|
Today, the House Committee on Financial Services, led by Chairman French Hill (AR-02) held a hearing examining Rule 14a-8 under the Securities Exchange Act of 1934, which governs shareholder participation in corporate governance. Members evaluated the influence of proxy advisory firms on capital markets, specifically their effect on corporate governance and shareholder voting outcomes.
On the Impact of Sarbanes-Oxley and Dodd-Frank on Annual Proxy Statements:
“Together, these two laws [Sarbanes-Oxley and Dodd-Frank] have driven up costs, increased the length and complexity of proxy statements, expanded the disclosure and oversight process, and fundamentally changed much of the shareholder access to the proxy system,” said Chairman Hill.
On the Cost of Unnecessary and Irrelevant Shareholder Proposals:
“Under this flawed system, companies are too often forced to waste valuable time and resources fighting proposals that are irrelevant to the company’s bottom line, hurting investors and workers alike,” said Capital Markets Subcommittee Chair Ann Wagner (MO-02).
"Allowing a small group of left-wing activists to hijack the proxy proposal process to push social, environmental, DEI, or political objectives totally unrelated to the core business of a company does not advance the cause of capitalism. It undermines capitalism. It corrupts capitalism because it results in the misallocation of resources of the company. It undermines the profitability of the company. It hurts the shareholders,” stated Financial Institutions Subcommittee Chair Rep. Andy Barr (KY-06).
“More than 60% of shareholder proposals last year were related to environmental and social topics. … We have activists treating public companies as their own personal forum for social and environmental change, and quite frankly, it's a waste of time and it's a waste of money, and it's ultimately sucking productivity out of our economy and into organizations that seek to perpetuate endless social and cultural war in corporate America,” said Housing and Insurance Subcommittee Chair Mike Flood (NE-01).
On How Proxy Advisory Firms Can Deter Businesses from Joining Public Markets:
“For many small and medium private companies considering an IPO, the decision often comes down to whether the benefits of accessing public markets outweigh the risk of compliance. But as we have seen in recent years, the shareholder proposal process can be dominated by a small group of activist investors advancing niche political agendas that have little to do with long term value creation. At the same time, proxy advisory firms wield outsized influence over voting outcomes, and [are] operating with limited transparency and potential conflicts of interest. So together, these dynamics can create an uncertainty and additional cost that make public markets less attractive,” declared House Small Business Committee Chairman Roger Williams (TX-25).
On the Impact of Foreign-owned Proxy Advisories Firms on Our National Security:
“Today every American thinks they’re investing in the market, but their votes are actually being hijacked and dictated by unelected, unaccountable, foreign proxy advisers. This is not, in my opinion, shareholder democracy. Instead, it’s concentrated power that is unchecked and it undermines the integrity of our capital markets. I believe proxy advisers should stick to providing what they do best. Research,” said House Republican Conference Chairwoman Lisa McClain (MI-09).
“Foreign investments that could threaten our national security are supposed to get scrutiny. In the case of ISS and Glass Lewis, both foreign owned companies with an extremely outsized impact on proxy voting in our capital markets, they haven’t been subjected to CFIUS review,” added Rep. Warren Davidson (OH-08).
Witnesses Echoed the Work of the Committee:
Mr. James Copland, Senior Fellow & Director of Legal Policy, Manhattan Institute said, “Overall, U.S. capital markets continue to lead the world. But we have seen the number of companies listed on U.S. public exchanges decline more than 50% since the mid-1980s. And to the extent that companies are less likely to access the public markets today due to inefficient regulatory barriers idiosyncratic to American markets, it impedes capital formation and economic efficiency, to the broader public’s detriment. … Many of the factors that have discouraged public stock offerings remain as significant today as they were then, including heightened reporting standards under the Sarbanes-Oxley Act of 2002 and America’s singular litigation landscape that imposes a “tort tax” on public corporate offerings, mergers, and disclosures. … Until 2017, not a single environment-related shareholder proposal received majority shareholder support over board opposition at one of the 250 largest publicly traded U.S. companies.”
Mrs. Ferrell Keel, Partner, Jones Day said, “The only people who have a shot at successfully submitting a proposal are professional activists—individuals and organizations who are oftentimes not even shareholders. These professionals do not merely help a shareholder navigate Rule 14a-8. Rather, they effectively borrow a shareholder’s stake to get their foot in the door, and then control the process from start to finish. It’s not uncommon for the named shareholder to not engage with a company a single time. This means that the term “shareholder” proposal is a misnomer. In reality, most proposals are “activist” proposals that are orchestrated by individuals who primarily care about the issue at hand—regardless of the cost and ultimate impact that a proposal will have on the value of a company, its shareholders and its stakeholders.”
Mr. Ron Mueller, Partner, Gibson Dunn & Crutcher LLP said, “U.S. public companies of all sizes take shareholder relations seriously and welcome the opportunity to engage productively with their investors. But public companies also recognize that not all shareholders have the same priorities, and board of directors and company management have fiduciary responsibilities to act in the best interests of shareholders at large. Thus, one has to question why a single shareholder owning shares with a value of just $2,000 can initiate a process that imposes significant costs and, more importantly, diverts key company personnel, executives, and directors from other business activities, which costs and consequences are borne by all of the company’s shareholders. … Moreover, the nature of shareholder proposals being submitted to companies in recent years have changed significantly from the proposals submitted in prior decades. Shareholder proposals no longer are primarily focused on corporate governance issues or on providing information or input on important business activities, but instead increasingly are crafted by special interest groups focused on narrow policy issues or specific outcomes, without regard to whether or how companies may already be addressing the issue, or to other considerations that may be more significant and consequential.”
###
|
