House Republicans Propose 11 Bills Reforming Proxy Advisory Services

The bills would make it substantially easier for issuers to exclude proposals and harder for the SEC to compel them to include proposals on proxy statements.

Republicans on the House Committee on Financial Services introduced 11 bills on July 12 that would reform proxy voting advice.

The bills’ introduction accompanied two subcommittee hearings on July 13 in which Republicans alleged that proxy voting firms such as Institutional Shareholder Services Inc. and Glass, Lewis & Co. were prioritizing progressive politics rather than the economic interests of their clients. ISS owns Chief Investment Officer.

Some of the proposed legislation mirrors recommendations made by the committee’s ESG Working Group’s interim report from June, such as a bill that would require proxy advisory firms to register with the SEC.

This registration process would require proxy firms to disclose “information on the procedures and methodologies that the applicant uses to ensure that proxy voting recommendations are in the best economic interest of the ultimate shareholders.” The bill then requires the SEC to publish these disclosures on their website.

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At a hearing on July 14, Steven Friedman, general counsel at ISS, indicated he would support mandatory SEC registration for proxy advisory firms. ISS is currently registered with the SEC as an investment adviser.

Apart from regulating proxy firms, most of the bills take aim at the process by which shareholders make proposals in the first place. Some bills would empower the issuer to remove certain shareholder proposals from the proxy statement. One such bill proposed by Representative Byron Donalds, R-Florida, would permit an issuer to exclude a proposal “if the subject matter of the shareholder proposal is environmental, social, or political.”

When considering environmental, social and governance issues, a focus on the “E” and “S” and the omission of “G” is a theme common in the committee’s approach.

Another bill proposed by Representative Erin Houchin, R-Indiana, would permit issuers to exclude proposals that have already been substantially addressed by the issuer, if it is duplicative of another proposal or if it is similar to one that has been voted down in the previous five years.

Instead of empowering issuers to exclude proposals, a second approach proposed in some of the bills has been to disempower the SEC from requiring issuers to include a proposal. A bill proposed by Representative Ralph Norman, R-South Carolina, states that “the Commission may not compel an issuer to include in a proxy statement of the issuer … any shareholder proposal.”

Norman’s bill speaks to concerns expressed by some Republican members in the subcommittee hearings that the SEC was requiring too many proposals to be considered through Staff Bulletin 14L. Currently, issuers may exclude proposals which address their day-to-day business operations, known as the “ordinary business exemption,” as well as those economically irrelevant to the issuer.

14L modifies these exemptions and explains that when deciding whether to permit the exclusion of a proposal, SEC staff will consider whether it “raises issues with a broad societal impact, such that they transcend the ordinary business of the company.”

The last approach to regulating proxy voting comes in a bill proposed by Representative Bill Huizenga, R-Michigan. His bill would require advisers with the authority to vote shares on behalf of clients to vote in one of three ways: the way their client instructs them to; the way the issuer instructs them to; or to abstain. Advisers would no longer have the ability to vote with their discretion, though the bill explicitly states that they would not be penalized for failing to solicit the opinion of their client.

All 11 bills have been sent to the House Committee on Financial Services. The committee has not yet scheduled a markup hearing for these bills.

Tags: Proxy Access, proxy voting, SEC, shareholder proposals

What should ESG-minded allocators invest in? That is the question before investors who care about environmental, social and governance issues—amid a political fracas that now surrounds the ESG concept, especially in the U.S.

CIO’s webinar Thursday on ESG investing covered those concerns thoroughly. Although not a listing of stock tips, the program weighed the pros and cons facing investors who include ESG factors in their investment decisionmaking, coming during a summer of harsh weather and a political climate that is similarly disagreeable toward the risk-measurement framework.

Hosted by Amy Resnick, executive editor of CIO, the webinar featured: Robert Lampl, sector head for industrials, financials and real estate at ISS ESG, a unit of Institutional Shareholders Services, which also owns CIO; Jeff Mindlin, CIO of Arizona State University Enterprise Partners, which runs the school’s endowment and other investment pools; and Leola Ross, deputy CIO and ESG head at the Seattle City Employees’ Retirement System.

Mindlin pointed out that climate problems are affecting business everywhere, in light of extreme weather patterns worldwide. “Insurers are fleeing Florida,” owing to greater hurricane risks, Mindlin said, which shows the need for “ESG now to be integrated into business.”

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There are ample sound ESG-friendly investments available, Ross argued. Some are not so obvious. She cited Deere & Co., parent of farm equipment maker John Deere, which advises farmers where best to plant their crops using computerized modeling. Data centers are another good destination for ESG-minded investors, she suggested.

With many Republican-led states restricting ESG-oriented spending and investing by state-related organizations, Mindlin said he “didn’t want to politicize” climate-oriented investing. He advised allocators to engage with companies that emit carbon, instead of divesting their stock—as that engagement would be more effective in driving change.

The webinar took place against a backdrop of a higher level of ESG proxy resolutions this year, according to ISS data: 340 environmental and social resolutions and 224 governance ones have been on U.S. company ballots to date in 2023. This marks a record, although the number of shareholders backing them has dropped. At the same time, more anti-ESG resolutions have emerged.

Lampl noted in the webinar that oil and gas companies “are aware of the transition” they must make from fossil fuel to renewables and that those businesses are channeling capital into greener alternatives. They do not “want to find themselves in a Nokia moment, where they just disappear” because they are outmoded, he said. The Finnish company once dominated the cell phone market but failed to keep up with rivals.

A lot of the panelists’ discussion centered on the utility of assessing investments through an ESG lens: It helps investors avoid risks from environmental and other disasters, which are not visible in P&L statements. Mindlin spoke of an investor he knew who stayed out of energy investments, a tactic that bore fruit when Russia invaded Ukraine, and oil and gas prices became very volatile. “He just crushed it,” Mindlin said, meaning that he scored good returns.

One good development is that multinational corporations now are paying attention to ESG disclosure protocols from regulators around the world, Lampl declared. This is necessary to keep up with the competition, he said. If companies do not disclose, there’s “a suspicion they are hiding something.”

The panelists pointed to a change in how ESG is discussed, owing to the term becoming politically charged. Corporate executives and investment folks “used to put a slide in the deck” about their ESG efforts, Mindlin recounted. “Then they removed ,it so not to get swept up in politics.”

Nonetheless, Ross added, “climate change does post a risk” to the planet that should not be ignored.