were voting incorrectly when it came874to shareholder votes. They were voting ``yes'' when they should875have voted ``no'' because the companies were clients or were876prospective clients. Jack Bogle, the founder of Vanguard, wrote877several books about that subject. The independent proxy878advisors were invented, were asked for, and became a part of879the market, to avoid those inherent conflicts of interest.880    I am sure that advocates who are paid by corporate insiders881have valuable comments, but I think it would be useful for this882committee to hear from the institutional investors that use883these services so that you can understand why they buy them,884how they use them, and when they vote with and against them.885886    [The prepared statement of Ms. Minow follows:]887888[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]889890    Chairwoman Wagner. I thank you, Ms. Minow.891    Before turning to member questions, I want to remind892everyone involved in this hearing, both members and witnesses,893to adhere to proper decorum in every way, shape, and manner and894I will impose that.895    I now recognize myself for 5 minutes for questions.896    Mr. Washington, as a former corporate secretary of a public897company, you played a key role in navigating the firm898throughout the shareholder proposal process during proxy899season. Can you discuss the impact that a proxy advisory firm's900recommendations have on a shareholder's proposal?901    Mr. Washington. Certainly. It has a quite significant902impact. This is more recent, but the Society for Corporate903Governance, as put forth in the written testimony, found that904in the last proxy season, there is a 36-point difference in905shareholder support for a proposal that is endorsed by ISS and906Glass Lewis versus when it is not. That is 42.4 percent in907favor versus 6.6 percent. So a dramatic impact when the908advisory firms are in favor of a shareholder proposal.909    That has a knock-on effect within the boardroom. It affects910corporate decision making as to whether you will take a911particular action or not because it factors into the calculus912of, what would this do for the company's reputation, what might913it do for the associated controversy if you did not follow the914shareholder proposal?915    Chairwoman Wagner. Then you would say that the impact on916these proxy advisory firms' recommendations, what, does it917carry a large amount of weight?918    Mr. Washington. A very significant amount of weight, yes.919    Chairwoman Wagner. Ms. Ising and Mr. Washington, how have920proxy advisors materially impacted corporate behavior over the921last 10 years? Please, Ms. Ising.922    Ms. Ising. I think there are three key impacts that I would923highlight. The first is the increase in costs, which are924definitely passed on to shareholders. Companies are obviously925operating, running their businesses and trying to maximize926shareholder value, but they also have to spend significant927resources rethinking what they have determined is in the best928interests of the company and shareholders, given the proxy929advisory firm's expectations and the consulting fees that need930to be paid for the advisory services.931    It also takes management and board time to address these932issues. Frankly, the proxy advisory firms have contributed to933the number of shareholder proposals that we see in proxy934statements, and that--fueling that rise has also led to the use935of more corporate resources to address them.936    Chairwoman Wagner. Mr. Washington, how has it impacted937corporate behavior, the proxy advisors, over the last 10 years.938    Mr. Washington. It affects the way it would if you had a939major shareholder who actually did not actually have a stake in940your company. That is essentially what we are dealing with. It941is not like having an extra director in your boardroom who942would have to abide by fiduciary duties, nor is it like having943a regular shareholder who cares about the long-term financial944well-being of the organization. It is like having a major945shareholder or a couple of major shareholders who may have946other interests at play here.947    Chairwoman Wagner [continuing]. and other conflicts.948    Mr. Washington. Including some conflicts.949    Chairwoman Wagner. Professor Rose, there has been950widespread criticism of proxy recommendations that lack a basis951in fact or prioritization activist agendas over shareholders'952interests. How can we ensure that proxy advisors are acting in953the best interest, the best interest of shareholders.954    Mr. Rose. I think that the legislation, the draft955legislation that we have seen, especially Congressman Steil's956bill, would really go to the heart of that issue. It would957impose greater transparency into methodologies. It would958provide disclosure of conflicts of interest, and it would959impose liability for misleading statements. I think all of960those----961    Chairwoman Wagner. Liability. Good.962    Mr. Rose. Yes. I think all of those things could help963ensure that they are acting in the best interest----964    Chairwoman Wagner. Mr. Crain, NAM challenged the Biden965SEC's decision to suspend enforcement of the 2020 proxy rule--966you mentioned it briefly--and its latter recission of parts of967the rule. Can you describe how the SEC, under former Chair968Gensler, created more uncertainty surrounding the proxy969advisory industry.970    Mr. Crain. Absolutely. The 2020 rule, as has been971mentioned, was developed over the course of a decade, and it972really included many bipartisan ideas. Unfortunately, under973Chairman Gensler's leadership, they suspended--unlawfully, as974the court held--and then rescinded--again, unlawfully, as the975court held--that rule, creating a significant pendulum effect976that the market is currently feeling, and we are still977litigating this issue. There are oral arguments on Friday about978whether the SEC has the authority to regulate these firms at979all. Manufacturers say that they do. ISS says that they do not.980    Chairwoman Wagner. Thank you very much.981    The chair now recognizes the ranking member of the982subcommittee, Mr. Sherman, for 5 minutes for questions.983    Mr. Sherman. The loudest and most persuasive testimony is984the testimony that has not been spoken. California Public985Employees' Retirement System (CalPERS) is not here complaining.986The institutional investors are not here complaining. The987owners of capital in our society are not complaining. The988complaints are coming from those who represent corporate989America who do not want the owners of corporate America to tell990the managers of corporate America what to do because they are991just the owners.992    Now, low-cost investing is the rage now. You want to993minimize your costs, and these proxy advisors cost money. Would994it be illegal, Ms. Minow, to just have a mutual fund that says,995we always vote with management? Makes it simple. We spend 0.0996pennies figuring out what to do. Is that legal?997    Ms. Minow. It is legal.998    Mr. Sherman. Or, we always vote against management. Is that999legal too?1000    Ms. Minow. That is also legal.1001    Mr. Sherman. Okay. You do not have to pay for this advice1002if you do not want it. In fact, you could offer investors a1003lower administrative cost if you just--or you could also--you1004could also have a proxy--a mutual fund, its policy was, we just1005never vote, or we always just count our votes toward a quorum1006but otherwise do not vote.1007    Ms. Minow. They would have to make a case that was1008consistent with their obligation as fiduciaries, but if they1009are small enough, I think they could do it.1010    Mr. Sherman. You would have to be small to do that, whereas1011always voting with management, a big one could do that?1012    Ms. Minow. If they disclosed it so that people could1013decide----1014    Mr. Sherman. We save money by not thinking----1015    Ms. Minow. Yes, that people could decide----1016    Mr. Sherman [continuing]. is the----1017    Ms. Minow [continuing]. that is what they wanted.1018    Mr. Sherman. Index investing, that is the slogan: We save1019money by not thinking. Why not carry it one step further and1020apply that to this?1021    Ms. Minow. Sure.1022    Mr. Sherman. I mean, if you are not going to spend a penny1023figuring out what stock to buy, why should you spend a penny1024figuring out how to vote on the damn proxy statement?1025    So we are being told that there are errors. Now, the SEC1026Investor Advisory Committee reported proxy advice contained1027errors at the rate of 0.3 percent of the--and none of those1028errors were shown to be material. Proxy advisors, of course--1029private companies. Their clients expect them to be accurate.1030    Ms. Minow, what is the argument for supporting more Federal1031regulation of advisors to promote accuracy when the review1032shows no material misstatements of fact?1033    Ms. Minow. Proxy advisors are publishers of reports. Just1034like newspapers, they give----1035    Mr. Sherman. If I could sue my newspaper in my town for an1036error rate of greater than 0.3 percent, I could afford to1037retire from Congress.1038    Ms. Minow. Absolutely. There is no possible justification1039for that regulation.1040    Mr. Sherman. Okay. Is there any organization that is--can1041we close the door back there? It is creating--and I would ask1042to suspend the clock.1043    Chairwoman Wagner. Yes. Suspend the clock, please.1044    Apologies, ladies and gentlemen. It was at a minute-thirty1045left in his time.1046    Mr. Sherman. Thank you. Thank you.1047    Chairwoman Wagner. He may resume.1048    Mr. Sherman. Let's see. If an investor wanted to invest in1049a mutual fund that was dedicated to moving us away from fossil1050fuel, how could that fund vote those values without getting any1051advice? Could that work?1052    Ms. Minow. Exactly. As I said, the proxy advisors came of1053age in the 1980s to prevent the conflicts of interest that the1054investment managers were facing.1055    Mr. Sherman. Okay. What if you wanted a fund that invested1056in traditional values, now and then, as I posited the idea that1057there might be a question before a corporation as to whether to1058get involved in the pornography business, they say that you can1059make money in that. If we had investment advisor--if the proxy1060advisors were required to give advice consistent with1061maximizing profits, would they then have to advise a1062traditional values funds to vote ``yes'' to pornography?1063    Ms. Minow. They are happy to do it. They are in business,1064Ranking Member Sherman. If you come to them and say, I would1065like you to vote proxy voting policies or vote my proxies for1066me----1067    Mr. Sherman. Right.1068    Ms. Minow [continuing]. according to whatever policy you1069want, they would provide----1070    Mr. Sherman. So, if you pay them to tell you how to vote1071traditional values, they will.1072    Ms. Minow. Yes.1073    Mr. Sherman. Unless Congress prohibits such advice, as has1074been proposed by some of my Republican colleagues.1075    I yield back.1076    Chairwoman Wagner. The chair now recognizes the gentleman1077from Arkansas, the Chair of the full Committee on Financial1078Services, Mr. Hill, for 5 minutes.1079    Chairman Hill. I thank the chair.1080    Mr. Crain, good to have you with us. I was thinking about1081your members and, just curious, when they designed their1082corporate policies and compensation programs, do the views and1083the policies and the likely recommendations of the proxy1084advisory firms influence that?1085    Mr. Crain. They absolutely do. If you are putting together1086one of these policies, you absolutely need to take into account1087the very powerful fact. If you, quote/unquote, get it wrong,1088then ISS and Glass Lewis might recommend against you.1089    The best way to avoid, quote/unquote, getting it wrong is1090by paying for their consulting service. They will tell you what1091is in the secret sauce to help you structure the policy in a1092way that aligns with their view of corporate governance. Then1093you avoid the negative vote recommendation at the end of the1094day. That is absolutely part of the calculus for publicly1095traded manufacturers.1096    Chairman Hill. That is amazing. Is that--that seems like1097that is just way outside the scope of the business judgment1098rule and the fact that we have all these rules and State law1099about having independent boards of directors that are1100responsible for all that, but you are saying there is--this1101is--would you describe this as an outsized influence over the1102board?1103    Mr. Crain. I absolutely would. I think----1104    Chairman Hill. Why is it more outsized than some successful1105money manager--CalPERS? Does CalPERS--it is a powerful money1106manager out there in California. Do they rely on ISS or1107somebody to tell them what to do even though they are one of1108the biggest in the country?1109    Mr. Crain. My understanding--I am not an expert on their1110specific relationships, but I do believe they rely on the proxy1111firms to some extent.1112    I think your point is well taken, though, that proxy firms1113uniquely are unregulated in this space. If you think about the1114large institutional investors, if you think about the1115exchanges, if you think about the publicly traded companies who1116are operating in America's capital markets, everybody is a1117participant in the capital markets, and they have some1118appropriate degree of regulation. We can all agree or disagree1119with exactly what that appropriate degree is but proxy firms do1120not. They are unregulated, and that is an issue, despite their1121influence.1122    Chairman Hill. Yes. I appreciate what my friend, Nell1123Minow, said about when she started her company was in the dark1124ages, though. Right?1125    Ms. Minow. Yes, sir.1126    Chairman Hill. Back in 1992, you are reflecting on the11271980s LBO craze, leverage buyout craze, two classes have1128stopped, staggered directors----1129    Ms. Minow. Greenmail.1130    Chairman Hill. No independent directors, no independent1131compensation committee, no separate chairman from a CEO. Right?1132Those were the top issues then. Would you agree? Among many1133others, but those were top issues.1134    Ms. Minow. Those were definitely the top issues at that1135time, yes.1136    Chairman Hill. Okay. Since 2000, the implementation of1137Sarbanes-Oxley, where we have all this micromanagement of1138influence between investment bankers, investment research,1139owners, owner disclosure, it is a different world, would not1140you say, that today's capital markets are different than 1992s?1141    Ms. Minow. I have kind of a Dickensian best of times, worst1142of times assessment of that. We certainly are doing much better1143with regard to independent directors and the number of boards1144that they serve on. There are a lot of big improvements, and1145Sarbanes-Oxley--it was a huge impact on that. However, some1146things are worse. To the extent that they are better,1147legislation played an important role, but so did the1148shareholder feedback.1149    Chairman Hill. Yes. I am for shareholder feedback. I was in11501992 when you and I met each other, and I am for it now. The1151problem is we have, like, fewer public companies now. Public1152companies are not going public because of the cost and1153litigation around this kind of stuff.1154    I credit the success of this industry to Harvey Pitt and1155the no-action letter in 2003. This is a self-created, self-1156fulfilling prophesy set of organizations due to that no-action1157letter, which basically said, If you use one of these folks,1158you are off the hook, to Brad Sherman's comments that he just1159made about----1160    Ms. Minow. Excuse me, but that has been rescinded.1161    Chairman Hill. Yes, but it was still the origin of how this1162business grew, in my opinion. Do you agree with that?1163    Ms. Minow. I would think that my origin story goes back to1164the Labor Department and their letter----1165    Chairman Hill. Right.1166    Ms. Minow [continuing]. in 1988 for--for ERISA fiduciaries.1167    Chairman Hill. Right. Yes, I think we have taken care of1168that. We are doing a good job of that.1169    Ms. Minow. Yes.1170    Chairman Hill. I want to turn and ask Ms. Ising, from your1171experience, how influential are the proxy advisory firms in1172voting outcomes?1173    Ms. Ising. They are very influential. It obviously depends1174on the specific company at issue, but we have seen studies that1175show, for example, on say-on-pay votes, it can be upwards of a117640 percent difference. The way we often will also see that1177influence show up, is not just in the vote totals but also in1178the dramatic impact that happens once the left hand issues the1179voting recommendations, and the right hand casts the votes.1180    Chairman Hill. Thank you.1181    Ms. Ising. So you can swiftly see it.1182    Chairman Hill. I appreciate that.1183    I yield back to the chair.1184    Chairwoman Wagner. The gentleman yields back.1185    The chair recognizes the gentlewoman from California, the1186Ranking Member of the full Committee on Financial Services, Ms.1187Waters, for 5 minutes.1188    Ms. Waters. Thank you very much, Madam Chair.1189    As I stated in my opening remarks, I firmly believe that1190President Trump's ongoing efforts to align his and his family1191and his friends' pockets is an illegal and despicable attempt1192to use the Office of the President for personal gain. I think1193it is deserving of this committee's immediate attention.1194Nevertheless, I will indulge the witnesses with a few questions1195about the proxy advisory industry.1196    For those listening at home, proxy advisors are independent1197research firms that have asset managers and ordinary investors1198alike to better understand the numerous proposals they must1199vote upon at the annual meetings of the companies they are1200invested in.1201    Critics of proxy advisors often claim they have too much1202power over corporate governance and often accuse them of1203recommending votes that are contrary to what corporate1204management wants.1205    I want to ask the question of you, Ms. Minow. As you put1206out in your testimony, however, ISS recommended a vote with1207management on a whopping 96 percent of proxy proposals in 2024,1208and those proposals went on to receive 90 percent--96 percent1209of the vote. Almost all of those proposals were recommendations1210to vote in favor of unopposed board candidates, auditor1211approvals, and other routine matters. Sounds to me like1212management words of an all-powerful proxy advisory cartel are1213overblown. Might go so far as to say that proxy advisors are1214too aligned with corporate management.1215    Can you talk a little bit more about the role of proxy1216advisors and whether silencing them, as some of the bills1217posted for this hearing would do, would benefit the advisor? I1218would like to hear from you.1219    I will tell you the truth. If you were talking about1220tariffs, if you were talking about Social Security, if you were1221talking about Medicaid, if you were talking about the issues1222that are really confronting us at this time with a President1223who is leading this country in a terrible direction, I would be1224more interested, but this is my duty.1225    I am going to sit here and listen to all about these1226powerful proxy advisors. Please, go right ahead.1227    Ms. Minow. Thank you, Representative Waters, and I hope we1228can have that other conversation sometime too.1229    Yes. Proxy advisors, as I said, they are in business. If1230you come to them and say, I would like you to vote proxies for1231me, and here are my policies, I--for example, there are a1232number of extremist right-wing proposals that are appearing1233this year on proxies--say we are going to vote all in favor of1234those and against all of the ones that are coming from the nuns1235and the public interest groups. They will be happy to vote your1236proxies exactly as you say but what they do is provide a lot of1237research.1238    If you will permit me, I would like to give--to add to the1239record two examples of ISS proxy advisory reports, which I1240think should be a part of the record, because you will see,1241quite honestly, they go into great quantitative detail in their1242evaluation. They say, and this is what management says, and1243this is what we say, and this is what somebody else says. I1244think they would really enhance the record of this hearing.1245    Ms. Waters. I ask permission to enter into the record a1246recent report from ICCR, the Sustainable Investment Forum, and1247the Shareholder Rights Group on shareholder proposals.1248    Chairwoman Wagner. Without objection, so ordered.12491250    [The information referred to was not submitted prior to1251printing.]1252    Ms. Waters. Thank you. We have a little bit more time left.1253    You know anything about tariffs? Wall Street is telling us1254that there is so much uncertainty. They do not know what this1255President is going to do from day to day. He really does not1256know anything about tariffs.1257    Anyhow, I think he was trying to improve or--the tariffs on1258a little island called Lesotho in Africa. I think you have no--1259people on the island would have you but to tell you the truth,1260I just wish that this committee would take up some serious1261issues. We are going to have a markup on Wednesday. I want1262everybody to pay attention. I got something for them. Okay?1263    Ms. Minow. Okay.1264    Ms. Waters. You sure you do not know anything about1265tariffs? Oh, that is okay. These big old important proxy1266advisors, that is what we are here about today. They have so1267much power. Got to do something about them. Cannot let the--1268what are they doing? Telling the wrong people the right thing1269or the right people the wrong thing. We do not know. Frankly, I1270do not care but I got to do this.1271    Ms. Waters. As the Ranking Member, I have to pretend, but I1272tell you, sit in with us tomorrow, listen to us, what is going1273to happen on the markup, okay?1274    Ms. Minow. Yes, ma'am.1275    Ms. Waters. I yield back my time, and I am glad to do it.1276Thank you.1277    Chairwoman Wagner. The chair now recognizes the gentleman1278from Oklahoma, the Chair of the Task Force on Monetary Policy,1279Treasury Market Resilience, and Economic Prosperity, Mr. Lucas,1280for 5 minutes.1281    Mr. Lucas. Thank you, Chair, and thank you to our witnesses1282for testifying today. I too look forward to hours and hours and1283hours and hours and hours of good insights tomorrow.1284    For the moment, let us turn to the prospective. Last week,1285Paul Atkins was sworn in as the 34th Chairman of the SEC. This1286is certainly a welcome change as the previous Chairman had1287pursued an aggressive rulemaking agenda, undoing much of the1288progress made under the first Trump Administration.1289    For example, many of their forms implemented under Chair1290Clayton intended to increase transparency, and proxy advisory1291industry were rolled back or went unenforced under Chairman1292Gensler.1293    Ms. Ising, what would you suggest to the new chairman as1294the first order of business in improving the misguided1295regulations of the past? First order of business, what would1296you tell the new chairman?1297    Ms. Ising. I think the first order of business with respect1298to proxy advisories is restoring the common--well, first,1299making sure and continuing the grounded view that proxy1300supervisors are engaged in solicitations, bringing back the13012020 rules, which as Charles mentioned, are very much a1302reasonable approach, and continuing to focus on the need for1303transparency, for fairness, and predictability in how these1304firms operate.1305    Mr. Lucas. Mr. Crain, as Ms. Ising just detailed, there are1306a number of positive steps that the SEC could take with its1307existing authority. Now turning to Congress, what statutory1308changes should this committee be looking at so that public1309companies are not burdened by regulatory whiplash that you talk1310about in your written testimony?1311    Mr. Crain. The first place that I would look at is the1312Exchange Act's clear directive that the SEC has the authority1313to regulate solicitation and that proxy advisors are, in fact,1314engaged in solicitation. Hopefully, the NAM is successful this1315Friday in protecting that authority in Federal court. I am1316going to say, unlikely event that we are not--knock on wood--it1317would be incredibly impactful if Congress were to weigh in and1318remake clear that the Exchange Act does have that authority.1319    Putting the authorities aside, though, there are plenty of1320specific reforms that Congress could institute that would1321ensure that there is not a pendulum swing when there is a1322change in administration. Things like companies' ability to1323review draft recommendations to identify errors, companies'1324ability to respond to the proxy firm's recommendations and1325ensure that investors have access to those responses, things1326like regulating conflicts of interest and increasing1327transparency. There is a lot of work that you all can do1328separately and apart from whatever happens at the SEC or in1329court.1330    Mr. Lucas. Mr. Washington, my bill, the Public Company1331Advisory Committee Act, would provide public companies the1332opportunity to engage with the SEC on a range of regulatory1333issues, including the ones discussed today. Can you speak more1334to why the SEC would benefit from establishing a public company1335advisory committee?1336    Mr. Washington. Delighted to do so. Thank you for this1337palate-cleansing bipartisan moment, because we think this is an1338issue that both sides of the aisle can embrace.1339    The SEC has a number of advisory committees, including one1340for investors. They do not have one for issuers. We think that1341having a group of issuers, large comp---small and mid-cap1342companies who can get together and advise the SEC in advance of1343proposing rules or sending rules, revising rules, will1344dramatically streamline the regulatory process, improve1345decision making, and reduce the burdens on investors, issuers,1346and the government alike.1347    So we really hope that this is a--your legislation--and we1348appreciate your leadership on it--is something that can be1349embraced on both sides of the aisle and can move forward.1350    Mr. Lucas. Madam Chair, before I yield back, I would note,1351I am looking forward to quality bonding time with all my1352friends tomorrow. With that, I yield back.1353    Chairwoman Wagner. It will be a spectacle, that is for1354sure. The gentleman yields back.1355    The chair now recognizes the gentleman from California, Mr.1356Vargas, for 5 minutes.1357    Mr. Vargas. Thank you very much, Madam Chair. Thank you for1358holding this hearing and there is nothing like bonding. Looking1359forward to it. Nothing like bonding around here. Fabulous.1360    Now, I tried to research your backgrounds, and you have1361stellar backgrounds obviously, and I believe that four of the1362five of you are attorneys.1363    Mr. Crain, I do not believe you are an attorney. Is that1364correct?1365    Mr. Crain. That is correct, I am not.1366    Mr. Vargas. I believe the four of you are. Is that correct?1367Or am I incorrect about that?1368    Mr. Washington. Guilty as charged.1369    Mr. Vargas. You are?1370    Great. Okay. Mr. Washington, you have mentioned conflict of1371interest a couple times here, and I think that is very1372important.1373    So we have been reading about the President's1374cryptocurrency and his memes. Is there potential here for a1375conflict of interest, and would not an investor want to know1376some information?1377    You are an attorney first. Could you tell me, is there a1378possibility for a conflict of interest here?1379    We heard from The New York Times that in American history1380we have never seen so much intertwining between public policy1381and a President's personal fortune. Is there a potential here1382for conflict?1383    I would advise you before that, remember what Lisa1384Murkowski said.1385    Mr. Washington. Yes. No, I think----1386    Mr. Vargas. She said that they fear retribution from the1387President if they speak freely. Go ahead.1388    Mr. Washington. Yes. There are different rules that apply1389in determining where there is a conflict of interest in the1390political sphere, in the legal sphere, and in the corporate1391sphere. I feel qualified to talk about the conflicts of1392interest that exist in the legal sphere and the corporate1393sphere but not in the political sphere, respectfully.1394    Mr. Vargas. Would anyone else like to try? Ms. Minow?1395    Ms. Minow. Thank you very much. Before I went into ISS, I1396was in the government, and for a while, I was an ethics1397counselor in the government, and I can tell you it is a per se1398conflict of interest.1399    Mr. Vargas. Why is it a per se conflict of interest?1400    Ms. Minow. Because the President, like the other people in1401government, is supposed to have one interest, and that is what1402he swore to, the benefit--to uphold the Constitution and to1403benefit all Americans. When he sells access to have dinner with1404him, when he sells products and gives better attention to the1405people who buy those products, that is not just a perceived1406conflict but an actual conflict of interest.1407    Mr. Vargas. Who is going to police it, then, from the1408Federal Government?1409    Ms. Minow. I think it is probably Congress, sir--1410    Mr. Vargas. Congress? Not the Consumer Financial Protection1411Bureau (CFPB), not any other institution that we have?1412    Ms. Minow. [continuing]. and the press.1413    Mr. Vargas. It would not be anybody else? I mean, do not1414you want--now, if you are an individual investor, retail1415investor or an institutional investor, would not you want1416information on this? Would not you want to have some advice?1417    Ms. Minow. The President only once tried to have a public1418company with outside shareholders, and he learned very quickly1419that he was not happy about that. I do not know who his other1420shareholders are, but they are probably just members of his1421family.1422    Mr. Vargas. I bring this up for two reasons. One, obviously1423you want advice. I mean, if you are going to invest in a1424company, you are the investor, you are the owner of that1425company, ultimately you want advice. That is why I think proxy1426advisors are so important. You want advice. Whether it is the1427nuns or whether it is Opus Dei, it does not matter. They have1428two very--I am Catholic, I can tell you they have very1429different views--but they want advice.1430    You also want to make sure there is not a conflict here,1431and this is where I think it gets very important that we look1432at this as an institution. I mean, it is fascinating that we1433are not talking about that today.1434    You see this incredible opportunity for corruption, and yet1435there is silence. No one's talking on the other side. The1436people in power do not want to talk about it. Again, I think1437Senator Murkowski kind of let the cat out of the bag when she1438said there is retaliation, there is repercussions, we fear the1439President because of political actions that he may take.1440    So, again, I thank all of you for being here. I do not see1441how you get over the fact that investors are the owners of the1442company and they can get any advice they want. Again, whether1443they want advice on climate or whether they want advice against1444pornography or whether they want any kind of advice, they1445should get it and they should invest the way they want.1446    Last, just on a personal note, if you could say hello to1447your sister, she was my professor at Harvard. We can say1448Harvard these days, we are very proud of it today. Thank you.1449    Ms. Minow. Thank you, sir.1450    Chairwoman Wagner. The chair now recognizes the gentleman1451from Ohio, the Chairman of the Subcommittee on National1452Security, Illicit Finance, and International Financial1453Institutions, Mr. Davidson, for 5 minutes.1454    Mr. Davidson. Thank you, Madam Chairwoman. I really1455appreciate you having this hearing. I cannot believe it really1456took us this long to get this hearing. It is a commonsense1457solution to a problem.1458    There are very few things where you have 97 percent market1459share by two firms and there are not people that are concerned.1460I have people here that--at least one person here seems not1461concerned. We have colleagues who think that the right way to1462run capital markets is to just check with CalPERS, and whatever1463they say is probably what we should do for the agenda for the1464hearing.1465    Thankfully, Mr. Sherman is not running the agenda for the1466hearing, and may we never see that day.1467    The space that we are talking about really, Chairman Hill1468highlighted it, but, ISS, the incumbent in the proxy voting1469advisory space, was founded in 1985. ISS was a pioneer,1470providing proxy voting recommendations to institutional1471investors, and they were capitalizing on growing governance1472expertise. As I understand it, other firms existed, but none1473had ISS' early scale or influence. Then the SEC issued their14742003 rule requiring mutual funds to disclose voting policies.1475    Mr. Washington, do you agree with the timeline in the1476industry's development? Why exactly is it that a duopoly,1477consisting of ISS, operated 18 years before Glass Lewis1478existed, has now emerged?1479    Mr. Washington. Look, in almost any market there are1480different economies of scale, and so there will be markets1481where there will be naturally one player, two players, multiple1482players.1483    I would say, as a society we are interested in encouraging1484more players to enter into this market. That is why we believe1485in light touch regulation, because we actually want the1486environment to be conducive to more players coming into the1487market. At the same time, we want to make sure that the players1488who come into the market are providing accurate, reliable1489information to their clients. We are hopeful that legislation1490will proceed--that it will provide those market conditions to1491increase competition while ensuring accuracy.1492    Mr. Davidson. Thank you.1493    Mr. Rose, what would it take to get some market share1494beyond the 3 percent that is not gobbled up by the two big1495incumbents? What would it take to get that to happen?1496    Mr. Rose. I think that it is quite challenging. If you look1497at markets like this where you have a sort of certification1498function provided by market players--look at credit rating1499agencies, you look at auditing--they tend to be dominated by a1500small number of folks.1501    Again, I guess I would reiterate Mr. Washington's point.1502That is why light touch regulation would be helpful here. I do1503think regulation is necessary, but a light touch so that it1504would not create barriers.1505    Mr. Davidson. It is safe to say that they, just the two1506firms, exert quite a lot of influence over our capital markets,1507right? Does anyone disagree with that?1508    Mr. Rose. Absolutely. Absolutely.1509    Mr. Davidson. Okay. So is it also a concern that they are1510both foreign-owned? I mean, my understanding is ISS is owned by1511Deutsche Borse, and Glass Lewis has been owned by various1512Canadian firms but, currently, Peloton Capital Management, a1513private equity firm based out of Toronto. Should we be1514concerned about that?1515    Mr. Rose. In my view, it creates an additional layer of1516risk. Those firms are a little bit less, I suppose, a little1517bit less regulated by either U.S. investors directly as1518shareholders or by U.S. regulators.1519    Mr. Davidson. Then we have talked a little bit about it in1520terms of--Mr. Crain, you mentioned a potential conflict of1521interest inherent when proxy advisory firms are aligned there.1522They want to serve their clients. They want to serve people1523maybe better by giving favorable or unfavorable referrals on1524proxies.1525    So as the National Association for Manufacturers, NAM,1526notes, 59 percent of manufacturers cited unfavorable business1527climate as primary concern. We often hear about the Tax Code1528barriers. However, is any part of the unfavorable climate for1529manufacturers connected to corporate governance guidance?1530    Mr. Crain. I think absolutely. When you think about an1531unfavorable business climate, you think about burdensome1532regulations, you think about uncompetitive tax policies, as you1533mentioned, and you think about access to capital.1534    One way to access capital is by going public. One thing1535that makes going public more difficult is the influence and the1536power that these proxy firms have. I think it is absolutely1537fair.1538    Mr. Davidson. Thank you for your testimony today. My time1539has expired, and I yield back.1540    Chairwoman Wagner. The gentleman yields back.1541    The chair now recognizes the gentleman from Illinois, Mr.1542Casten, for 5 minutes.1543    Mr. Casten. Thank you. There is a certain irony hearing1544concerns about capital flying from the United States without1545mention of the last hundred days when it is running away from1546equities and treasuries, but I guess we are not going to talk1547about that today.1548    Mr. Crain, I want to just give you a hypothetical. Let's1549suppose that I am looking for a sole investor in my business.1550Setting aside what this business does, I need 250 grand from1551you. You are going to be my sole investor. You can ask me any1552question you want about cash-flow management, my compensation,1553hiring strategy, but I reserve the right to tell you that your1554questions are immaterial and not answer them.1555    Setting aside what my business does, are you on board?1556    Mr. Crain. I think my first question would be, why are you1557approaching someone who does not have 250 grand to give you?1558    Mr. Casten. Would you invest in a company on those terms,1559that I take your money and then I get to tell you whether your1560judgments are material?1561    Mr. Crain. I think certainly investors in a company,1562especially if I am the sole investor in your business, would1563certainly have some questions about what you are using that1564money for.1565    Mr. Casten. I say that as a--as a guy who built some1566companies with private equity. Never took a company public, but1567I always--it always struck me that there is this disconnect1568where, if you are starting a company and you find an investor,1569it is understood that as the entrepreneur, as the CEO, you are1570the custodian of someone else's capital and you work for them.1571    Yet, once you get a large, diffuse investor base, there is1572this idea that somehow, well, now their questions are kind of a1573nuisance, they are not as sophisticated as I am, they are not1574asking the kind of questions that I would have.1575    Since you--I guess since you do not have the $250,000, let1576me reframe the question. I got my money. I want you to work for1577my company now and as a condition of working for this company,1578you have to join a labor union, and you have to pay dues to the1579labor union.1580    The labor union is going to negotiate for compensation and1581benefits and all that, but they have to present their proposals1582to me first as the CEO, and I will roll them back to you for1583consideration after I have had a chance to vet them. Would you1584want to work for that company?1585    Mr. Crain. I will admit to being a little lost in the1586hypothetical, but I think the answer you are looking for is no.1587    Mr. Casten. I ask that because, like, number one, like, we1588have a proposal right now that would permit companies to say1589that shareholders are going to actually pay for these proxy1590advisory services, but then the company gets to review them1591before the people who actually paid for it can review them. We1592have another bill that would allow the companies just to ignore1593certain proposals outright because in their judgment this is1594not material.1595    I guess, Ms. Minow, like, I am sympathetic to the argument1596that you cannot possibly have every investor in every company,1597someone who owns one share of a company with 20 million shares1598outstanding, to ask you every question. Is not this just a1599collective action problem in the same ways that we have--labor1600unions help negotiate so that people can speak with one voice.1601Are not these proxy advisory firms just providing--solving a1602collective action problem?1603    Ms. Minow. Thank you very much. I am very, very happy with1604that question because that is exactly how I describe it. When1605you are making the buy-sell decision, that is something that--1606where there is a premium on exclusivity, and you just want to1607have information that nobody else has, as long as it is legal.1608    When you are talking about proxy voting, I can vote the1609best proxy policies in the world, but if I cannot get other1610people to vote with me, there is an awful economic term called1611rational apathy, and it means that it is more expensive for me1612to learn what is on the proxy than it could possibly benefit1613me, and that is why proxy advisors perform such an essential1614role.1615    I really appreciate that question.1616    Mr. Casten. No, and I am guilty of being in that 96 percent1617probably that just says, yes, just vote what they recommend.1618Easier, right?1619    Ms. Minow. I will vote your proxies.1620    Mr. Casten. I guess I just want to leave a question for all1621of you. Dan Savage, the love/sex advice columnist and very1622funny philosopher of all things, in my view, had this great1623comment, and it was in the context of people saying some fairly1624homophobic things to him. He said, when somebody accuses you of1625something you have never thought of, they are telling you what1626they are capable of.1627    There is something that is very strange to me, that we are1628sitting here saying we should never allow outside groups to1629tell a management team that their wisdom, their judgment about1630how to run a company is sufficiently--like, we cannot--we have1631to challenge them because they might do something foolish1632otherwise. Yet, I do not hear a peep about the State Financial1633Officers Foundation who is going out and telling pension funds1634we are going to change laws in your States because we do not1635want your pension fund to invest in companies that prioritize1636ESG, prioritize Diversity, Equity and Inclusion (DEI),1637prioritize climate change.1638    That is a real thing. That is really a group that is1639actually doing the thing that we are theorizing some, I do not1640know, some combination of George Soros and Dan Savage might be1641doing on the other side, but that is actually happening from1642the right.1643    I yield back.1644    Chairwoman Wagner. The gentleman's time is expired.1645    The chair now recognizes the gentleman from Wisconsin, the1646Chair of the Subcommittee on Digital Assets, Financial1647Technology, and Artificial Intelligence, Mr. Steil, for 51648minutes.1649    Mr. Steil. Thank you very much, Madam Chairwoman. Always1650good to have the last name pronounced like a true Luxembourger.1651    We have a huge opportunity today to talk about a duopoly1652that most Americans have never heard of--ISS and Glass Lewis--1653but two companies have a huge impact on their lives, their1654ability to save for retirement, and their own financial1655security. I think a lot of Americans would be surprised to know1656that both of these companies are foreign-owned.1657    Mr. Crain, are either ISS or Glass Lewis at least American1658companies if they are having such a big say on American1659retirement accounts?1660    Mr. Crain. I do not know the exact structure of their1661ownership, but, no, I do not believe so.1662    Mr. Steil. Mr. Rose, do you know their ownership structure?1663    Mr. Rose. I believe that they are both foreign-owned1664currently. I think that they are----1665    Mr. Steil. Germany and Canada.1666    Mr. Rose. Germany and Canada.1667    Mr. Steil. They are foreign-owned enterprises----1668    Mr. Rose. Yes.1669    Mr. Steil [continuing]. and they are opining on U.S.1670retirees' accounts. This should be concerning out of the gates1671for people.1672    Then we might want to know, how do they make their money?1673Sure, they provide advisory services and people pay for that,1674but, Mr. Rose, do they make money elsewhere?1675    Mr. Rose. They can make money through consulting services.1676    Mr. Steil. Consulting services. Why would somebody want to1677pay ISS and Glass Lewis, a German company and a Canadian1678company, a whole bunch of money for consulting services? There1679is are lot of consulting companies here.1680    Mr. Rose. So they could help convince your shareholders to1681vote for whatever proposal they want.1682    Mr. Steil. Oh, so you are saying that conflict of interest1683might go right over the so-called Chinese wall to the other1684side because they are making money on this side and they are1685making money on this side, all on the backs of American1686retirees. Is that correct?1687    Mr. Rose. That is the danger, yes.1688    Mr. Steil. So wait a minute, we should probably disclose1689these conflicts of interest, do you think?1690    Mr. Rose. I agree.1691    Mr. Steil. Does anybody on this panel think that we should1692not disclose conflict of interest for proxy advisors?1693    The record will reflect all of our witnesses think we1694should disclose them.1695    Mr. Crain, are they, of course, then required to disclose1696these conflicts of interest under current securities law?1697    Mr. Crain. Unfortunately, they are not, Congressman.1698    Mr. Steil. Holy cow. It sounds like Democrats and1699Republicans at least agree on the point that we should know if1700there is a conflict of interest for foreign companies that are1701advising a whole host of voting on American retirement1702accounts. This is egregious.1703    Of course, there was a period of time when the SEC came1704forward and said, maybe we should regulate these entities, and1705they wrote forward a law--or they wrote forward a rule and1706regulation.1707    Then what happened to that rule and regulation, Mr. Crain?1708    Mr. Crain. They suspended it, and then they rescinded it.1709    Mr. Steil. Were they legally allowed to do that, Mr. Rose?1710    Mr. Rose. Sorry. Repeat the question.1711    Mr. Steil. They suspended the proxy advisor rule. Were they1712legally allowed to do that?1713    Mr. Rose. They were.1714    Mr. Steil. Away we go, and now we do not have any rules or1715requirements of substance, with meat and potatoes on the bones,1716protecting American retirement accounts, because Gary Gensler1717went and gutted a well thought-through, well-structured rule1718that, in my opinion, did not even go far enough, he guts it1719out.1720    What we are doing is, we are allowing these foreign-owned1721companies to be making money on the consulting side, not1722telling anyone what their conflicts of interest are, and then1723advising places like, I think CalPERS was referenced earlier by1724one of my colleagues on the other side of the aisle who1725receives this advice and counsel.1726    That seems like a heck of a problem. Do you agree, Mr.1727Crain?1728    Mr. Crain. I absolutely would.1729    Mr. Steil. What should the SEC do? I think we should pass1730my legislation. We brought forward a healthy chunk of it to the1731House floor last Congress. We passed it across the House floor.1732The Senate did absolutely nothing.1733    I will comment on the Senate later, but I think we now have1734a real opportunity to bring this forward, because American1735retirement accounts are at stake because of this--these two1736companies that are making money, not sharing their conflict of1737interest, not letting the American people know why their1738shares, that are held in all sorts of retirement accounts,1739pension funds, how or why they are being voted on.1740    Let me hit another quick point with you if I can, Mr.1741Crain. What happens--of course it would not be the conflict of1742interest, I do not want to accuse anybody of any wrongdoing--1743but what would happen if they gave terrible advice?1744    Let's say there was a proxy advisor that recommended a1745``yes'' vote in favor of a resolution that was illegal. Has1746that ever happened, Mr. Crain?1747    Mr. Crain. If that happened, they would probably be robo-1748voted in the favor of that resolution, if that is the1749recommendation they made.1750    Mr. Steil. When we had the general counsel of ISS and the1751general counsel of Glass Lewis and I asked them--they sat right1752where you sat--and I said, Mr. General Counsels, do you review1753for legality? What was their answer to me? No.1754    In my opinion, they have advised, in a case of Travelers--1755and we can look it up, we can spend more time on this1756sometime--to actually recommend in favor of an illegal action.1757    Do you agree with that, Mr. Washington?1758    Mr. Washington. Yes, that has occurred.1759    Mr. Steil. This is horrific. They are not--and are they1760liable for that, do you know, Mr. Washington?1761    Mr. Washington. Not under the current regulatory regime.1762    Mr. Steil. In my bill, they would at least be liable for1763that. We have massive reform that needs to be done on this1764proxy advisor duopoly. I am excited we are here talking about1765it.1766    Thank you, Madam Chair, for holding today's hearing. I1767yield back.1768    Chairwoman Wagner. The gentleman yields back.1769    The chair now recognizes the gentlewoman from Michigan,1770Mrs. McClain----1771    Mr. Sherman. I request 10 seconds.1772    Chairwoman Wagner. No.1773    Mr. Sherman. Thank you.1774    Chairwoman Wagner. The chair now recognizes the gentlewoman1775from Michigan, Mrs. McClain, for 5 minutes.1776    Mrs. McClain. Thank you, Madam Chair, and thank you, Mr.1777Steil, for bringing forth this wonderful piece of legislation.1778I think it is well noted.1779    I do have to take one moment and just notice the hypocrisy.1780We think conflict of interest is a bad thing, right? Except1781when it is, like, from our party's conflict of interest or it1782has something to do with me.1783    So what I would just ask all the witnesses up there is,1784could we just keep our context the same no matter what context1785it is?1786    I mean, I think it is very interesting that my friends1787across the aisle want to talk about influence peddling, and1788they accuse our President of having a conflict of interest and1789maybe having some influence peddling when we had hearing after1790hearing about the past President, Biden, and his son, Hunter1791Biden, clearly doing influence peddling, but I think they had a1792different view on that.1793    However, Madam Chair, I am extremely excited to know that1794this is a bipartisan piece of legislation--or a bipartisan1795hearing that we actually agree on, and that is, transparency is1796good, right?1797    I mean, Mr. Crain, Congress has mandated that investment1798firms must be fiduciaries, correct?1799    Mr. Crain. That is exactly right.1800    Mrs. McClain. However, the firms they are hiring, the proxy1801firms, do they have the same responsibilities and goals, like1802fiduciary, as the firms do?1803    Mr. Crain. They do not. Proxy advisory firms do not have a1804fiduciary duty to the ultimate Main Street investors who are1805investing with the asset managers----1806    Mrs. McClain. Is it safe to say their goals do not align?1807    Mr. Crain. Yes.1808    Mrs. McClain. Do you think that is a problem?1809    Mr. Crain. I do.1810    Mrs. McClain. I think so too. I think the American people1811would say that is a problem as well.1812    Mr. Crain, these proxy advisors are claiming that despite1813their tremendous influence over how investors cast their vote,1814they should not be subject to SEC oversight. Can you--which is1815very interesting to me. Can you discuss the history of the1816SEC's authority to regulate proxy advisors?1817    Mr. Crain. Absolutely. This goes back to 1934, the Exchange1818Act. Congress, in your wisdom, your predecessors, gave the SEC1819the authority to regulate solicitation and soliciting entities.1820    What the proxy firms are doing in the present day is1821soliciting. They are soliciting proxies and casting them on1822investors' behalf, and yet they are arguing in court this week1823that they are not soliciting, that they should not be subject1824to SEC regulation.1825    Mrs. McClain. It is different, kind of like our conflict of1826interest opinions, right?1827    Mr. Crain, can you also describe how the Biden1828Administration created more uncertainty surrounding this proxy1829advisory industry?1830    Mr. Crain. Under the first Trump Administration, the SEC,1831under Chairman Clayton, had finalized a commonsense compromise1832rule that had been in process for a decade at that point. Under1833Chairman Gensler, under the Biden Administration, they1834suspended and then ultimately rescinded that rule.1835    Both of those decisions were found to be unlawful in1836Federal court. The effect that they have on the market is that1837it is the pendulum effect that you just mentioned where1838companies do not know what the rules of the road are.1839    Mrs. McClain. Interesting. Maybe there is a conflict of1840interest there we should look at, but let us not let facts get1841in the way of a good story, right?1842    Ms. Ising, ISS described ESG policies as being no longer1843optional but rather a necessary part of investment and asset1844management. Part of this strategy involves committing to the18451.5 degrees Celsius of the Paris Agreement.1846    Companies have a fiduciary responsibility to their1847shareholders, yet, are being held hostage by the agenda of1848staff at foreign-owned proxy advisory firms.1849    Can you discuss reasonable commonsense regulation that1850would protect shareholders from the ideological preferences of1851rogue staffers?1852    Ms. Ising. I think the key here is that we do not have1853sunshine on what the proxy advisors are doing. We constantly1854see errors in their reports. Whether it is on pro-ESG1855proposals, it is counter-ESG proposals, the issue is, who are1856the people making the decisions, and why is it that we need to1857pay for consulting services to be able to have the1858understanding of the underpinnings and the ultimate decisions1859that ultimately dramatically impact the proxy voting decisions1860being made?1861    Mrs. McClain. Thank you. With that, I yield back, Madam1862Chair.1863    Chairwoman Wagner. The gentlelady yields back.1864    The chair now recognizes the gentleman from Florida, Mr.1865Haridopolos, for 5 minutes.1866    Mr. Haridopolos. Thank you, Madam Chair.1867    I also let the folks know that the Florida attorney general1868has actually launched an investigation of ISS and Glass Lewis1869and on the impacts that they have had on Florida businesses, et1870cetera, and I am glad to see our attorney general in Florida1871making that maneuver.1872    Mr. Crain, I want to ask you a question if I could, please.1873What would be the consequence for our markets if ISS prevails1874in its litigation against NAM, in your opinion?1875    Mr. Crain. Essentially, they would be entirely unregulated.1876All of the consequences that we have been talking about today--1877the conflicts of interest, the errors, the one-size-fits-all1878policies, the robo-voting--they would be left entirely1879unchecked from a regulatory perspective, and that is incredibly1880problematic for public companies and probably more importantly1881for their investors who are the ultimate owners of those1882companies.1883    Mr. Haridopolos. Just to kind of build on that, I really1884appreciate Congressman Steil's points that were made and I want1885to emphasize Gensler actions, the last 4 years, have been a1886little bit challenging for this committee on multiple fronts.1887    What is your--what do you think the consequence of Mr.1888Gensler has been in giving the SEC guidance on this issue?1889    Mr. Crain. What the Gensler SEC did is essentially rescind1890all the efforts previous that had been made to bring proxy1891firms under reasonable oversight, and then they even went1892further and stopped defending their authority to write any type1893of rule at all.1894    So if ISS is successful in this case, the SEC used to be in1895that case, and they walked back from that opinion that they1896even have any authority in this space at all, trying to tie the1897hands, not just of the Gensler SEC, but any future SEC under a1898different administration. It is incredibly problematic,1899specifically in this proxy firm space.1900    Mr. Haridopolos. My last question, Mr. Crain, please1901describe to me maybe some examples of the most egregious1902current conflicts of interest among proxy advisors and some of1903the adverse impacts it has had on investors, if you could.1904    Mr. Crain. The clearest conflict of interest is ISS'1905consulting service. We know, as publicly traded companies, as1906publicly traded manufacturers, that the business consulting1907service will wait for a negative recommendation from the proxy1908voting service. Then, as soon as that negative recommendation1909comes in, that is when they send out their ask for businesses1910to buy their services, because the best way to avoid a negative1911vote--a negative vote recommendation, I should say--is to just1912hire ISS, but it is not just ISS.1913    Glass Lewis has recently launched a stewardship service1914where they are advising activist investors and institutions on1915how to best pressure and influence companies, whether it is by1916shareholder proposals, by vote-no campaigns, et cetera. Who is1917going to ultimately be recommending whether shareholders should1918vote for those campaigns? It is Glass Lewis.1919    So the conflicts are baked into their business models, and1920that has a real impact on the recommendations they make, and on1921the companies that they are making recommendations about, and1922ultimately on the investors who have holdings in those1923companies.1924    Mr. Haridopolos. Madam Chair, just to close, I want to1925applaud you for bringing this to our attention. As a new member1926of the committee, it is important that we understand some of1927these moving parts, and it is really eye-opening to say the1928least, some of the things that Chairman Steil, as well as Mrs.1929McClain and others have brought up today. We appreciate the1930candid information.1931    I am so glad that our attorney general in Florida is also1932looking at these type of measures because, again, this is the1933future of so many folks who have made investments, and to see1934that this type of unique behavior to be generous takes place. I1935am glad that we are having this public disclosure, so we can1936put the appropriate legislation in place to stop some of the1937shenanigans that have happened.1938    So thank you so much, Madam Chair, and I yield back.1939    Chairwoman Wagner. I thank the gentleman, and he yields1940back.1941    The chair now recognizes the gentleman from Montana, Mr.1942Downing.1943    Mr. Downing. Thank you, Madam Chair. Before I begin, I1944would like to request unanimous consent to submit this comment1945letter from Egan-Jones Proxy Services for the record.1946    Chairwoman Wagner. Without objection, so ordered.19471948    [The information referred to can be found in the appendix.]19491950    Mr. Downing. Thank you.1951    I am going to start out with Ms. Ising. Institutional1952investors are required to act in the interest of their clients1953to maximize their returns. Yet ISS and Glass Lewis have been1954criticized for routinely endorsing left-leaning proposals at1955shareholder meetings.1956    ISS and Glass Lewis control 90 percent of the proxy1957advisory industry and can sway up to 30 percent of votes in1958shareholder meetings.1959    Can you give some specific examples of when ISS and Glass1960Lewis endorsed proposals that were not focused on maximizing1961the returns or resulted in diminished returns for investors?1962    Ms. Ising. I am happy to do so. I would note that even the1963voting percentages that were given recently are particularly1964notable because last year ISS recommended for more than half of1965all shareholder proposals that were voted on just in 2024.1966    We see that, relevant to your question, of how they are not1967focused--they do not do a cost-benefit analysis. Our companies'1968boards of directors have fiduciary duties to act in the best1969interest of the company and the shareholders, to maximize1970shareholder returns. Those--they are not always--the proxy1971advisory firms are not taking that into account in doing their1972analysis.1973    For example, there was recently a proposal, a shareholder1974proposal that ISS supported on the use of pig gestation crates1975in a company's supply chain. The company noted that it did not1976breed, process, transport, own, or raise animals, and it had1977already announced a move away from sourcing pork raised in1978gestation crates. Yet, ISS said, no, this is something this1979company should be spending its time on.1980    Mr. Downing. Is there any reason to believe that ESG-1981related proposals are generally more aligned with shareholder1982value than right-leaning proposals? If not, how do you explain1983the discrepancy in the proxy advisors' recommendations?1984    Ms. Ising. I cannot explain the discrepancy. What I will1985say is, is that this is a symptom, A, of--on a related note,1986there is just--there is a need for meaningful reform on1987shareholder proposals, right? That needs to happen. The fact1988that the proxy advisory firms are so focused on supporting many1989of these proposals, they should not even be getting to the1990ballot.1991    Mr. Downing. Thank you.1992    Let me move to Mr. Crain. Does the way the proxy advisory1993industry operates in the United States discourage companies1994from going or staying public?1995    Mr. Crain. It absolutely does. America has the deepest and1996most liquid capital markets in the world, and if you are a1997company looking to grow, then going public is a critical way to1998access capital, which is obviously important for that company.1999It is also important for everyday investors who largely cannot2000invest in privately held companies but when a business goes2001public, they have that investment opportunity, and they can2002take advantage of the growth opportunities as that investment2003grows, as that company grows.2004    If you are considering going public, and you are looking at2005burdensome costly regulations, and you are looking at having to2006be held accountable by these firms who are themselves2007unregulated, meanwhile, you are making a whole bunch of SEC2008disclosures, but the proxy firms are not--they are effectively2009unregulated--and yet they are exerting influence on the2010corporate decisions that you are making. That is a real2011disincentive from going public, and that has a significant2012impact on both companies and investors2013    Mr. Downing. I appreciate that. I have had some experience2014that has led me to some conclusions about the weaponization of2015these proxy programs. I was a former securities and insurance2016regulator, and I had some public reinsurance companies coming2017to me, saying, we know we are making decisions that are not in2018the interest of the business.2019    A lot of it was about not--not putting risk money out for2020oil and gas because they did not want to be involved in that,2021and they said, but their backs were against the wall because of2022these proxy votes.2023    So I have seen that as a regulator, and it has really,2024really bothered me.2025    I am going to move on to Professor Rose. Do you have any2026more suggestions that have not been mentioned today to increase2027competition in the proxy advisory space?2028    Mr. Rose. As I mentioned, I think it is a real challenge,2029and I am quite hopeful that maybe technological innovations can2030help provide some benefits here. Maybe there are ways to get2031around some of the work that the proxy advisors do, perform2032those functions but without the political leanings that might2033accompany that.2034    It is a real challenge. I do think the proposed legislation2035could help, again, so long as those regulations are not overly2036burdensome----2037    Mr. Downing. Thank you.2038    Mr. Rose [continuing]. and the barriers to entry are not2039too significant.2040    Mr. Downing. Yes, thank you, sir.2041    Finally, Mr. Washington, how does your advice to members2042defer based on whether the proxy advisors are likely to2043recommend a, quote, vote for or a vote against a particular2044shareholder proposal?2045    Mr. Washington. In all cases, the board needs to consider2046what is in the best interest of the corporation. The issue is2047that the proxy advisory firms can tilt the balance of those2048considerations because it can increase controversy, reputation2049risk, and so forth, that can affect the board's decision2050making.2051    I would just--if I might, there is no doubt that our2052members truly value the conversations that they have with their2053real investors. There is no question of that. The question is2054here, the proxy advisory firms are not in the same position as2055the investors, and yet they yield greater----2056    Chairwoman Wagner. The gentleman's time is expired.2057    Mr. Downing. Thank you, Madam Chair. I yield my time.2058    Chairwoman Wagner. I thank all of our members for2059participating. I would like to thank all of our witnesses for2060their testimony today in this long overdue hearing on cleaning2061up the proxy advisory atmosphere, I will say. We have some good2062legislation that I think is going to do that, and I think we2063have grand support for.2064    So without objection, all members will have 5 legislative2065days to submit additional written questions for the witnesses2066to the chair. The questions will be forwarded to the witnesses2067for their response. Witnesses, please respond no later than2068June 4, 2025.20692070    [The information referred to can be found in the appendix.]20712072    This hearing stands adjourned.20732074    [Whereupon, at 4:13 p.m., the subcommittee was adjourned.]20752076                                APPENDIX20772078                              ----------20792080                   MATERIALS SUBMITTED FOR THE RECORD20812082[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]20832084                               [all]