[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                      REFORMING THE PROXY PROCESS
                    TO SAFEGUARD INVESTOR INTERESTS

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 13, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-38
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
53-577 PDF                  WASHINGTON : 2024                    
          
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    Subcommittee on Capital Markets

                    ANN WAGNER, Missouri, Chairwoman

FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                DAVID SCOTT, Georgia
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania             SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice     WILEY NICKEL, North Carolina
    Chairman                         STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York                EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 13, 2023................................................     1
Appendix:
    July 13, 2023................................................    41

                               WITNESSES
                        Thursday, July 13, 2023

Berry, Jonathan, Managing Partner, Boyden Gray PLLC..............     5
Doyle, Tim, Senior Policy Advisor, Bipartisan Policy Center (BPC)     7
Minow, Nell, Vice Chair, ValueEdge Advisors......................    12
Netram, Chris, Managing Vice President, Policy, National 
  Association of Manufacturers (NAM).............................     8
White, Joshua T., Assistant Professor of Finance and the Brownlee 
  O. Currey Jr. Dean's Faculty Fellow, Vanderbilt University's 
  Owen Graduate School of Management.............................    10

                                APPENDIX

Prepared statements:
    Berry, Jonathan..............................................    42
    Doyle, Tim...................................................    67
    Minow, Nell..................................................    80
    Netram, Chris................................................    99
    White, Joshua T..............................................   114

              Additional Material Submitted for the Record

Lucas, Hon. Frank D.:
    Additional information provided in response to questions 
      posed during the hearing to Tim Doyle......................   126
Meuser, Hon. Dan:
    Written responses to questions for the record submitted to 
      Jonathan Berry.............................................   128
Waters, Hon. Maxine:
    Better Markets Fact Sheet, ``ESG Investing is Here to Stay''.   214
    Written statement of Green America...........................   223
    Written statement of the Interfaith Center on Corporate 
      Responsibility.............................................   229
    Written statement of Out Leadership..........................   231
    Written statement of Principles for Responsible Investment...   237
    Written statement of the Shareholder Rights Group............   244
    Written statement of various farmers and ranchers groups.....   250
    Written statement of various investor organizations..........   256
    Written statement of various undersigned organizations.......   259
    Written responses to questions for the record submitted to 
      Jonathan Berry.............................................   265
    Written responses to questions for the record submitted to 
      Tim Doyle..................................................   266
    Written responses to questions for the record submitted to 
      Nell Minow.................................................   267
    Written responses to questions for the record submitted to 
      Chris Netram...............................................   268
    Written responses to questions for the record submitted to 
      Joshua T. White............................................   269

 
                      REFORMING THE PROXY PROCESS
                    TO SAFEGUARD INVESTOR INTERESTS

                              ----------                              


                        Thursday, July 13, 2023

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Lucas, Huizenga, 
Hill, Steil, Meuser, Garbarino, Lawler, Nunn, Houchin; Sherman, 
Meeks, Scott, Vargas, Gottheimer, Gonzalez, Casten, Nickel, 
Lynch, and Cleaver.
    Ex officio present: Representative Waters.
    Chairwoman Wagner. Good morning. The Subcommittee on 
Capital Markets will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Reforming the Proxy Process 
to Safeguard Investor Interests.''
    I want to ask for a point of personal privilege from the 
ranking member to recognize one of our staff, one of the 
minority staff members, if that is okay with you, sir?
    Mr. Sherman. It would be objectionable to me if we didn't.
    [laughter]
    Chairwoman Wagner. I do want to take this point of personal 
privilege and recognize one of our really important staffers, 
whose last day with the committee will be tomorrow, after about 
4\1/2\ years. Bring him out here. Don't let him hide back 
there. Is he here? Okay, good. I want to recognize Franklin 
Thornton. Franklin, stand up.
    [applause]
    Franklin served the committee as a committee clerk in the 
117th Congress, and was extremely helpful and patient to our 
Members on both sides of the aisle during much of our COVID-19 
pandemic when hearings, and markups, and doing everything 
online via Webex was very difficult. So, I want to thank him 
for facilitating those hearings and those markups, and I want 
to thank him for his service, and I think we all wish him the 
best on his next career in Denver. So Franklin, thank you for 
everything.
    [applause]
    Chairwoman Wagner. And now we will move on, and I will 
recognize myself for 4 minutes to give an opening statement.
    Thank you all for joining us today. This hearing will 
examine policies that prioritize increased transparency, 
accountability, and economic analysis in shareholder voting 
decisions, while also addressing concerns with the outsized 
influence of proxy advisor firms.
    I am greatly concerned with the Biden Administration's 
continued efforts to force non-material environmental, social, 
and political issues on American companies and investors. 
Prioritizing these ideologically-driven regulations drives up 
the costs and burdens of participating in the U.S. public 
markets. This, in turn, diminishes the appeal for private 
companies considering going public or remaining a public 
company, and fewer publicly-traded companies means fewer 
investment opportunities for Main Street investors. These 
increased costs hinder the ability of American public companies 
to compete on a global scale, putting them at a disadvantage, 
while China's economic influence continues to grow. What is 
even more concerning is that these policies end up burdening 
retail investors, who rely on solid financial returns to save 
for retirement, purchase a home, or pay for their child's 
education.
    We must remember that the primary purpose of our public 
markets is to foster economic growth. Unfortunately, 
unrestricted shareholder activism is diverting attention and 
limited resources from core issues undermining the 
attractiveness of U.S. markets and discouraging companies from 
going public. The prioritization of shareholder proposals that 
deviate from a company's strategic direction or long-term goals 
has transformed boardrooms into partisan platforms where fringe 
political agendas overshadow sound financial management and 
business strategy.
    For our public markets to remain focused on long-term 
shareholder value, it is crucial to reform the proxy process to 
reduce the financial burdens on small and mid-sized companies 
and minimize distractions for management. By ensuring that 
shareholders' proposals align with a company's interests and 
long-term goals, we will promote value creation for all 
shareholders.
    Today, we will also discuss the Biden Administration's 
imposition of climate reporting and other requirements that 
place unnecessary burdens on companies, hindering their ability 
to grow and compete in a global economy. For example, the SEC's 
proposed 500-page climate disclosure rule would replace 
voluntary sustainability reports with mandatory disclosures, 
including detailed emissions data and climate risk management 
strategies. Congress has not granted the SEC the authority to 
create regulations that compel companies to disclose general 
information about environmental, social, and governance (ESG) 
issues. In fact, Congress repeatedly expressed dissatisfaction 
with the current number and complexity of disclosures the SEC 
requires and repeatedly urged the agency to simplify them 
rather than adding to their complexity.
    Piling on pages of complicated disclosures minimizes their 
usefulness to Main Street investors and impedes the ability of 
younger, smaller companies to compete against large incumbents. 
In light of these challenges, it is crucial that we address 
these issues with a focus on fostering economic growth, 
promoting sound financial regulations, and reducing unnecessary 
burdens on American businesses.
    I very much look forward to hearing from our esteemed panel 
of experts today as we delve deeper into these matters in order 
to safeguard the interests of Main Street investors.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from California, Mr. Sherman, for 4 
minutes for an opening statement.
    Mr. Sherman. And I would ask unanimous consent that if the 
ranking member of the full Financial Services Committee isn't 
here to give her 1-minute opening statement, that she can do it 
after one or all of the witnesses.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Sherman. This month, we have a series of hearings 
designed to prevent shareholders from getting the information 
they want to decide whether to invest and make sure that those 
shareholders don't affect the behavior of the corporations they 
own. We prevent investors from making decisions based on any 
criteria not approved by the Governors of Florida and Texas by 
depriving them of information, and then, in this morning's 
hearing, preventing them from introducing resolutions, and in 
this afternoon's hearing, preventing them from getting the 
advice they need to decide how to vote on those resolutions.
    We are told that these considerations are fringe or 
immaterial, and there are those who say that it is material 
only if it is 5 percent of earnings per share, but the 
Republican witness correctly testified yesterday that what is 
material, is what is important to investors. Now, there may be 
a few unusual investors. Yesterday, I posited the idea of 
someone who only wants to invest in companies whose boardrooms 
are painted purple. Those folks do not need to be catered to, 
but where a material portion of the investment community finds 
something material, it is our job to get them the information 
and to allow them to affect the corporate behavior of the 
companies they own.
    There are at least two groups of investors, the first I 
call the, ``Ebenezer Scrooge investors,'' who are interested 
only in earnings per share, but even they need information 
about global warming. They have to decide whether to invest in 
the Maldives Coconut Plantation Corporation, and they will get 
an SEC document that details the risk factors in terms of 
competition. Coconuts might be grown elsewhere, but if you are 
going to invest in the Maldives Plantation Corporation, you 
also need information about another risk factor, inundation, 
because the Maldives are only 4 feet above sea level. Even the, 
``Ebenezer Scrooge invester,'' needs information about the 
effect of global warming on earnings per share.
    Second, we have the, ``John Denver investors.'' This is 
hundreds of billions of dollars of investment capital that 
cares what the effect of their investment is on our 
environment, and if we don't provide them with the information 
they want, many of them will invest in European companies that 
do provide that information.
    And third, what I call the, ``John Bolton investors,'' 
those who are concerned about the national security impacts of 
the investments they make.
    Today, we are going to focus on the rules for introducing a 
resolution, and we have the Republican SEC raise that. You have 
to be an investor of $25,000 worth of shares for a period of 1 
year. I might go along with that, but what I can't go along 
with is they prevent aggregation. What would this mean in the 
context of running a political campaign? What if we said that 
any contribution of under $2,000 cannot be accepted by a 
campaign? So, if you can run your campaign with only $2,000 and 
up, fine, but if you have 100 donors who want to give you $20, 
that doesn't count. Shareholders who invest $1,000 or $500 in a 
corporation, if there are a lot of them, should count just as 
much as one investor with $25,000 of investment.
    We are told that the SEC should, in effect, conspire, 
collude with corporate boards to keep out of the proxy 
statement resolutions on certain topics, and look at how these 
topics overlap. One topic is that you shouldn't have something 
that doesn't relate to the company's business and at least 5 
percent of the business. The other says you shouldn't have a 
resolution that relates to ordinary business operations. So if 
it doesn't relate to the company's business, you can't propose 
it, and if it does relate to the company's business, you can't 
propose it. Thank God today's SEC is no longer issuing no-
action letters that, in effect, disempower all shareholders.
    We are told that this is about cost. It isn't. This hearing 
is being held for those who think these resolutions might win, 
and they don't want to give these shareholders a chance.
    I yield back.
    Chairwoman Wagner. The gentleman's time has expired. The 
Chair now recognizes the gentleman from Michigan, Mr. Huizenga, 
who is also the Chair of our Subcommittee on Oversight and 
Investigations, for 1 minute for an opening statement.
    Mr. Huizenga. Thank you, Madam Chairwoman. I appreciate you 
having this hearing today. Last year, ESG shareholder proposals 
continued their upward trajectory as activist investors 
continued their assault on the returns of actual retail 
investors. At the center of this debate are the proxy advisory 
firms, which in many cases support policies that run counter to 
their own fiduciary responsibility to maximize returns for 
investors. Coupled with the recent politicization of the SEC, 
proxy advisory firms have seized immense power to shift policy, 
often using a one-size-fits-all framework to promote a liberal 
social and political agenda. The proxy process is broken. It no 
longer promotes long-term shareholder value and operates 
without transparency or accountability and ignores materiality.
    As the Biden Administration continues to focus on 
implementing costly environmental, social, and political-based 
regulatory requirements, which have significant ramifications 
for U.S. public markets, Republicans will promote policies that 
protect retail investors, maximize returns, and increase 
financial security. I yield back.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the ranking member of the Full Committee, the 
gentlelady from California, Ms. Waters, for 1 minute.
    Ms. Waters. Thank you very much, Madam Chairwoman. I would 
like to take a point of personal privilege to acknowledge 
Franklin Thornton, who served our committee as clerk for the 
past 2 years, including during the difficult months during the 
pandemic. His patience and professionalism enabled the 
committee to conduct its business during that time. And for the 
past few months, he has been serving dutifully on our housing 
policy team, and I would like to wish him the best in his 
future endeavors.
    Chairwoman Wagner. Thank you. We did the same at the 
opening. We are all so grateful for Franklin, and we wish him 
the best as he moves on. Thank you.
    Ms. Waters. Thank you very much. Today, Republicans are 
giving the term, ``investor protection,'' new meaning by 
pushing legislation that would protect investors from their own 
ideas. For a party that supposedly values free speech and free 
market capitalism, they are now trying to muzzle the ability of 
shareholders to bring forth proposals that can influence the 
direction of the companies they own. MAGA Republicans would 
prefer that shareholders only be able to vote on what corporate 
management wants, completely avoiding any sense of 
accountability or transparency. When it comes to corporate 
board decision-making, this committee has real work to do when 
it comes to investor protection, and this paternalistic, 
disingenuous approach to shareholder rights is not it. I yield 
back.
    Chairwoman Wagner. The gentlelady yields back.
    We now welcome the testimony of our witnesses: Mr. Jonathan 
Berry, managing partner of Boyden Gray PLLC; Mr. Tim Doyle, a 
senior policy advisor at the Bipartisan Policy Center and the 
founder of Doyle Strategies LLC; Mr. Chris Netram, the managing 
vice president of policy at the National Association of 
Manufacturers; Dr. Joshua White, an assistant professor of 
finance and the Brownlee O. Currey Jr. Dean's Faculty Fellow at 
Vanderbilt University's Owen Graduate School of Management; and 
Ms. Nell Minow, the vice chair of ValueEdge Advisors. We thank 
you all for your testimony here today, and we will now get 
started.
    Mr. Berry, you are now recognized for 5 minutes to give 
your oral remarks.

STATEMENT OF JONATHAN BERRY, MANAGING PARTNER, BOYDEN GRAY PLLC

    Mr. Berry. Thank you. Good morning, Chairwoman Wagner, 
Ranking Member Sherman, and members of the subcommittee. My 
name is Jonathan Berry, and I am the managing partner of the 
law and policy strategy firm, Boyden Gray. I was previously the 
Acting Assistant Secretary for Policy at the U.S. Department of 
Labor during the Trump Administration. I also currently 
represent the National Center for Public Policy Research and 
other shareholder clients in litigation against the SEC 
regarding its shareholder proposal rule, 14a-8. While my views 
on the subject of today's hearing are informed by that work, I 
do not appear here today on behalf of any client, and the views 
I present are my own.
    Politically-motivated shareholder proposals are a main 
entry point by which ESG-focused activists, and money managers, 
and advisors influence public companies to adopt their agendas. 
This process starts with 14a-8. Now, the SEC did not invent the 
shareholder proposal. To the contrary, prior to 14a-8, there 
existed and still exists a robust system of State corporate law 
governing proposals. While Exchange Act Section 14-a gave the 
Commission authority to compel disclosures of existing 
information, Congress left the substantive regulation of 
stockholder meetings to State law, as was traditional. Rule 
14a-8 upended this arrangement, first by compelling companies 
to include shareholder proposals and, over time, by contorting 
the law governing the substance of shareholder proposals in 
ways far beyond State law.
    For a time, the SEC permitted the exclusion of social 
proposals if they also related to the company's ordinary 
business operations, but in 1998, the Commission narrowed the 
ordinary business exclusion to prevent excluding proposals 
that, ``focus on sufficiently-significant social policy 
issues.'' The SEC opened the gates even wider in 2021 with a 
staff bulletin effectively cutting ties between social 
proposals and ordinary business completely. Environmental and 
social proposals now represent a majority of all proposals in 
Russell 3000 companies, and 58 percent of proposals in 2022.
    While so-called anti-ESG proposals have risen somewhat, the 
SEC has blocked many of them from consideration on company 
proxy statements. This last proxy season, my client, the 
National Center for Public Policy Research, took a shareholder 
proposal that the SEC had blessed on a discrimination issue and 
substituted the terms, ``viewpoint'' and ``ideology,'' for the 
prior proposal's terms, ``sexual orientation'' and ``gender 
identity.'' But the SEC said that my client's proposal could be 
struck off the ballot, that viewpoint discrimination in the 
workplace was not a significant social policy question.
    The SEC's pattern of disfavoring conservative proposals is 
the only rational explanation for the disparity here, and we 
see the pattern. A recent analysis found that the SEC granted 
no-action relief on 46 percent of all requests for liberal-
aligned proposals but 72 percent of all conservative-aligned 
ones. Put the SEC's viewpoint filter on top of the enormous 
volume of pro-ESG proposals that activists put out, and you see 
why pro-ESG viewpoints are overrepresented in the proxy 
process.
    Now, once proposals make it to the shareholder ballot, the 
rest of the proxy process takes over to use the proposal as an 
opportunity to pressure companies to adopt ESG goals. Here, I 
want to call attention to the proxy advisory firms in 
particular. ISS and Glass Lewis control upward of 90 percent of 
the relevant market, and, for example, ISS recommends voting 
against directors of many companies flagged by climate 
activists unless the company has issued detailed disclosures of 
its climate-related risks and implemented net-zero-by-2050 
reduction targets. Both advisors threaten in their voting 
guidelines directors at companies that fail to respond to 
proposals that receive broad shareholder support, and Glass 
Lewis guidelines seem to say that even 20 percent counts as 
broad support.
    I would like to close by applauding the committee for 
grasping the fundamental nature of the problems caused by Rule 
14a-8 and supporting the exclusion of shareholder proposals if 
the subject matter is environmental, social or political, and 
ultimately barring 14a-8 altogether. I commend the committee's 
focus on ensuring proxy advisors and asset managers face 
greater accountability for how they recommend and vote on 
shareholder proposals, and I would also like to note there is 
increasing activity in the States on these subjects.
    I thank the committee again.
    [The prepared statement of Mr. Berry can be found on page 
42 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Berry.
    Mr. Doyle, you are now recognized for 5 minutes to give 
your oral remarks.

   STATEMENT OF TIM DOYLE, SENIOR POLICY ADVISOR, BIPARTISAN 
                      POLICY CENTER (BPC)

    Mr. Doyle. Good morning, Chairwoman Wagner, Ranking Member 
Sherman, Ranking Member Waters, and members of the 
subcommittee. Thank you for inviting me to testify today. My 
name is Tim Doyle, and I am the senior policy advisor at the 
Bipartisan Policy Center, or BPC, where I provide subject 
matter expertise on corporate governance and ESG-related 
matters.
    BPC is a nonprofit organization founded in 2007 by four 
former Senate Majority Leaders: Howard Baker, Tom Daschle, Bob 
Dole, and George Mitchell. BPC drives principled and 
politically-viable policy solutions through analysis and 
negotiation, and by providing a forum for diverse views. BPC's 
funding reflects the character and diversity of the 
organization in that it comes from charitable philanthropies, 
individuals, and corporate donors. As such, we believe all 
donors have unique and diverse interests. However, we believe 
that bipartisanship is the only way to forge a sustainable 
public policy solution. It is with that policy philosophy that 
I testify today.
    BPC has been evaluating and discussing ESG-related issues 
for a number of years now. We have learned that the key to 
understanding ESG is looking into how one intends to use the 
ESG data. As a result, the use of the ESG acronym varies widely 
depending on sector, company, and an individual's perspective. 
Given the difficulty in fully understanding the breadth of ESG-
related topics, the committee should continue to work 
collaboratively with nonprofits, think tanks, academics, and, 
of course, investors and issuers in finding common language 
when using the term, ``ESG.''
    The ESG debate raises profound questions about the way to 
deliver returns for investors. The next few years will 
determine what comprises ESG in the future or even whether the 
term has lasting power. Furthermore, given the exponential 
growth in ESG investment funds and other financially-based uses 
of the term, ``ESG,'' establishing some consensus around the 
definition of, ``ESG,'' would greatly improve the capital 
markets, further protect retail investors, and ultimately 
encourage more companies to go public.
    Of course, at the center of the ESG debate is disclosure. 
Determining what is disclosed involves numerous factors 
depending on if it is legislatively mandated, regulatorily 
required, or individually requested at annual shareholder 
meetings. My written testimony focuses on the regulatory 
requirement disclosure, which, historically, is used in 
materiality analysis, and also for or regarding the need for 
enhanced oversight of the proxy advisors, given the influence 
that their voting recommendations have on ESG-related issues.
    Materiality has been a standard used for determining 
disclosure at least since the 1976 Supreme Court case, TSC 
Industries, Inc. v. Northway, Inc. What many don't realize is 
that leading up to the holding in that case was years of 
litigation involving disclosure. The, ``reasonable investor,'' 
standard described in that case was itself a compromise in that 
it provided analysis to be used so investors would receive 
enough information to make informed investment decisions, but 
not so much as to become overwhelmed with an avalanche of data, 
as the Court stated. This standard has stood the test of time, 
and this committee should strongly consider codifying that 
decision if, for no other reason than to bring some regulatory 
certainty and disclosure for both investors and issuers.
    The growth of the proxy advisory industry is, in some ways, 
an example of a success story. The transition from defined 
benefit to defined contribution retirement plans resulted in 
the exponential growth of institutional investors over the last 
couple of decades. This, in turn, has created the potential 
need to vote on thousands of shareholder proposals. It is all 
too clear, however, that proxy advisors began to have what some 
have called an oversized influence on the proxy process, and 
ultimately, an indirect, and in some cases, a direct influence 
over corporate disclosure and policy.
    We sometimes forget that the proxy advisors are for-profit 
entities, and inherent in that is a conflict between their 
recommendations and their clients. Moreover one proxy firm, in 
particular, even started providing consulting services to the 
same companies for which they were providing recommendations. 
In both scenarios, the appearance of impropriety requires 
enhanced transparency and accountability to protect investors 
and ensure a strong capital market.
    Another issue that is regularly raised is that some proxy 
advisor reports which are used to make recommendations have 
errors in them that may well affect voting results on certain 
proposals. This committee should develop policies that ensure 
transparency to alleviate the conflicts of interest, to protect 
investors, and to create a framework for issuers to correct 
errors before proposals are voted on. It is important to 
mention that many of these issues have had bipartisan support. 
For example, proxy reform, which has been contemplated by the 
SEC for more than a decade, has previously had congressional 
support. There have also been several Republican- and 
Democratic-appointed Commissioners at the SEC who have 
supported reforming the proxy process, including additional 
oversight of proxy advisory firms.
    In closing, I truly appreciate the opportunity to share 
some of what we have learned over the last few years at BPC. 
Thank you very much.
    [The prepared statement of Mr. Doyle can be found on page 
67 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Doyle.
    Mr. Netram, you are now recognized for 5 minutes to give 
your oral remarks.

  STATEMENT OF CHRIS NETRAM, MANAGING VICE PRESIDENT, POLICY, 
          NATIONAL ASSOCIATION OF MANUFACTURERS (NAM)

    Mr. Netram. Good morning, Chairwoman Wagner, Ranking Member 
Sherman, Ranking Member Waters, and members of the 
subcommittee. My name is Chris Netram, and I am the managing 
vice president of policy at the National Association of 
Manufacturers (NAM). I appreciate the opportunity to testify 
today on behalf of the NAM's 14,000 members and the 13 million 
men and women who make things in America.
    Manufacturing supports local communities across the 
country, creating well-paying jobs for Americans from all walks 
of life. Manufacturing pioneers groundbreaking technologies and 
lifesaving innovations, and manufacturing is an economic driver 
that powers growth here at home and supports American 
competitiveness on the world stage. Manufacturing is capital-
intensive, and manufacturers often turn to the public markets 
to finance investments that create jobs and strengthen 
communities. The public market allows businesses to access 
capital, and it lets Americans share in the industry's success. 
Investments like mutual funds and pension plans help workers 
save for a child's education, a new home, or a secure 
retirement.
    Manufacturers have a fiduciary duty to act in these Main 
Street investors' financial best interest. Focusing on 
financial returns helps businesses grow and safeguards 
investors' retirement security, but in recent years, third 
parties have hijacked the proxy process to distract companies 
from this duty. Activists use the proxy ballot to advance 
political and social agendas, proxy firms dictate corporate 
governance decisions, and the SEC is empowering these groups 
while also proposing ESG disclosure mandates of its own.
    As you have already heard, ESG proposals are at an all-time 
high. They now make up approximately 60 percent of all 
proposals, and it takes only $2,000 to get an ID on a ballot. 
The SEC is encouraging these proposals, telling companies that 
anything with broad societal impact can't be excluded from the 
proxy ballot, even if totally unrelated to a business's 
operations. Turning the proxy ballot into a debate club diverts 
time and resources away from shareholder value creation and 
forces companies to wade into controversial topics over which 
they have no control. Congress must prevent the SEC from 
empowering activists and forcing companies to include 
irrelevant proposals on their ballots.
    Cheerleading for activists are proxy advisory firms, where 
proxy firms' influence goes well beyond ESG proposals. Their 
policies shape corporate decisions, and their recommendations 
dictate shareholder votes. Despite their power, proxy firms 
operate with minimal regulatory oversight, and the SEC has, in 
fact, rescinded the modest protections that were adopted in 
2020 to inform and protect investors. This means that the 
firm's conflicts of interest, errors, and lack of transparency 
go largely unchecked. Nevertheless, asset managers continue to 
rely on their services, in many instances even allowing proxy 
firms to robo-vote on their behalf. In other words, 
unaccountable, error-prone firms are robo-voting on decisions 
that affect Americans' retirement savings.
    I want to take this opportunity to thank Congressman Steil 
for his years of leadership on legislation to rein in proxy 
firms. Manufacturers believe that Congress must act to require 
the firms to engage with businesses, protect investors from 
conflicts of interest, enforce anti-fraud standards, and limit 
robo-voting.
    Not only is the SEC empowering proxy firms and ESG 
activists, the agency is also undertaking an ESG agenda of its 
own. New ESG disclosure mandates threaten to increase costs and 
liability for manufacturers and overwhelm investors with 
immaterial information. Even small and privately-held 
businesses will feel these effects. That is because many of 
these new requirements impact supply chains, like the climate 
rule, Scope 3, mandate. Investors need material information to 
make informed investing decisions and grow their retirement 
savings. Instead, the SEC has proposed far-reaching mandates 
that won't inform investors but will harm manufacturers. 
Congress must limit the SEC's regulatory onslaught and require 
the agency to focus only on material disclosures.
    In conclusion, manufacturers believe strongly in the 
importance of tackling climate change, improving 
sustainability, and enhancing diversity. Taking a company-
specific approach to these issues can support business growth 
and drive shareholder returns, but politically-motivated 
activists are pursuing inflexible ESG agendas with little 
regard to their impact on everyday Americans' financial 
security, and the SEC is increasingly a partner in that effort. 
If this trend is allowed to continue, small manufacturers will 
be the hardest hit. I have spoken to small manufacturers around 
the country who are deeply concerned about potentially losing 
public company customers and are facing insurmountable 
regulatory costs because they just can't keep up with ESG.
    Thank you for the opportunity to testify today, and I look 
forward to answering your questions.
    [The prepared statement of Mr. Netram can be found on page 
99 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Netram.
    Dr. White, you are now recognized for 5 minutes for your 
oral remarks.

 STATEMENT OF JOSHUA T. WHITE, ASSISTANT PROFESSOR OF FINANCE 
     AND THE BROWNLEE O. CURREY JR. DEAN'S FACULTY FELLOW, 
   VANDERBILT UNIVERSITY'S OWEN GRADUATE SCHOOL OF MANAGEMENT

    Mr. White. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, Ranking Member Waters, and members of the Subcommittee 
on Capital Markets. Thank you for inviting me today to discuss 
reforms of the proxy process. I look forward to your questions 
on this important issue.
    The House Financial Services Committee is considering 
several legislative proposals aimed at safeguarding investor 
interests. These issues are paramount for ordinary investors 
who put their money into public equities to save for college or 
retirement. In my written testimony, I discuss what I believe 
are three key challenges running counter to the interests of 
most investors. The first is a dramatic upswing in the volume 
of non-governance ESG shareholder proposals. The second is the 
influence of proxy advisory firms on managers' and 
institutional investor behavior. And the third is costly SEC 
mandates to disclose non-material public information that 
reduces the attractiveness of U.S. capital markets. I ask that 
my written testimony be entered into the record.
    The proxy voting process plays a pivotal role in corporate 
governance. It is how most shareholders vote for directors who 
have a fiduciary duty to represent their interests. Equity 
investors also vote on other matters, such as advisory votes on 
any shareholder proposals that appear on the proxy. In the past 
2 years, we have seen a record number of environmental and 
social proposals, which are the, ``E','' and ``S,'' component 
of ESG, with the, ``G,'' representing governance. Managers can 
ask the SEC to exclude shareholder proposals from the proxy, 
which is known as no-action relief. Research shows that the 
stock price tends to increase when the SEC approves such 
exclusions. This suggests that managers are skilled at spotting 
proposals that risk investor welfare and only serve to advance 
special interests.
    In November 2021, the SEC updated its exclusion policy with 
Staff Legal Bulletin 14L, which notes the SEC will no longer 
honor prior admission policies if a proposal has significant 
social policy implications. In my written testimony, I provide 
data analysis showing the profound influence that this bulletin 
had on proxy voting. In 2022, there was a 100-percent surge in 
environmental and social proposals, yet investor support for 
these proposals plummeted. In July of 2022, the SEC proposed 
additional changes to the rule underlying proposal exclusions. 
If adopted, it will make it even more challenging for managers 
to omit proposals they perceive as harmful to shareholder 
value. The cost of shareholder proposals is substantial and 
includes both the legal costs and, more importantly, the time 
that managers and directors spend addressing proposals.
    Flooding the proxy with environmental and social proposals 
likely overwhelms investors, potentially leading to less-
informed voting on critical issues. Institutional investors 
often rely on proxy advisory firms, which provide fee-based 
voting recommendations to its clients. Their reports can help 
passive portfolio managers reduce the cost of voting on 
thousands of proxies. However, there are concerns about the 
power of proxy advisors in the U.S. as there are only two firms 
that dominate the market. Studies show that their voting and 
advice is highly influential, but concerns arise with this 
influence.
    Some show that certain institutional advantage investors 
managing trillions of dollars follow their advice more than 95 
percent of the time. This is known as robo-voting, which poses 
multiple issues. Research indicates that asset managers who 
rely less on proxy advice yield higher returns for their 
investors. That implies that robo-voting can negatively impact 
the majority of investors. One study finds that the largest 
proxy advisor often skews its environmental and social 
recommendations due to pressure from sponsors of those 
proposals, who know that those proxy advisors will bring in 
robo-voting. Managers and directors might also proactively 
adopt environmental and social proposals that destroy value to 
avoid negative attention or negative recommendations from proxy 
advisors on their own board seats.
    Finally, I am concerned about some of the SEC's recent 
rulemakings. These endeavors mandate the disclosure of non-
material information. Shifting away from the materiality 
standard for disclosure can harm investors and can harm the 
company by revealing proprietary disclosure costs. When the 
benefits do not outweigh the costs of disclosure, it should not 
be mandated.
    Together, these three forces place pressure on public 
companies and discourage private companies from going public. 
The end result is lower return for shareholders, and fewer 
investment or diversification opportunities for retail 
investors who lack access to investing in public companies. 
Thank you.
    [The prepared statement of Dr. White can be found on page 
114 of the appendix.]
    Chairwoman Wagner. Thank you, Dr. White.
    And Ms. Minow, you are now recognized for 5 minutes for 
your oral remarks.

    STATEMENT OF NELL MINOW, VICE CHAIR, VALUEEDGE ADVISORS

    Ms. Minow. Thank you very much, Madam Chairwoman, and 
members of the subcommittee, for this opportunity to speak to 
you. I want to associate myself with the opening remarks made 
by Ranking Members Sherman and Waters and thank them very much 
for the roundtable they presided over yesterday, and I 
recommend that everyone on the committee and the staff take a 
look at that.
    Many years ago, I was talking to a corporate director who 
was very unhappy with the vote on a shareholder proposal, and 
he said, ``You have to understand now those are fringe 
shareholders.'' And I said, ``The vote got a 60 percent vote in 
favor, which means you are the fringe.''
    We have talked a little bit about what is material, and I 
will tell you, as Ranking Member Sherman said yesterday, the 
best people to decide what information is material are the 
investors. As much as I appreciate the opportunity to speak to 
you today, I particularly appreciate the opportunity to remind 
some of the members of this panel, including the National 
Association of Manufacturers, of how capitalism works.
    ``Capitalism'' is named for the providers of capital. It is 
provided for the shareholders. And as I guess the only person 
on this panel who has actually filed a shareholder proposal, I 
can tell you that we have talked a lot about the costs, which I 
have to say are grossly overestimated by self-reported figures, 
but not about the benefits. I think it is of tremendous 
benefit. You would think that the National Association of 
Manufacturers would be talking about their recognition of the 
importance of sustainability if they hadn't heard from their 
shareholders. I don't think they would, so I have a few key 
points.
    Only a small percentage of companies receive any 
shareholder proposals, the household name companies get a lot, 
and many companies get one or two, but the vast majority get 
none. The average is one every 7 years, so it is really not a 
huge problem. Even a 100-percent vote in favor of a shareholder 
proposal is not binding. Companies are free to ignore it. It is 
a wonderful way, a very cost-effective way on both sides for 
shareholders to raise issues of importance.
    A lot of these resolutions have been characterized as 
political. Again, as with material, it is up to the investors 
to decide what is political and what is material. So if the 
vote is nonbinding, the cost is really very minimal. Limiting 
shareholder proposals is killing the messenger, one of the very 
few ways insulated insiders get honest feedback. Now, I have 
heard a lot of complaints that a small number of individuals 
are responsible for a large percentage of shareholder 
proposals, and that is true, but the important figure is the 
level of support that those proposals get. For example, 20 
percent of the proposals filed by John Chevedden and Ken 
Steiner received support of more than 50 percent of 
shareholders, including a 79-percent vote at Duke Energy on a 
proposal that would require a simple majority vote rather than 
a supermajority for certain matters, and a 98-percent vote at 
Carlyle and a 99-percent vote at American Airlines. Again, 
these are not fringe shareholders, and these are not fringe 
issues. These are issues of vital importance to a wide and 
diverse variety of investors, of individuals, of index funds, 
of pension funds, and of all kinds of different funds. I think 
that, again, is how capitalism works.
    I also want to point out that shareholder proposals are a 
very modest way to raise concerns at a low cost to investors 
and issuers. If shareholder proposals are limited further, the 
result will be challenges that are far more expensive and 
disruptive for everybody. I do want to make, if I may, Madam 
Chairwoman, a small correction to one of your points, which is 
that if a company goes private, that makes it not available for 
investment. In fact, the people I work with, the large pension 
funds, are huge investors in private equity. And I welcome 
anyone in the National Association of Manufacturers to go 
private at a fair price and see how they like dealing with 
private equity owners. I guarantee you the first thing that 
will happen is they will cut all the salaries.
    Proxy advisor services are the exemplars of the free 
market. Nobody has to use their services. There is competition. 
There is a new anti-ESG proxy advisor that no one has 
mentioned, run as a side hustle by Presidential candidate, 
Vivek Ramaswamy, already being used by one of the large pension 
funds, so if there are no barriers to entry, nobody has to buy 
it. And if 90 percent follow the recommendations--and that is 
because 90 percent of the recommendations are a vote for the 
board of directors, a vote for the auditors--when it comes to 
the other issues, the more controversial issues, in fact, they 
depart from proxy advisors quite often.
    Thank you very much, and I will be happy to answer any 
questions.
    [The prepared statement of Ms. Minow can be found on page 
80 of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Minow.
    We will now turn to Member questions, and I recognize 
myself for 5 minutes for questioning.
    Dr. White, for more than 80 years, shareholders' engagement 
has been focused on a company's strategic direction, or perhaps 
their long-term goals would be a better way of putting it, with 
an eye on maximizing revenue and increased returns for 
investors. Recently, there has been an increase in the number 
of shareholder proposals that have turned boardrooms into 
partisan battlegrounds fighting over social agendas instead of 
focusing on sound financial management and business strategy. 
Could you please provide insights into the recent trends of 
politically-motivated shareholder proposals, specifically how 
this shift has changed the focus of corporate boards away from 
investors and companies' strength and onto external agendas 
untethered from the organization's financial health?
    Mr. White. Thank you, Chairwoman Wagner, for that question. 
Yes, I would agree that there has been a politicization in the 
corporate boardroom. Companies now have to misallocate what are 
scarce resources that investors provide them in hopes of 
generating a return. And they are focused not necessarily on 
the, ``G,'' component of ESG, but more on the environmental and 
social component. As Ms. Minow pointed out, oftentimes, there 
are shareholder proposals to remove managerial entrenchment 
mechanisms, such as a supermajority vote. I just want to remind 
everyone that is the, ``G,'' component of ESG, which academic 
research has shown for more than 20 years is valuable.
    The environmental and social concerns are that, if you have 
a shareholder, or a subset of shareholders, or a minority 
shareholder that wants to push a special interest, they may be 
willing to sacrifice investment returns if it forwards their 
mission objective. That does not benefit all investors. In 
fact, if businesses do not run their organizations in the most 
efficient way, their competition will, and we compete on a 
global basis. To the extent that we politicize the boardroom, 
these burdens are just going to be passed onto public 
companies, which may then actually go private. That is what the 
research shows.
    Chairwoman Wagner. Okay. Mr. Netram, in November 2021, the 
SEC issued new guidance that made it difficult for companies to 
exclude ESG shareholder proposals. Staff Legal Bulletin 14L 
states that the SEC will now focus on the social policy 
significance of issues raised by shareholder proposals, rather 
than an individual company's connection to a particular issue. 
How significant of a departure is this from the SEC's 
longstanding criteria that relied on a proposal having a 
connection to the company's ordinary business operations?
    Mr. Netram. It is incredibly significant. As we pointed 
out, this is a huge shift in the approach to these topics. What 
we have actually seen in practice is that granted requests for 
no-action relief after this rulemaking have fallen by about 
half. And what that means is that companies are now forced to 
deal with issues that are well outside of their control instead 
of being able to focus on things that are material to their 
underlying business.
    Chairwoman Wagner. So, the impact is large on businesses, 
on the shareholders, and on the retail investors at the end of 
the day?
    Mr. Netram. That is correct.
    Chairwoman Wagner. Mr. Netram, it has been observed in the 
past that proxy firms, ISS and Glass Lewis, have released 
voting recommendations based on inaccurate and flawed data. I 
got incredible numbers yesterday, somewhere around 42 percent 
of those saying that this information is completely flawed and 
inaccurate. Investors who rely on the firms' recommendations 
are at risk of making uninformed decisions, undermining the 
integrity of the market. In this context, can companies review 
a proxy for recommendations and provide feedback to ensure that 
shareholders can make well-informed decisions when voting?
    Mr. Netram. Currently, no. No such process exists for 
companies to make sure that the data that runs into the vote 
recommendations are accurate.
    Chairwoman Wagner. Why is it crucial for businesses to have 
the opportunity to review and offer feedback on draft proxy 
firm recommendations?
    Mr. Netram. Because what we are talking about are, 
effectively, governance decisions on the direction of the 
business on which Main Street investors are relying for their 
retirement security. If those decisions are based on 
incomplete, inaccurate, or misleading data, the end result 
cannot be good.
    Chairwoman Wagner. And upwards of 42 percent is a very 
large amount. Would requiring proxy advisor firms to disclose 
their methodologies, calculations, and sources of information 
lead to a more transparent and reliable advisory process?
    Mr. Netram. Absolutely.
    Chairwoman Wagner. I thank you, and I will yield back my 
time. And I recognize the gentlewoman from California, Ms. 
Waters, who is the ranking member of our full Financial 
Services Committee.
    Ms. Waters. Thank you so much, Madam Chairwoman. First, I 
would like Ms. Minow to know that you answered many of my 
questions about the value of shareholder proposals, and I would 
like to just have you comment further. As I mentioned, for a 
party that is supposedly pro-free-market capitalism and pro-
investor-freedom, I find it incredibly ironic that Republicans 
want to limit the ability of the capitalists, shareholders, who 
are the owners of the companies that power our economy, from 
proposing initiatives to be voted on at corporate meetings. A 
key tenet of the Republican Party is that the government 
shouldn't be able to tell you what you can and can't do, but in 
the instances of our capital markets, they are trying to do 
just that. Republicans want to stifle the ordinary investor and 
their fiduciaries' ability to have a voice in how their 
investments are managed. Do you have any additional thoughts on 
that? If so, I would like to hear them.
    Ms. Minow. I appreciate that very much. There have been a 
lot of improvements over the years in boards of directors. When 
I first came to work in this field, O.J. Simpson was on five 
boards, and he was on an audit committee of one of them, and 
boards have become much more engaged, and much more qualified. 
That is all because of shareholder initiatives. That is all 
because of shareholder proposals. It was not unusual in those 
early days for a person to serve on 10 boards. Now, the average 
is two or three boards, and board members are doing a vastly 
better job because of shareholder proposals' management 
entrenchment devices. I am not here to say anything good about 
CEO pay, except to say it could be worse and it would be worse 
without the oversight of shareholders.
    Again, I just want to emphasize that shareholder proposals 
are nonbinding. Companies can and do ignore the results of a 
shareholder proposal, and if that means the Chair would vote 
against the board next year, well, that is how the market 
responds. But yes, shareholder proposals have been enormously 
important, and I mentioned that 20 of John Chevedden's 
proposals got majority votes. I should also mention another 20 
of them were successfully negotiated with the company in a 
manner that was satisfying to both sides.
    Ms. Waters. Thank you, Ms. Minow. Could you please discuss 
more how pension funds that the whole public shares engage the 
companies they own and their ability to engage companies in 
which they are invested through private funds? As I understand 
it, private funds don't make disclosures, neither of their 
investing practices or policies, nor do they make available 
information about the underlying portfolio companies. How are 
pension funds that are large investors and private funds, such 
as private equity funds or venture to capital funds, know 
whether the value of their investment is fair? How can they 
engage these private companies if they don't know about the 
governance or diversity metrics of these companies?
    Ms. Minow. Yes. Thank you, Ranking Member Waters. That is 
what, ``private,'' means. And it has been my experience in 
working with large institutional investors that they are in 
very close touch with the managers and partners of the private 
equity funds, both in deciding whether to make the investment 
as they learn about what those strategies are and also as they 
themselves engage with their portfolio holdings. Again, that is 
very, very market-based.
    Looking at things, I have to say that I work with money 
managers, and they are the most, ``mathy,'' people in the 
world. They are the most green eyeshade, resolute, forward-
looking people in the world. And portraying them as sort of 
flower-strewing hippies who vote on behavior, based on what 
their wishes are about flowers and bunnies is just not true.
    Ms. Waters. Based on the knowledge that you have about the 
position that these pension funds are in, perhaps we need some 
legislation to deal with that. Do you agree?
    Ms. Minow. I would love to see that. Thank you.
    Ms. Waters. Thank you, and I yield back.
    Chairwoman Wagner. The ranking member yields back. The 
Chair now recognizes the gentleman from Michigan, Mr. Huizenga, 
who is also the Chair of our Subcommittee on Oversight and 
Investigations, for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman, and I appreciate 
the panel. Welcome to the alternative universe.
    It is amazing. Yesterday, this side of the aisle was 
compared to, ``Trotskyites.'' By the way, the definition of 
that is socialist democracy. And by the way, Trotsky was trying 
to overthrow democratic capitalism, and he didn't think the 
Soviet Union was going far enough. We also had a misquoting of 
Milton Friedman yesterday. This month is the 50th anniversary 
of his seminal work. The social responsibility of business is 
to increase its profits. It is literally the name of his essay. 
But we are being told by others on the other side of the aisle 
that we are somehow anti-capitalist, anti-democratic. It is 
insanity. It is complete insanity and just underscores how 
political this has become.
    I am going to get to the Index Act, Mr. Netram, first and 
foremost. Republicans in both the House and Senate introduced 
the Index Act, which highlights the roles some asset managers 
play in passive managed funds. You noted in your testimony that 
boards of directors must act in Main Street investors' long-
term financial best interests, and those investors have the 
right to hold company leaders accountable via the proxy ballot. 
How important is it for these shareholders to have an active 
role in the shareholder voting process? In other words, is it 
important that Congress create some guardrails on investment 
advisors who direct how shareholders should cast their votes?
    Mr. Netram. It is critically important because these are 
not shares of the asset managers. These are shares held for the 
benefit of Main Street investors. They deserve to have a voice 
in that process.
    Mr. Huizenga. Right. I want to move on to some of the other 
issues that we need to cover here. Proxy advisors like Glass 
Lewis and ISS--and the former president of one of those 
institutions is here today--affect the outcome of millions of 
shareholders' votes. Their influence is growing, and, 
unfortunately, they increasingly focus heavily on ESG 
initiatives without any accountability, oversight, or 
competition. That is why they will be appearing before my 
Oversight and Investigations Subcommittee this afternoon.
    Mr. Berry, your testimony pointed to overlap between the 
environmental and social agendas and prominent shareholder 
activist and proxy advisors. How do proxy advisors and 
shareholder activists arrive at the same priorities? Do they 
coordinate?
    Mr. Berry. The short answer is, yes. They work through 
organizations like Climate Action 100+ that convenes asset 
managers, institutional investors, proxy advisors, and 
shareholder components.
    Mr. Huizenga. Okay. And is it true that companies are 
already required by law to disclose, ``impacts related to 
climate change that have a material effect on a company's 
business and operations?''
    Mr. Berry. Yes, absolutely, if material.
    Mr. Huizenga. Materiality, materiality, materiality. Okay. 
Given that material information regarding climate change must 
already be disclosed, is there a good reason to deviate from 
that standard?
    Mr. Berry. As we said previously, it is a time-tested 
standard, and there is no good reason as far as ISS.
    Mr. Huizenga. Okay. In ISS' written testimony, the firm 
states that ISS performs its work in a prudent, open, and 
honest manner. Yet, in December of 2022, the head of governance 
solutions for ISS testified that ISS failed to consult with the 
Texas Employees Retirement System over new types of shareholder 
proposals.
    Mr. Berry, how does a failure like this and others affect 
the accuracy, reliability, and information provided to those 
actual shareholders?
    Mr. Berry. It can have a huge effect. If there is no 
feedback, there is no consultation. How can you expect 
reliability?
    Mr. Huizenga. Okay. Mr. Netram, you emphasized in your 
testimony that proxy advisors have an outsized influence on 
corporate governance at manufacturers of all sizes, public and 
private. By the way, I know many privately-held companies that 
have sustainability officers because their customers requested 
it, or because they feel internally that they need to do that. 
How does this influence affect the decision-making process of 
companies and their boards?
    Mr. Netram. For the manufacturing industry, proxy advisory 
firms operate as sort of quasi-regulators. Their influence is 
felt well before any vote is cast as companies try to contour 
themselves to match their policies with proxy advisory firms' 
recommended policies.
    Mr. Huizenga. And it is true that while those proxies or 
those shareholder proposals may not be legally binding, ISS and 
Glass Lewis will then recommend that those boards reject them 
or get voted out, correct?
    Mr. Netram. That is correct.
    Mr. Huizenga. Okay. Maybe not by legal act, but certainly 
by action. Okay, quickly--well, I guess I have 7 seconds left, 
so I don't know that I am going to be able to do this, but I 
hope that we can blend some common sense to this and that, 
``materiality,'' is the watchword, and I yield back, Madam 
Chairwoman.
    Chairwoman Wagner. The gentleman from Michigan yields back. 
I now recognize the ranking member of the subcommittee, the 
gentleman from California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. Capitalism is under attack. If by the sweat of 
your brow and the forbearance of consumption you accumulate 
capital and you have the courage to invest, these proposals 
would deprive you of the information that is material to 
millions and millions of investors. And if you do become a 
shareholder, the proposals here would prevent the shareholders 
from affecting the behavior of the company they own. The 
purpose here is to blind the investors when they make the 
investment decision and hog-tie them when they try to affect 
the company's behavior.
    Today's Republican Party has recently begun this war on 
capitalism. As I said yesterday, they are of the same mind now 
with the centuries'-long effort of the Socialist Workers Party 
of Leon Trotsky. The gentleman from Michigan says that is 
unfair, and he is right because it is unfair to Mao Zedong 
because it takes a Eurocentric view of communist thought and 
fails to give appropriate mention to East Asian communism. 
Imagine a shareholder resolution that says the company must de-
risk from China, decouple from China, and not sell advanced 
technology to China. Many boards, probably most, would fight 
hard to block that from the proxy statement, and two political 
parties will help them do that: the Republican Party of the 
United States; and the Communist Party of China.
    We are told that we are supposed to protect retail 
investors, but we are told that if you have $25,000 to invest, 
you can propose something, but if 3 people have $10,000 to 
invest each, they can't. We must have aggregation. We shouldn't 
just be talking about ESG, ESG-WNC. The last hearing that I 
chaired of this subcommittee focused on workforce as part of 
ESG. And as I have just mentioned, we need resolutions about 
how companies deal with China, and we need disclosures of the 
big China risks that so many companies take. Mr. Berry tells us 
we should rely on States. That is a race to the bottom. When a 
State needs $100 million or even a few million dollars in 
revenue, they will allow boards to be entrenched management. I 
do agree with Mr. Berry that we should allow all flowers to 
bloom, both red flowers and blue flowers.
    A lot of people on my side of this issue are not CPAs--I 
guess I am the only CPA on our side--and underestimate just how 
hard it is going to be to really have meaningful ESG 
disclosures. To ascertain, quantify, tabulate, define, make 
comparable, and audit numerical information is very difficult 
to devise that system. We are told that investors who care 
about ESG are the fringe, and, as Ms. Minow points out, they 
are the winners.
    Ms. Minow points out the importance of private companies, 
and that we need to require disclosures by multibillion-dollar 
companies, even if they are privately held, and not just to the 
private equity companies that invest. Mr. White puts forward 
the idea that if you want to be a, ``John Denver investor,'' 
rather than an, ``Ebenezer Scrooge investor,'' you are morally 
wrong somehow, or you are incompetent, or you should be blinded 
and hog-tied, and, frankly, I don't agree with that.
    We are told that we have to prevent inaccurate speech. 
Everybody who wants to kill the First Amendment says that they 
are not going after good speech; they are only going after bad 
speech. The answer to bad speech is good speech. And we 
shouldn't be censoring political talk, and we shouldn't be 
censoring what advisors have to say.
    Ms. Minow, we are told that somehow there is a big cost 
involved in these things. I remember when creating the proxy 
statement was very difficult because you had to set the type. 
We didn't have computers back then--I was at the financial 
printing office--but I would assume that printing something is 
easy now. Tabulating is easy. Isn't most of the cost here the 
cost of trying to prevent it by fighting this with lawyers and 
to prevent the vote from ever being proposed?
    Ms. Minow. Yes, that is true. As I said, the costs that 
they send out are very inflated. Shareholders are limited to 
500 words. They can have as many words as they want to respond. 
They have in-house counsel to respond. In my opinion, it 
doesn't take more than an hour or two.
    Mr. Sherman. So they attack it as being fringe, and they 
say it is expensive, and the expense is the money they get to 
prevent these fringe proposals from winning.
    Ms. Minow. Correct.
    Mr. Sherman. I yield back.
    Chairwoman Wagner. The gentleman's time has expired. I now 
recognize the gentleman from Pennsylvania, Mr. Meuser, for 5 
minutes.
    Mr. Meuser. Thank you very much, Madam Chairwoman. And I 
certainly thank all of our witnesses as well.
    Proxy voting process is not working to serve the best 
interests of investors. I think that is kind of clear when you 
have 97 percent of the proxy voting held within two 
organizations, which would be alarming to, I think, general 
investors who probably aren't aware of that and don't engage in 
proxy voting as well. The idea that you happen to agree with a 
particular ideology from these proxy companies and that is why 
you are favorable to them, can really hedge it down a road that 
could reverse its course sometime in the future, particularly 
when laws, regulations, standard practices, laws that have been 
in effect since 1940, like the Investment Advisers Act of 1940, 
where there are fiduciary responsibilities, where there is 
ERISA, where it is very clear for pension funds and whatnot 
that you are to act in the interest of the investor, not an 
ideology, and if there is a conflict of interest, it shouldn't 
be disclosed, little things like that, that have been followed 
for decades now. But instead, we have an SEC that has decided 
to put out a 500-page report that says, well, we are going to 
do things a lot differently now, and because we believe in a 
certain ideology, we are going to force--not recommend, not 
suggest, not even give tax incentive towards--but we are going 
to force investment companies.
    And of course, we have seen pushback. Warren Buffett has 
called it, ``asinine.''--I think that is a technical term. 
Large investment firms--I will leave their names out--have 
stated that they are being asked, mandated, required, told to 
renege on their fiduciary responsibilities. So, what are we 
talking about here? If we want to see these sorts of changes, 
they need to go through an actual legislative body of the 
Federal Government called Congress, right? Not the whims of a 
few individuals who are temporarily going to be running a 
particular agency, such as the SEC.
    Anyway, Dr. White, how does the polarization of business 
management, capital allocation, influenced by proxy advisors--
go back to the proxy advisors--impact market confidence and 
invester trust? Do you think that this just breeds trust, this 
sort of mannerism of voting?
    Mr. White. Thanks for the question. When you think of the 
word, ``trust,'' you trust whom you are investing your money 
with--your retirement income--that they are going to vote in 
your best interest as a shareholder. They have a fiduciary duty 
to do so. The reality is that asset managers can simply rely on 
the voting advice of proxy advisors whose interests might not 
be maximizing shareholder value. If I was rational, I would 
probably sort on only the votes that they recommend voting 
against for the board, and only the proposals on the ENS side 
of governance that they recommend voting for, and that leaves 
out informed voting, and it is why we see asset managers who 
conduct their own research tend to outperform. So, relying on 
proxy advice can erode that trust that your investment advisor 
is acting in your interest.
    Mr. Meuser. Thank you. Mr. Netram, what do you believe, and 
isn't it true that the information that is now being required 
by Chair Gensler's ESG disclosure proposals as material, if it 
is material to a public company's operations, wouldn't it 
already be obligated to be disclosed?
    Mr. Netram. That is absolutely true. That is the core duty 
of a corporation here to disclose material risk to their 
investors so that they can make informed investing decisions. 
That duty currently exists with or without this proposed rule.
    Mr. Meuser. Okay. Mr. Netram, you mentioned Representative 
Steil earlier. I don't know if you alluded to the bill. Would 
you comment on the importance of his legislation?
    Mr. Netram. Absolutely. Congressman Steil's bill would make 
sure that proxy firms are actually subject to some level of 
oversight. Right now, we are in a system where these are the 
only actors in the financial system that have minimal to no 
oversight at all. Everybody else--companies, exchanges, asset 
managers--are subjected to fairly significant oversight. Proxy 
firms so far have been able to escape that, and the Steil bill 
would bring them into the net.
    Mr. Meuser. Excellent. Thank you. Madam Chairwoman. I yield 
back.
    Chairwoman Wagner. The gentleman from Pennsylvania yields 
back. The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Scott. Thank you, Madam Chairwoman. I appreciate that.
    Ms. Minow, let me start with you. The shareholder process 
provides a very important mechanism for investors to express 
their views and is very essential to making sure that company 
executives are managing the company for the benefit of its 
owners, and that is what they are there for. However, I am very 
concerned that the SEC's recent proposal to amend Rule 14a-8 
will create additional uncertainty and encourage the submission 
of proposals by proponents whose interests are not aligned with 
the interests of shareholders who are seeking a return on their 
investments.
    For example, in a situation last month, SEC Commissioner 
Mark Uyeda raised concerns about the process through which the 
agency staff decides whether to allow companies to exclude 
shareholders' proposals from their proxy statements. And 
Commissioner Uyeda cited several figures that showed an 18-
percent increase in the number of shareholder proposals 
submitted to companies between 2021 and 2023, and a 40-percent 
jump in the number of proposals that reached a vote over that 
same 2-year period.
    My first question is to you, Ms. Minow. Do you agree with 
SEC Commissioner Uyeda that we have seen an increase in 
shareholders proposals over the past 2 years?
    Ms. Minow. Thank you very much, Congressman. Yes, we have, 
but as I have noted, a lot of those proposals are withdrawn 
following successful negotiations with the company. And, of 
course, we have had this new influx of anti-ESG proposals, most 
of which got single-digit numbers of support and cannot be 
resubmitted because the system works very well. That is how 
markets work.
    Mr. Scott. Would you attribute this increase, in part, to 
the updated November 2021 guidance issued by the SEC's Division 
of Corporation Finance about the application of Rule 14a-8, and 
its decisions of whether to give no-action relief to companies 
that seek to avoid shareholders proposal being voted on?
    Ms. Minow. My understanding is that ruling is a return to 
earlier guidance. During the Trump Administration, a lot of 
tightening of those rules occurred, and I think that the 
general feeling of the investor community is a preference for 
the earlier approach.
    Mr. Scott. And in your experience, do you know of any 
shareholder proposal that led to a negative change or a 
deterioration of a company?
    Ms. Minow. Thank you for that question. As I noted, even a 
100-percent vote in favor can be ignored by the company, so 
that has not happened.
    Mr. Scott. Thank you very much.
    Ms. Minow. Thank you.
    Mr. Scott. I yield back.
    Chairwoman Wagner. The gentleman from Georgia yields back. 
The Chair now recognizes the gentleman from Arkansas, Mr. Hill, 
who is also the Chair of our Subcommittee on Digital Assets, 
for 5 minutes.
    Mr. Hill. Thank you, Madam Chairwoman. I appreciate this 
hearing. And I'm glad to have our panel with us. Nell, it is 
nice to see you again. How long you have been working on these 
issues? I think I can beat you by about 2 years, but we have 
known each other a long time, and you have been a real voice in 
the corporate governance arena.
    With that being said, I have to say I don't know if I share 
David Scott's concerns or not, but I will share his raising SEC 
Rule 14a-8, and I am not convinced that, as proffered, we are 
going back to the way things were before the Trump 
Administration's changes. We had a great hearing yesterday, and 
we heard a lot of concerns about this. And in my view, between 
Staff Legal Bulletins 14I, 14J, and 14K, replacing with this 
14L, it is a problem. I think it really politicizes the proxy 
process.
    And my friends on the other side of the aisle might be 
talking about great progressive ideas and things of that 
nature, and I don't think they should be met with conservative 
responses. It is a law of physics here that a force of equal 
might well be met by another one opposing it, and that is not 
what the proxy process is for.
    And in addition to opening up to these social things, which 
is not relevant, it disconnects it from the individual company 
responsibility, and that is a big difference that usually 
doesn't get mentioned. So it makes it, as I say, much easier 
for politically-motivated people to weigh in on this situation. 
Take the wokest company on the planet, you pick it, Apple, 
Google, they reject every one of these social impact-type 
statements. The management, the board recommends it because it 
is not relevant to the mission. I think we need to go back to 
the future and be focused more about who is on the board. Are 
they competent? Compensation committees, are they independent? 
Are they implementing the strategy? Are they developing a good 
quality return for shareholders and getting out of all this 
madness?
    Mr. Netram, let me start with you. Companies are facing 
more and more detailed ESG and political proposals that are 
intended to interfere or could be considered to be interfering 
with regular business operations. And 14L removed, as I noted, 
that longstanding commitment directly to the individual 
business by the way it is phrased. How does this proposal 
process change when the SEC limits no-action releases under 
Rule 14a-8, as Mr. Scott noted?
    Mr. Netram. Thanks for the question, Congressman. 
Effectively, what it does is it gives activists a roadmap to 
engage in real micromanagement of the company. And as you 
noted, part of what we need to do here is to support companies 
taking risks and innovating and delivering returns to 
investors, and part of that is on the company itself. The 
company has a duty to respond to the marketplace. If a company 
isn't responding to the marketplace for the demands that they 
need, would the marketplace trust them to act and build their 
business? That company will wither and die, so taking the act 
of this and the roadmap out of it will allow companies to 
flourish.
    Mr. Hill. Dr. White, when you look at these 14a-8 
proposals, it seems like it tips the scale to special interest 
proponents on either side of the political spectrum. Would this 
increase litigation risk for companies, and what other 
potential impacts might it have on corporate governance?
    Mr. White. Yes, thank you for that question, Congressman. 
It would certainly continue to tip the increase towards special 
interest groups. What we saw with 14L, which is a staff 
opinion, that is, something that receives commentary like 
proposed rulemakings at the Commission, we saw an increase in 
the SEC's disagreement for no-action relief requests by more 
than 50 percent. And we can expect that to continue with the 
new Rule 14a-8 proposals that came out in July 2022. The SEC 
added language that says even if you address the same subject 
matter in the same objective, if it is addressed through a 
different means, it is not a reason for duplicative exclusion. 
So, one could easily imagine four or five activists getting 
together and slightly tweaking the version of their proposal 
and having five proposals on the same topic appear on the 
proxy.
    Mr. Hill. Yes, I just think that goes against the whole. We 
have so many rules against not doing that with owning stock, 
and yet we are going to try to manipulate the process through 
the proxy. It doesn't sound like a good idea.
    Ms. Minow, we have been around each other a long time on 
passively-managed funds. That was an innovation when we were in 
business together. Now, it dominates the market. Do you think 
that a passively-managed ETF proxy should just default to vote 
with management as a fiduciary in that capacity, except maybe 
in the case of M&A?
    Ms. Minow. No, I don't. As we said----
    Mr. Hill. Why?
    Ms. Minow. ----before, the proxy advisors, over 90 percent 
of their recommendation----
    Mr. Hill. Not the proxy advisors.
    Ms. Minow. I understand that, but----
    Mr. Hill. Respond to me off the dais. My time has expired. 
It is not about the proxy advisors; it is about what the 
management is doing. I yield back.
    Chairwoman Wagner. The gentleman from Arkansas' time has 
expired. The Chair now recognizes the gentleman from 
California, Mr. Vargas, for 5 minutes.
    Mr. Vargas. Thank you very much, Madam Chairwoman, and I 
appreciate the opportunity. And again, I thank the ranking 
member, and, of course, I especially thank the panel here 
today. I seldom agree with my colleagues, but today I do. 
Welcome to the alternative universe. This is insanity, complete 
insanity. I agree with those statements.
    This was the headline that I read this morning in The 
Washington Post, ``Floods, Fires and Deadly Heat Are the Alarm 
Bells of a Planet on the Brink,'' an article by Sarah Kaplan. 
It reads, ``The world is hotter than it is been in thousands of 
years. It is as if every alarm bell on the earth were ringing. 
The warnings are echoing throughout the drenched mountains of 
Vermont where 2 months' worth of rain fell in only 2 days. 
India and Japan were deluged by extreme flooding. They are 
shrilling from the scorching streets of Texas, Florida, Spain, 
and China, with a severe heatwave also building in Phoenix and 
the Southwest in the coming days. They are burbling up from the 
oceans where temperatures have surged to levels considered 
beyond extreme, and they are showing up in unprecedented, 
still-burning wildfires in Canada that have sent plumes of 
dangerous smoke into the United States.
    ``Scientists say there is no question that this cacophony 
was caused by climate change or that it will continue to 
intensify as the planet warms. Research shows that human 
greenhouse gas emissions, particularly from burning fossil 
fuels, have raised the earth temperature by 1.2 degrees.''
    It goes on to explain that this is insanity.
    When we are trying to take away the rights of shareholders 
to know about these climate disasters, and we are doing it in 
the name of shareholder rights, this reminds me of the quote 
from Peter Arnett back in the Vietnam era, who said, ``It 
became necessary to destroy the town to save it.'' It is often 
misquoted as, ``We had to kill them to save them.'' This is 
what we are trying to do to the shareholders here. This is 
exactly what we are attempting to do. This is insanity. 
Shareholders want to know about this. Investors want to know 
about this, their long-term profitability.
    Ms. Minow, am I wrong about this? Is this fringe?
    Ms. Minow. Thank you very much. Congressman, I appreciate 
that, and it allows me to mention that what we are seeing in 
these large institutional investors is a portfolio-wide 
approach. And that is, I think, a much better approach for 
sustainable, long-term wealth creation, than trying to do stock 
picking. You are 100-percent right. These issues that you are 
talking about affect every company in America. The information 
that we are asking for--it is no secret that it is the fossil 
fuel industry that is against these questions. Everybody else 
is for them. I haven't noticed anybody come up with a single 
example of some ESG proposal or ESG vote that was somehow 
detrimental to anybody. There are a lot of grand statements, 
but very few specifics.
    Mr. Vargas. I totally agree. It is fascinating that when I 
talk to people, this is their huge concern, especially in 
Phoenix right now, when they are going to San Diego because we 
can't take the heat. This is information that they want their 
investors--go ahead?
    Ms. Minow. Yes, if I may make one more comment?
    Mr. Vargas. Sure.
    Ms. Minow. I am old enough to remember when I heard a lot 
of complaints about the short-termism of the large 
institutional investors. They only care about the next quarter. 
Now they are looking into the future, they are looking into the 
long term, and we are getting the same complaints from the same 
people. You can either have patient capital or silent capital. 
You cannot have both.
    Mr. Vargas. And it is interesting to me, again, when 
shareholders want this information, where they find it 
material, that now my good friends on the other side of the 
aisle say, ``You don't get to have this information. We are not 
going to allow it.'' I don't know how that is free market--I 
won't quote Trotsky or Mao Zedong, but it does seem to me that 
it goes against capitalism. It just seems to be going in the 
wrong direction. I don't have much time here left other than 
to, again, thank the panel for being here. I appreciate it. It 
has been very lively, but read the headlines, and talk to the 
people at home. You know that climate disaster is what is on 
their minds, especially during these heatwaves, and during the 
smoke coming from Canada that we have never seen before. I 
don't know how the hell this isn't material. With that, I yield 
back.
    Chairwoman Wagner. The gentleman from California yields 
back. The Chair now recognizes the gentleman from Oklahoma, Mr. 
Lucas, for 5 minutes.
    Mr. Lucas. Thank you, Madam Chairwoman. And before I focus 
on my questions, I would simply note I have just come from a 
House Science Committee hearing, and I would suggest to my 
colleagues, both in Congress and around the country, that one 
of the keys to addressing the future of this great planet and 
the issues that we address here from a business perspective is 
changing how we create our energy sources, urging the 
bipartisan leadership, the bicameral leadership, the 
appropriations process to fully fund fusion research so that we 
can go to the next generation of energy production for this 
planet. We have to focus on that. If we won't spend time and 
resources on the next source, well, that is our fate.
    Let me pull back closer to home. In November of 2021, the 
SEC issued revised guidance aimed at broadening the scope and 
increasing the volume of shareholder proposals to be considered 
by public companies. Instead of focusing on how social policy 
matter might impact the actual business, these proposals can 
now take aim at the wider aspects to society unrelated to 
specific business issues.
    Mr. Netram, from your understanding, how does the SEC staff 
determine if an issue has a broad social impact? Who gets to 
play God on that one?
    Mr. Netram. That is an excellent question. It raises a 
number of questions, the guidance. What is the society that we 
are looking at? Is that the locality in which a company 
operates? Is it the entire United States? Is it the entire 
world? What is an impact? What is a measurable impact? Who is 
being impacted, and has Congress actually empowered the SEC to 
make those decisions?
    Mr. Lucas. Mr. Berry, could you also discuss this?
    Mr. Berry. Certainly, there is a tremendous amount of 
viewpoint bias that the SEC staff exercises here, and they will 
call one thing significant and another insignificant on pretty 
nakedly political grounds.
    Mr. Lucas. In your observations, does there need to be any 
relationship to the operations of the company to get one of 
these classifications?
    Mr. Berry. Really, the upshot of what the SEC said in 14 
hours is there doesn't need to be any tie whatsoever.
    Mr. Lucas. Oh, my goodness. Mr. Berry, in your written 
testimony, you provide historic context to how the SEC requires 
public companies to interact with shareholders. Could you 
expand on this historic perspective, specifically how the SEC 
arrived at the current treatment of shareholder proposals, and 
how this position has changed over the past decades?
    Mr. Berry. The SEC originally focused its rulemaking on the 
core mandate of disclosure, what Congress directly authorized. 
But over the decades, the SEC has gotten more into the 
substance of corporate governance, something that the courts 
have disfavored, and yet we are still here. In the last few 
decades, the SEC has essentially opened the gates to all manner 
of shareholder proposals in the EMES space.
    Mr. Lucas. Kind of following up on that, Mr. Doyle, also 
looking at the historic perspective, can you discuss how the 
proxy process has evolved from, say, the mid-1900s to where we 
are today?
    Mr. Doyle. The process itself?
    Mr. Lucas. Please.
    Mr. Doyle. Yes, sort of. Again, as I think has been 
mentioned by a couple of other witnesses already, it has 
developed--I will try to come up with the right term here. As 
was mentioned, it was first not talked about through the 
Security and Exchange Commission, and then, as mentioned, they 
started to provide rules for their involvement. And I will 
mention that the more recent issue with proxy advisors is their 
inherent bias on both the recommendations that they make for 
clients that they have as well as for for whom they have 
consulting services. I don't know if that answers your 
particular question.
    Mr. Lucas. Fair point. The SEC's aggressive rulemaking 
agenda is set to inundate investors with a flood of non-
material information that public companies are required to 
disclose.
    Mr. Netram, could you speak to the challenges and 
compliance costs that public companies face and how they are 
preparing themselves for this? This is not free, right?
    Mr. Netram. It is absolutely not free. There is a dollar 
cost associated with responding to these proposals, but really, 
the larger cost and the bigger impact to the investors that 
companies are supposedly serving is the distraction from 
actually focusing on the underlying business. Manufacturers are 
facing an increased challenge. We have supply chain 
constraints, workforce constraints, competition from China, and 
raw material constraints, and taking time and attention away 
from that to respond to activists is really instrumental.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Lucas. Thank you, Madam Chairwoman.
    Chairwoman Wagner. The gentleman from Oklahoma yields back. 
The Chair now recognizes the gentleman from Illinois, Mr. 
Casten, for 5 minutes.
    Mr. Casten. Thank you, Madam Chairwoman. And thanks to all 
of our witnesses, and I want to thank you for coming here today 
and give you a little respite from financial services.
    We are all now going to travel to an episode of Shark Tank. 
Congratulations, you are all billionaires, and I am an 
entrepreneur with a great idea I would like to pitch to you. 
But as a pre-condition of the pitch, I get to be CEO of the 
company we are going to build, and I do not have to listen to 
any of your nonsense as I deploy your capital or make hiring 
decisions. Are any of you interested in hearing my pitch? Are 
you interested in signing that term sheet?
    Ms. Minow. No.
    Mr. Netram. I would like to hear the pitch.
    Mr. Casten. You are a weirdo.
    [laughter]
    Mr. Casten. I frame it that way because it is blindly 
obvious to the average American how Shark Tank works, what the 
rules are, and I think we can get caught up in a lot of this 
language around shareholders. But let me remind my colleagues, 
as I did yesterday, of Milton Friedman's theory of shareholder 
primacy which says that corporate executives are employees of 
corporate owners and are accountable thereto.
    If you want to know what happens, if you can ignore the 
interests of shareholders, if you can get money and not have to 
be accountable to them, I would remind our colleagues of the 
hearing not that long ago with John Ray and the FTX bankruptcy. 
And let's ask Sequoia and Citadel what they thought about 
signing term sheets where they had no authority to impact how 
capital was spent. Milton Friedman is turning over in his 
grave, but I am sure that our nation's beleaguered C-suite 
executives are thanking the Republican Party for standing up 
for their fragile interests and needs.
    Mr. Netram, do you believe that companies' climate risks 
are material information for investors to know, yes or no?
    Mr. Netram. I'm sorry, sir. Can you repeat the question?
    Mr. Casten. Do you believe that the climate risks of a 
company represent material information that investors should 
know?
    Mr. Netram. I think it depends on the underlying company 
and what business risks that they face.
    Mr. Casten. Okay. I think you used the word, ``material,'' 
29 times in your testimony. Are you familiar with the 
definition of, ``materiality,'' that guides the SEC?
    Mr. Netram. Yes, sir.
    Mr. Casten. Okay. And just to remind everybody, I will read 
it here. It was from the Basic Inc. v. Levinson Supreme Court 
case: ``Information is material if there is a substantial 
likelihood that a reasonable shareholder would consider it 
important in making an investment or voting decision, or if it 
would have significantly altered the total mix of information 
available,'' a reasonable investor, not what certain Members of 
Congress think a reasonable investor should do, because I know 
more than them what is reasonable.
    In 2016, the SEC issued a concept release requesting 
comment on existing disclosure agreements out of the JOBS Act. 
Do you know what percentage of investors commented to say that 
the voluntary reporting was inadequate to meet the demand for 
climate-related information?
    Mr. Netram. I do not.
    Mr. Casten. It was 90 percent; 90 percent of investors said 
voluntary reporting is insufficient. Do you know on the current 
proposed climate disclosures what percentage of investors have 
commented in support of climate disclosure and public company 
10ks?
    Mr. Netram. I do not.
    Mr. Casten. It's 97 percent. This debate is settled. There 
is no question about whether climate disclosures are material 
unless you think that there are people on this committee who 
know better than free markets, who know better than the 
interests of investors.
    The SEC's mandate, I would remind everybody, is to maintain 
fair, orderly, and efficient capital markets and to facilitate 
the formation of capital. It is not to protect C-suite 
executives. We are here to protect capital markets. We are here 
to protect free markets. It may hurt my colleagues' feelings to 
be compared to the socialists and communists of lore, and I 
have tremendous respect for the bipartisan Senator. I did not 
misquote Milton Friedman yesterday, but I am going to misquote 
Barry Goldwater today, ``Partisanship in defense of free 
markets is no vice.'' And I am sorry that it has become 
partisan to look out for the interests of investors, to look 
out for competitive markets, to make sure that we do not end up 
with a capital market full of FTX's where you get a bunch of 
dumb money where executives can do whatever they want.
    And I get it. There are people who would like that in this 
world. Our obligation in Congress is not to look out for them, 
and I need you all to be full-throated and join us and do that 
because if we do not, this beautiful, wonderful economy we have 
is dead. I cannot believe we are having this conversation. I 
yield back.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the gentleman from Wisconsin, Mr. Steil, for 5 
minutes.
    Mr. Steil. Thank you very much, Madam Chairwoman. I 
appreciate you holding today's hearing. I think it is 
absolutely essential that we have this conversation, in 
particular when we see the massive concentration between ISS 
and Glass Lewis as it relates to proxy advisors and their 
advice, which is sometimes pretty suspect. Sometimes, we see 
them get the facts wrong. Sometimes, they even get the name of 
the CEO wrong in some of their information.
    If I can start with you, Mr. Netram, is there a reason we 
shouldn't be able to see the analytical process that is playing 
out by these two proxy advisors that have a pretty clear 
duopoly on the advice?
    Mr. Netram. I'm sorry. Can you repeat that question?
    Mr. Steil. Sure. They are providing information, but we 
don't have visibility into the methodologies that these proxy 
advisors are using. Should we have visibility into the 
methodologies that these two proxy advisors are using?
    Mr. Netram. Absolutely. We need to have visibility into the 
methodologies, their sources of information, and their 
conflicts of interest.
    Mr. Steil. I think that is essential. Do you agree, Mr. 
Doyle?
    Mr. Doyle. I do.
    Mr. Steil. Mr. Berry?
    Mr. Berry. Absolutely.
    Mr. Steil. It seems like it should be absolutely essential. 
It seems like a bit of a no-brainer. And then, we have Chairman 
Gensler striking down the original proxy advisor rule that was 
drafted when Chairman Clayton was there. Do you know what the 
rationale would be behind that, Mr. Netram?
    Mr. Netram. I believe that the rationale was to reverse the 
Clayton-era changes, thinking that they gave too much power to 
companies.
    Mr. Steil. But really what we are doing is allowing ISS and 
Glass Lewis to be completely unaccountable. Is that correct?
    Mr. Netram. Absolutely. It is really----
    Mr. Steil. So really, the net effect of Chairman Gensler's 
decision was to actually allow these two entities to be able to 
operate in the dark with no oversight from the Federal 
Government as they are providing advice. But we have seen them 
provide advice in conflict either with law or in the case of 
just simple errors without an ability for companies to be able 
to simply come back and counter the information that is being 
provided. Is that correct?
    Mr. Netram. That is correct.
    Mr. Steil. Do you agree with that, Mr. Doyle?
    Mr. Doyle. I do.
    Mr. Steil. Mr. Berry?
    Mr. Berry. Yes.
    Mr. Steil. What is the impact, Mr. Berry, when you allow 
this duopoly to play out when misinformation is being produced 
or information that simply needs to be countered because one of 
the proxy advisors views it in the best interest of a company 
for that company to engage in illegal behavior, for example, 
the Travelers case where a proxy advisor recommended in favor 
of a shareholder proposal which would have required Travelers, 
in that case, to engage in illegal behavior by altering the 
price of insurance based on race, which is outlawed in our 
States, rightfully so.
    Mr. Berry. Yes. Inadequate oversight of the proxy advisors 
means they are going to be giving the store away to shareholder 
activists to drive all kinds of behavior, including things that 
can be illegal.
    Mr. Steil. Mr. Netram, do you agree with that?
    Mr. Netram. I agree, yes.
    Mr. Steil. And what is the solution to this, Mr. Netram? I 
have a bill--you have commented on it previously--that actually 
allows us to shine some light, to have some disclosure, some 
understanding, some oversight over this duopoly. Do you think 
that is an appropriate approach?
    Mr. Netram. I think legislation is desperately needed here 
to bring some transparency to this process.
    Mr. Steil. What do you think the key aspects of that 
transparency should be?
    Mr. Netram. I think there are two keys. The first is 
disclosing conflicts of interest, disclosing methodologies, 
disclosing their sources of information so that investors can 
see exactly what is going on here. And then second, making sure 
that the anti-fraud standards actually apply to proxy advisory 
firms.
    Mr. Steil. Making sure that what standards?
    Mr. Netram. The anti-fraud standards.
    Mr. Steil. Absolutely. There should be some accountability 
to ISS and Glass Lewis if they are engaged in providing advice 
that is either misleading and correct or, in the case of 
Travelers, illegal. Is that right?
    Mr. Netram. That is correct.
    Mr. Steil. And does the legislation that I have put forward 
accomplish that goal, in your opinion?
    Mr. Netram. It absolutely does.
    Mr. Steil. Mr. Berry, do you have any further comment on 
that?
    Mr. Berry. I think if we cut down on the agency problems 
with the proxy advisors in the same way we care about agency 
between shareholders and managers, that would be a huge 
improvement.
    Mr. Steil. So, we should disclose conflicts of interest?
    Mr. Berry. Absolutely.
    Mr. Steil. And do you see conflicts of interest in the two 
largest proxy advisor firms?
    Mr. Berry. Yes, especially between consulting and proxy 
advice, there are real issues there.
    Mr. Steil. Mr. Doyle, I see you nodding your head. Do you 
agree with that?
    Mr. Doyle. I do, and I would also mention that members on 
this committee and others have supported through a bipartisan 
way to respond to and to try to alleviate some of those 
conflicts.
    Mr. Steil. I think, at a minimum, we should have 
disclosure. I think it is abysmal that Chairman Gensler struck 
down the Clayton rule. I think it moves us away from further 
disclosure. It allows these two proxy advisors to operate in 
the dark. I think we actually need to have a more robust regime 
than was even the rule in place. I appreciate you being here 
and your testimony today. Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman from Wisconsin yields 
back. And the Chair now recognizes the gentleman from 
Massachusetts, Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Madam Chairwoman. I also thank the 
ranking member and I appreciate the good work of the panel.
    Ms. Minow, prior to coming to Congress, I served as a union 
trustee on the Iron Workers Pension Fund, the Taft-Hartley 
Fund. I was a union trustee, and we would hire asset managers 
and obviously rely upon proxy vote services as well, advisors. 
And I have to say that as a union trustee, if a fund manager or 
an asset manager and proxy advisors ever voted against the 
interests of the ironworkers and the participants of that fund, 
they would be former fund managers, former asset managers, 
former advisors.
    Some are painting this as a system with no accountability 
and that it is a couple of activists that are directing the 
votes here. Is that really what is happening, or is there some 
level of, dare I say, democracy and causation between the views 
of the participants of these funds and the way the proxies are 
voted?
    Ms. Minow. Thank you, Congressman, for that question. It 
has been my great privilege to conduct training sessions for 
new trustees of union pension funds on proxy voting, and I have 
found them to be extremely interested in these issues for the 
protection of the plan participants. What do we all want? We 
want them to be able to retire in a comfortable way.
    So, you are 100-percent correct that the union's pension 
funds and the other pension funds that I have worked with, the 
public pension funds primarily, are particularly focused on 
making sure that their asset managers make, buy, hold, sell, 
vote, and litigate any decisions about share ownership purely 
for the benefit of plan participants. Furthermore, the Federal 
Government has not only the authority but the obligation to act 
if they don't do it, and they have acted, not as often as they 
should, but they have acted in those cases.
    I want to mention that it is not union pension funds or any 
other institutional investor who has called for non-financial 
measures of corporate performance. It is the Business 
Roundtable, which announced that they wanted to go for 
stakeholders, and they wanted to have this very amorphous idea 
of, throw the dart at the wall and then draw the target around 
it. So no, you are 100-percent correct.
    Mr. Lynch. Thank you. Madam Chairwoman, I ask unanimous 
consent to enter into the record a report by the Independent 
Shareholder Services entitled, ``U.S. Shareholder Proposals 
Jump to a New Record in 2023.''
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Lynch. Thank you, Madam Chairwoman, and it is dated May 
24th, so it is about 6-weeks-old, but in the takeaway section, 
it says that the volume of shareholder proposals has indeed 
jumped 14 percent between January 1, 2023, and May 31, 2023. 
Interestingly, it says this increase is being driven by a new 
wave of anti-ESG sentiment, fueling a record number of 
shareholder proposals. So you are right, there is a spike in 
proposals, but it is from anti-ESG people who are offering 
these shareholder proposals. And I have to admit, it looks a 
lot like democracy, right?
    Ms. Minow, you have people who are arguing to protect the 
earth from climate change, and then you have people who are 
saying, we don't believe in that, and we don't invest along 
with those ideas. That is sort of the position we are in, 
right? We represent close to 800,000 people apiece, and if we 
don't listen to them, they will make changes in leadership. 
Isn't this a lot like democracy?
    Ms. Minow. It is exactly like democracy, and as I noted, 
most of the anti-ESG proposals failed to get enough to pass the 
threshold to be reintroduced, so that shows that the market 
works. Democracy works. One thing I love to tell Members of 
Congress is that even one vote is enough to elect a corporate 
director. So if 99 percent of the shareholders vote against, I 
will give you all shareholder proposals. I will get rid of 
shareholder proposals entirely if shareholders can vote out 
boards of directors. If you need 50 percent in order to serve 
on the board, then let the shareholders send the message that 
way. In the meantime, shareholder proposals are a very modest, 
low-cost way for them to raise the issues they care about.
    Mr. Lynch. Thank you. Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman from Massachusetts yields 
back. The gentleman from New York, Mr. Garbarino, is now 
recognized for 5 minutes.
    Mr. Garbarino. Thank you, Madam Chairwoman. Thank you so 
much for holding this hearing, and thanks to the witnesses for 
being here today.
    Mr. Berry, we are pleased to hear that those across the 
aisle are concerned with shareholder democracy. In the spirit 
of promoting shareholder democracy, would you agree that if a 
shareholder proposal is rejected time and time again by a 
majority of shareholders, their voting preferences should be 
heard, and there should be a cooling-off period for it being 
resubmitted?
    Mr. Berry. Yes.
    Mr. Garbarino. Thank you very much.
    Mr. Netram, in the spirit of promoting shareholder 
democracy, should two proxy advisory firms be able to dictate 
30 percent of proxy votes? Shouldn't the shareholders 
themselves be voting and not auto-voting the preferences of 
third parties?
    Mr. Netram. I believe the shareholders themselves should be 
voting for the preferences.
    Mr. Garbarino. Thank you. It has been suggested, Mr. 
Netram, that the cost of shareholder proposals is just an hour 
of work. Can you discuss the cost to companies?
    Mr. Netram. Sure. The real cost to the companies lies in 
the time and attention that executives are diverting from the 
operation of the underlying business. In the manufacturing 
sector, in particular, we are facing a set of challenges that 
are existential, and taking the executives' attention away from 
that and navigating these incredibly turbulent waters is not 
helpful to shareholder value creation.
    Mr. Garbarino. Just an hour of work, that is not true. It 
is going to take a long time. What about retail investors? Is 
there a cost to them? Presumably, they have to read through the 
proposals to make informed decisions. Some companies have 
millions of retail investors. Is that time quantifiable?
    Mr. Netram. It must be quantifiable. I don't know what the 
answer is, but I am sure that it is.
    Mr. Garbarino. Wouldn't making our markets more efficient 
and letting boards focus on sound financial policy rather than 
political platforms enhance capitalism?
    Mr. Netram. I strongly agree with that statement.
    Mr. Garbarino. Thank you. I want to ask you now about 
impacts to the changes to Bulletin 14L. Companies are facing 
more and more detailed environmental, social, and political 
proposals that are intended to interfere with regular business 
operations. One publication that has helped fuel this pattern 
is the SEC's Staff Legal Bulletin 14L, which made a number of 
changes that broaden the scope of what could be deemed eligible 
for a company's proxy statement. One of those changes is the 
altering of ordinary business exclusion, effectively removing 
the longstanding requirement that there be a connection between 
a proposal and the company.
    Mr. Netram, how does the shareholder proposal process 
change when the SEC limits the availability of no-action relief 
under Rule 14a-8? Additionally, how can this change interact 
with the operations or business of a company?
    Mr. Netram. It fundamentally alters the way in which a 
business is run. If you remove that nexus between the core 
operation of the business and the shareholder proposal to open 
that up to really anything under the sun, you are taking the 
time and attention away from running your underlying business.
    Mr. Garbarino. Yes. You said you could open anything up 
under the sun, which means you could allow shareholders to 
influence more of the day-to-day operations of a company, 
right?
    Mr. Netram. That is correct.
    Mr. Garbarino. Can you explain how the increased level of 
detail and specificity in shareholder proposals creates 
governance risks by distorting a board's decision-making 
process?
    Mr. Netram. Absolutely. I think it goes beyond distorting 
the decision-making process to actually giving greater power to 
shareholder activists, in that under the new regime, you are 
allowed to make minor alterations to a proposal, infinite 
versions of alterations to proposals, and have corporate 
management be forced to consider each of those in turn.
    Mr. Garbarino. Is there any way to reform Rule 14a-8 to 
combat the submission and resubmission of non-germane 
shareholder proposals?
    Mr. Netram. Yes. I think we need to go back to actually 
ensuring that proposals that are germane to the underlying 
business are the focus.
    Mr. Garbarino. Dr. White, the SEC's proposed amendments to 
Rule 14a-8 would tip the scales in favor of a small group of 
like-minded shareholders whose objectives may not be aligned 
with the objectives of mainstream investors or the best 
interests of the company and shareholders. Can you discuss the 
SEC's proposed amendments and the potential impact they will 
have on the public markets?
    Mr. White. Thank you for that question. Yes, there were 
three proposed amendments. One was the substantial 
implementation exclusion, and it says that if you have already 
substantially implemented the subject matter with the same 
objective and the same means, then you can exclude it. The new 
rules would require that you prove that in order to achieve 
that exclusion.
    The duplication exclusion I mentioned earlier, which is if 
you have two or three activist shareholders that want to 
achieve the same objective, they can propose two or three 
different means, and it can appear on the proxy. For example, 
Amazon had 18 shareholder proposals on its proxy this year. If 
these rules were to move forward, it would make it even harder 
to remove.
    Mr. Garbarino. I am out of time. Thank you, Madam 
Chairwoman. I yield back.
    Chairwoman Wagner. The gentleman from New York yields back. 
The Chair now recognizes the gentleman from New York, Mr. 
Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Madam Chairwoman. Ms. Minow, do proxy 
firms proactively push ESG-related information out to the 
investors, or is it customary for investors to ask for ESG-
related information about a company as part of their 
established proxy voting policies?
    Ms. Minow. Thank you for that question. There is a 
variety--the clients have different relationships with ISS, and 
you have some in each of those categories. But I was one of the 
co-founders of ISS, so I can tell you that ISS began because 
all of a sudden there were complicated issues on proxies. 
Before that, it was all very routine: vote for the directors; 
vote for the auditor; go home. But all of a sudden, there were 
complex issues that had to do with CEO pay, that had to do with 
management entrenchment. And when the proxy advisors began, 
they started addressing those issues. Some will go to ISS and 
say, here are our policies, please vote according to our 
policies. Some will say, we will look at your advice, and we 
will evaluate it and decide what we agree with and what we 
don't agree with, so different clients have different kinds of 
relationships with ISS.
    Mr. Meeks. Would you say then, in asking these questions, 
is it unnecessary or irrelevant for an investor to ask for 
different kinds of information?
    Ms. Minow. Absolutely. That is required by their obligation 
as fiduciaries, and just as they get information about buy/sell 
decisions, they are getting information about voting decisions 
and then acting on it according to their own policies.
    Mr. Meeks. Let me make sure that I am correct--would it be 
correct to say that proxy advisors are providing this 
information in response to a market-driven, investor-driven 
demand?
    Ms. Minow. That is 100-percent correct, and as I pointed 
out earlier, Presidential candidate, Vivek Ramaswamy, has now 
started an anti-ESG proxy advisory service, and anyone who 
wants to purchase that service can do so.
    Mr. Meeks. When we look at our capital market systems, 
which I believe to be the envy of the world--everyone looks at 
it, this is the envy of the world--it seems that for it to work 
best, we would want our institutional investors to have access 
to independent analysis provided by proxy advisors or any other 
source of their choosing to enable them to make the most 
informed decisions possible. Do you agree?
    Ms. Minow. One hundred percent.
    Mr. Meeks. So, why in the world do you believe that my 
colleagues on the other side of the aisle want to stifle this 
access?
    Ms. Minow. They want to kill the messenger, and that is the 
opposite of what capitalism and efficient market theory is 
about.
    Mr. Meeks. Kill the messenger. I don't understand that. I 
listened to my other colleagues when they were asking their 
questions. We are in some weird times here. Ms. Minow, 
shareholder proposals are helping to raise industry standards 
for the diversity of corporate boards and C-suites. Do you 
believe this is an effective way for shareholders to signal 
that they care about the diversity of a company's board or C-
suite?
    Ms. Minow. I really want to emphasize your use of the word, 
``signal,'' because it is exactly appropriate. This is an area 
where shareholders are communicating. They are not forcing 
anybody to do anything. It strikes me that we literally pay 
these executives the big bucks so that their knees don't get 
weak when someone criticizes them.
    Mr. Meeks. Can you share examples from your work where 
shareholder proposals have led to positive changes or 
improvements within the companies?
    Ms. Minow. Absolutely. They have led to boards being far 
more engaged, and effective, and qualified. They have led to 
the end of many entrenching devices that made companies less 
accountable. As I said before, I am not saying anything good 
about CEO pay. I am just going to say it would be a lot worse 
if it were not for shareholder input. I think it has led to 
some very important changes and better disclosure, more 
accountability, and, again, that is what markets are all about.
    Mr. Meeks. Thank you. My time has expired. I yield back.
    Chairwoman Wagner. The gentleman from New York yields back. 
The Chair now recognizes yet another gentleman from New York, 
Mr. Lawler, for 5 minutes.
    Mr. Lawler. Thank you, Madam Chairwoman. Like many of my 
colleagues here today, I have serious concerns about the 
potential consequences of focusing on costly non-material 
environmental, social, and political issues at the expense of 
sound financial policies, what we are seeing in this press from 
both government regulation and shareholder activism driving up 
the costs and burdens associated with participating in the 
United States public markets. And it detracts from companies 
being able to raise capital and foster economic growth. Instead 
of focusing on running their businesses, we see companies 
having to spend their time and resources addressing 
politically-motivated proposals that don't have anything to do 
with the company's strategic direction or long-term goals.
    My home State of New York has been at the forefront of 
promoting ESG policies. Back in 2019, New York State 
Comptroller Tom DiNapoli released guidelines on how the New 
York State Common Retirement Fund would begin to pursue ESG 
goals with a new climate action plan, for instance. We have 
seen the Common Retirement Fund repeatedly filing shareholder 
proposals and pressing public companies to adopt these 
policies. This is not just some random shareholder. This is an 
elected official using his perch to drive companies to make 
decisions. That is not democracy, not even close. Over the past 
years, this fund alone has filed hundreds of proposals, and 
many companies have chosen just to settle and cut a deal, 
leading to more reports, and disclosures, and diverted 
resources.
    This is the same pension fund, by the way, that just 
announced a negative return of 4.1 percent for the State fiscal 
year that just ended. Bang up job. They are doing good by the 
taxpayers because, by the way, in New York, the taxpayers are 
on the hook when we don't meet our requirements. Several 
pension funds in New York City are even facing lawsuits 
alleging that they have breached their fiduciary duty. Yes, 
this is really working out great. Good policies.
    We have seen a lot of examples recently, and I hear it from 
my constituents. People want corporations to leave politics at 
home and focus on the underlying purpose at hand of running 
their businesses, selling their products, and delivering a 
return for their investors. Stay the hell out of politics. 
Leave it to Congress. Leave it to State legislatures. There are 
plenty of politics around here at all times. The American 
people are so tired of politics consuming everything from the 
media, to corporate America, to education. It is pathetic, and 
it is creating a challenge across-the-board.
    Mr. Berry, do you agree that politics and social policy 
should be made in Congress and State legislatures and not in 
corporate boardrooms?
    Mr. Berry. That is what Congress and legislatures are for, 
Congressman.
    Mr. Lawler. I agree.
    Mr. Netram, shareholders who submit proposals, especially 
on environmental and social topics, often argue that these 
proposals serve the long-term economic interests of companies 
and shareholders. Could you respond to this claim?
    Mr. Netram. I would say that the long-term economic 
interests of shareholders are best served when companies focus 
on their underlying business itself.
    Mr. Lawler. Would you agree that if, for instance, the New 
York State Pension Fund is giving a negative return, that is 
probably not in the best interest of pension fund recipients?
    Mr. Netram. Without knowing much about the New York City 
Pension Fund, those don't sound like great facts there.
    Mr. Lawler. That makes sense.
    Dr. White, can you speak about how the prevalence and 
persistence of socially-oriented shareholder activism and the 
influence of proxy advisory firms affects shareholder value and 
the ability of corporations to make efficient and effective 
business decisions?
    Mr. White. Yes. Thank you. I have heard a lot of discussion 
today about how it may be taking 1 hour to respond to 
shareholders. You would get a low grade in my class if you 
submitted that as a response. You have to carefully consider 
each proposal, potentially negotiate with the special 
interests, request relief from the SEC, which they reject more 
than 50 percent of the time, and reply if they fail to provide 
relief. Amazon had 116 pages and 40,000 words, which would take 
the average investor 2 hours to read, so I doubt it would take 
you 1 hour to respond, if it takes you 2 hours to read, and was 
very politicized.
    Mr. Lawler. Thank you. I yield back.
    Chairwoman Wagner. The gentleman from New York yields back. 
The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. Ms. Minow, I 
thank you and all of our witnesses for giving of your valuable 
time to be here with us. I think we sometimes take for granted 
those of you who come before us and spend a lot of time. And 
the check we give you is very little, probably like zero, so 
thank you very much.
    Saying something is so, does not make it so, and there are 
and have been here today suggestions that proxy advisors have 
their own political and social agendas. And many of those who 
have asserted that say that they have an outsized care about 
climate change, which I am still struggling with since this is 
the only climate we have. What are your views on this? Do proxy 
advisors always recommend in favor of climate or social 
proposals?
    Ms. Minow. Thank you for the question. And as Dr. White 
pointed out, there are a lot of shareholder proposals relating 
to climate which did not get substantial votes, and which got 
votes lower this year than they did in previous years. So no, 
that is not true.
    Proxy advisory services, I will say it again: No one has to 
buy it. The people who do buy it are the most sophisticated, 
professional financial experts in the world. And they have a 
choice of one that is a registered proxy advisor, and one that 
is not, one that has conflicts of interest, and one that does 
not, and now a new one that is the anti-ESG. Maybe, they will 
get all three and compare what their recommendations are; those 
are their own financial choices. So yes, the evidence shows 
that the clients of the proxy advisors depart from the 
recommendations of the proxy advisors on any issue that is 
complex or controversial.
    Mr. Cleaver. Do you agree, Mr. White?
    Ms. Minow. I beg your pardon?
    Mr. Cleaver. I was asking Mr. White if he agreed.
    Mr. White. I think that sounds like a fair description of 
the proxy proposal process. Proxy advisors do have conflicts of 
interest. Some of them do not. I would be concerned, though, of 
such a concentration in two entities that have so much power. I 
think if we were describing any other setting where an entity 
influenced trillions of dollars of investment returns and we 
did not have oversight or regulation or transparency, we would 
be highly concerned, so I am not sure how proxy advisors are 
different.
    Mr. Cleaver. But neither of you are suggesting that the 
proxy advisors are puppet masters who have control over asset 
managers or institutions?
    Ms. Minow. I compare them to restaurant critics. You can 
read the review of a restaurant and decide, well, they don't 
like green peppers, but I do like green peppers, maybe I will 
like it. These are First Amendment-protected publications that 
are voluntarily purchased, and I would be very, very cautious 
about providing any kind of prior restraint or additional 
review.
    Mr. Cleaver. Great example with the restaurants. I don't 
like green peppers either.
    Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman from Missouri yields back. 
The Chair now recognizes the gentleman from Iowa, Mr. Nunn, for 
5 minutes.
    Mr. Nunn. Thank you very much, Madam Chairwoman, and I 
thank the ranking member as well. I appreciate it, and I thank 
the panel very much for being here today.
    I want to talk a little bit to our witnesses who are 
shedding light on this, I think, very important topic. People 
in my district, Iowa's 3rd, elected me to serve their best 
interests, not that of any political party or social agenda 
that is being set forward. To that end, I, along with my 
colleagues on both sides of the aisle today, support policies 
that prioritize protecting everyday families, farmers in my 
home district, small business owners, and Americans across-the-
board. Their investment and their financial futures often 
depend on the decisions that are being made in this room. This 
follows up on yesterday's hearing on what we would like to 
drill down on for a term called, ``robo-voting.'' This is an 
alarming and ramping process that has come up.
    For those of you watching back in Iowa, robo-voting is the 
practice of automatically casting votes with proxy advisors' 
recommendations. Only two firms, including a witness who is on 
this panel today, are part of a duopoly, if you will, who are 
casting 97 percent of the proxy advisor market. They have given 
unprecedented power and control over my constituents' 401(k)s 
and their future funding.
    Essentially, for a corn grower who lives in my home State, 
their livelihood to both fuel and feed the world is being 
unknowingly funding groups who are committed to demising their 
very line of existence, their hard-earned 401(k) portfolio 
investment and advisors, who are voting on their shares, both 
solely on the recommendations of these two firms that operate 
oftentimes in opposition to those very farmers, livestock 
producers, and biofuels upon which hey have built their 
businesses. In fact, in some cases, they are openly hostile 
competitors and overseas companies where their retirement 
dollars are going. This can impede and even seek to end 
traditional farming in my State, and that is just one sector.
    In Iowa, growers who are also investors have little 
knowledge and only two respectable options to choose from in 
terms of proxy advisors. Not only are farmers losing funds to 
their competition, but they are losing market performance on 
those hard-earned retirement funds. According to Forbes, 
numerous studies demonstrate and correlate between an increase 
in activism in areas like environmental activism, and to public 
pension funds promoting social agendas and lower stock returns, 
resulting in a staggering 14-percent decrease in valuations for 
those affected companies.
    To that end, Madam Chairwoman, I am introducing a bill next 
week that requires the SEC to make a final rulemaking 
prohibiting the practice of robo-voting and prohibits 
institutional investors from outsourcing their voting decisions 
to a proxy advisor. It requires them to be based on investment 
merit returns versus activist desires. In my opinion, it is 
beyond time that this corrupt and largely lazy practice is 
brought into the light and ended. Our constituents are counting 
on us for this level of change.
    With that, Mr. Netram, can you go into detail and describe 
to us the process of robo-voting and how it impacts the 
decision-making process and the fiduciary responsibilities of 
asset managers?
    Mr. Netram. Absolutely. Thank you for that question, 
Congressman. Robo-voting, as you so accurately described it, is 
the process by which proxy firms automatically cast votes on 
asset managers' behalf in line with those proxy firms' 
recommendations and without any review by the asset managers. 
What you have is a system in which asset managers don't have 
the ability to make an informed decision on the votes that they 
are taking because the proxy firms are just automatically 
casting those votes. By definition, that means that those asset 
managers may or may not be acting in the Main Street investors' 
best interest.
    Mr. Nunn. Why do you think then, that Chair Gensler of the 
SEC did away with former Chair Clayton's overhaul of proxy 
advisor firms in 2020? And do you think that a robo-voting 
bill, like the one I am proposing this morning, is a priority?
    Mr. Netram. On the second question, absolutely. Thank you 
for leading on that legislation, Congressman. I think it is 
absolutely needed and a real priority for the industry. On the 
first question about Chairman Gensler's actions here, it is 
hard to know his mind, but it certainly does seem to be part 
and parcel of the SEC's overall effort to deregulate and 
empower proxy advisory firms. The net effect of this is that 
your constituents, Iowans, are left with conflicted, error-
ridden advice that is being automatically voted on their behalf 
without them even knowing about it.
    Mr. Nunn. Thank you, Mr. Netram. With that, Madam 
Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman from Iowa yields back. The 
Chair now recognizes the gentlewoman from Indiana, Mrs. 
Houchin, for 5 minutes.
    Mrs. Houchin. Thank you, Chairwoman Wagner and Ranking 
Member Sherman, and thank you to each of the witnesses for your 
testimony and for speaking with us today. One of my top 
priorities as a member of this committee is to protect retail 
investors and ensure that my constituents in Southern Indiana 
are given the same financial opportunities and the level of 
priority as investors in any other part of the country.
    When I hear from people back home, a constant point of 
concern is for the security of their wallets, the ability to 
save for retirement, provide for their families, and secure 
their futures. As my colleagues have discussed, the current 
system has lost sight of these priorities. Our capital markets 
and the soundness of our financial system have long been among 
our greatest strengths, but as political agendas and unrelated 
social issues drive the focus elsewhere, everyday Americans are 
forced to bear the cost of diminished returns and lost 
financial security. As a member of both the ESG Working Group, 
and this committee, I am glad we are now turning our attention 
to this issue. There is no reason why the well-being of 
everyday investors should take a backseat to politics over 
other unrelated issues.
    Mr. Netram, you submitted a comment letter to the SEC back 
on September 12, 2022, regarding their proposed amendments on 
Rule 14a-8. As you stated in your letter, these proposals, 
``will ultimately force companies and shareholders to consider 
proposals any time an activist demands, irrespective of whether 
the company has already taken steps to address the underlying 
issue or whether shareholders have already considered and 
rejected or are currently considering a similar proposal.'' 
Needless to say, that is very concerning. As the current system 
works, activists can persistently resubmit similar proposals 
year after year, despite being previously rejected by a 
majority of the shareholders. By moving forward with this 
proposal, the SEC would place the interests of activists even 
higher than the well-being of their investors.
    Mr. Netram, do you think it is fair for companies to have 
to continuously invest resources in fighting activist proposals 
that clearly do not benefit the company and its shareholders, 
especially when the proposals have been rejected in previous 
years?
    Mr. Netram. Absolutely not. When a broad majority of 
shareholders have rejected a proposal, it is absolutely unfair 
for companies to have to continually reassess and re-engage 
with the activists on those ideas.
    Mrs. Houchin. And are there ways that we can reform this 
process, the no-action process, so that we can prevent these 
duplicative problems?
    Mr. Netram. I think Congress has a real role to play here 
in reining in the SEC and directing them on a path that is more 
in line with the interests of mainstream investors.
    Mrs. Houchin. That is certainly part of the reason why we 
are here today, to really consider what package of bills we may 
be moving forward to address some of these issues. I am pleased 
to be leading an initiative that will address the issue. My 
bill will nullify this burdensome and unnecessary SEC proposal 
from taking place, saving shareholders both time and money and 
ensuring that the interests of a small number of activists 
don't take priority over our everyday investors.
    Mr. Netram, the SEC's required mandate includes protecting 
investors, facilitating capital formation, and promoting 
efficient markets. How does the dominance of social and policy 
issues in corporate annual meetings conflict with those 
objectives?
    Mr. Netram. The SEC can fulfill its mission to protect 
investors and support capital formation by allowing companies 
to really focus on long-term value creation. That is where 
their focus needs to be. What the SEC has done instead is they 
have taken steps to ensure or really encourage activists to 
hijack the proxy ballot and divert time, resources, and 
attention from the underlying business in which Main Street is 
investing.
    Mrs. Houchin. And I would argue that, in and of itself, is 
a threat to the general bottom line and overall performance of 
those shares for their shareholders. I am grateful to each of 
you for coming here to speak today. As we continue this 
important work on the committee, I hope we can ensure that the 
well-being of investors remains the chief focus of our capital 
markets. Thank you, Madam Chairwoman. I yield back.
    Chairwoman Wagner. The gentlelady from Indiana yields back.
    And seeing no other Member on the dais has a question, I 
would just like to thank our witnesses today for their 
testimony.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is adjourned.
    [Whereupon, at 12:18 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             July 13, 2023
                             
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