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


                         OVERSIGHT OF THE PROXY
                           ADVISORY INDUSTRY

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 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. 118-39
                           

                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
                  
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
53-378 PDF                WASHINGTON : 2024                     
                  

                 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 Oversight and Investigations

                   BILL HUIZENGA, Michigan, Chairman

PETE SESSIONS, Texas                 AL GREEN, Texas, Ranking Member
ANN WAGNER, Missouri                 STEVEN HORSFORD, Nevada
ALEXANDER X. MOONEY, West Virginia   RASHIDA TLAIB, Michigan
JOHN ROSE, Tennessee, Vice Chairman  SYLVIA GARCIA, Texas
DAN MEUSER, Pennsylvania             NIKEMA WILLIAMS, Georgia
ANDY OGLES, Tennessee

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 13, 2023................................................     1
Appendix:
    July 13, 2023................................................    33

                               WITNESSES
                        Thursday, July 13, 2023

Friedman, Steven, General Counsel, Institutional Shareholder 
  Services (ISS).................................................     3
Rajgopal, Shivaram, Roy Bernard Kester and T.W. Byrnes Professor 
  of Accounting and Auditing, Columbia University Graduate School 
  of Business....................................................     7
Shostal, Eric, Senior Vice President, Research and Engagement, 
  Glass Lewis....................................................     5

                                APPENDIX

Prepared statements:
    Friedman, Steven.............................................    34
    Rajgopal, Shivaram...........................................    45
    Shostal, Eric................................................    48

              Additional Material Submitted for the Record

Sessions, Hon. Pete:
    Letter from the Society for Corporate Governance to the SEC, 
      dated December 30, 2021....................................    60
Steil, Hon. Bryan:
    Forbes article, ``A Few Thoughts on the `Putting Investors 
      First Act of 2023'''-Part 1, by Shivaram Rajgopal..........    70
    Forbes article, ``A Few Thoughts on the `Putting Investors 
      First Act of 2023'''-Part 2, by Shivaram Rajgopal..........    82
    2019 Milken Institute report, ``Proxy Advisory Firms, 
      Governance, Market Failure, and Regulation,'' by Chester S. 
      Spatt......................................................    92
    Wall Street Journal editorial, ``Cracking the Proxy Advisory 
      Duopoly,'' dated July 12, 2023.............................   115
Waters, Hon. Maxine:
    Written statement of US SIF: The Sustainable Investment Forum   118
Friedman, Steven:
    Written responses to questions for the record from 
      Representative Garcia......................................   121
    Written responses to questions for the record from 
      Representative Ogles.......................................   123
    Written responses to questions for the record from 
      Representative Sessions....................................   124
    Written responses to questions for the record from 
      Representative Steil.......................................   122
    Written responses to questions for the record from 
      Representative Waters......................................   121
    Written responses to questions for the record from 
      Representative Nikema Williams.............................   125
Rajgopal, Shivaram:
    Written responses to questions for the record from 
      Representative Garcia......................................   128
    Written responses to questions for the record from 
      Representative Sessions....................................   127
    Written responses to questions for the record from 
      Representative Waters......................................   128
Shostal, Eric:
    Written responses to questions for the record from 
      Representative Garcia......................................   135
    Written responses to questions for the record from 
      Representative Ogles.......................................   130
    Written responses to questions for the record from 
      Representative Sessions....................................   131
    Written responses to questions for the record from 
      Representative Steil.......................................   133
    Written responses to questions for the record from 
      Representative Waters......................................   131
    Written responses to questions for the record from 
      Representative Nikema Williams.............................   130

 
                         OVERSIGHT OF THE PROXY
                           ADVISORY INDUSTRY

                              ----------                              


                        Thursday, July 13, 2023

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:35 p.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
[chairman of the subcommittee] presiding.
    Members present: Representatives Huizenga, Sessions, 
Wagner, Rose, Meuser, Ogles; Green, Horsford, Tlaib, Garcia, 
and Williams of Georgia.
    Ex officio present: Representative Waters.
    Also present: Representatives Steil and Sherman.
    Chairman Huizenga. The Subcommittee on Oversight and 
Investigations 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, ``Oversight of the Proxy 
Advisory Industry.''
    I now recognize myself for 4 minutes to give an opening 
statement.
    Mr. Shostal, Mr. Friedman, I appreciate you appearing 
before the Oversight and Investigations Subcommittee this 
afternoon. I believe this is the first time that your firms 
have testified before our committee, so congratulations.
    I would like to start by addressing an argument made 
yesterday by some friends on the other side of the aisle that 
Republicans are interfering with free market principles and 
that any discussion of ESG--environmental, social, and 
governance--is a threat to capitalism. That could not be 
further from the truth. We are holding these hearings to, in 
fact, defend capitalism and keep social policies out of the 
boardroom. Social policies should be debated in Congress, which 
we do often and robustly, and in State capitals, but not 
arbitrarily decided by third parties.
    Now, to the topic at hand. Currently, proxy advisory firms 
play an outsized role in our capital markets. And as the Biden 
Administration continues to pursue ESG-related policies through 
regulation and rulemaking, often bypassing Congress, their 
influence has grown. Recent data suggests that on average, a 
recommendation from ISS or Glass Lewis can swing a shareholder 
proposal vote by as much as 30 percent. You are very powerful.
    Today, you will hear from our witnesses that the proxy 
advisory industry provides sound independent recommendations to 
investors in order to maximize shareholder value. In reality, 
proxy advisory firms have hijacked the shareholder process, 
becoming the de facto standard setters for corporate governance 
policies in the United States, and many questions remain.
    Today, the subcommittee will seek to understand what 
metrics proxy advisory firms use to measure the impact of 
environmental, social, and governance policies, and how they 
maximize the long-term value. In addition, we will explore 
whether the proxy advisory firms have sufficient oversight and 
transparency to give shareholders confidence that the 
recommendations being provided are actually free from political 
and social influence. Finally, the subcommittee hopes to 
identify the factors used by the proxy advisory firms when 
making voting recommendations.
    Mr. Shostal, Mr. Friedman, in the past, your firms have 
declined to disclose your historical data and how you formulate 
your voting policies and recommendations. Transparency ensures 
accuracy and accountability. We have to live that every day up 
here, and that is the only way that your firms can promote a 
fair and reliable proxy process, and, of course, under the 
chairmanship of Gary Gensler, the SEC has injected themselves 
into the process, which should be a surprise to no one.
    Recent actions taken by the SEC have made it nearly 
impossible for companies to defend themselves against ESG 
proposals, which have grown to over 60 percent of all 
shareholder proposals in 2023. The simple truth is this: ISS 
and Glass Lewis seem to bear none of the consequences their 
recommendations have on companies and, in my opinion, operate 
without sufficient transparency.
    Ultimately, both ISS and Glass Lewis really don't answer to 
shareholders or act in a fiduciary manner with a responsibility 
to maximize returns on the investments of retail investors. 
Prioritizing political policies over sound economic analysis 
undermines the fundamental purpose of the proxy voting system.
    I look forward to hearing from all of our witnesses today, 
and I yield back the balance of my time.
    And I will now recognize the ranking member of the 
subcommittee, the gentleman from Texas, Mr. Green, for 4 
minutes for an opening statement.
    Mr. Green. Thank you, Mr. Chairman. And I thank the 
witnesses for appearing today as well.
    Mr. Chairman, the title of this hearing is, ``Oversight of 
the Proxy Advisory Industry.'' However, I believe a better 
title would be, ``Republican Overreach into the Proxy Advisory 
Industry as a Guise to Promote Climate Change Denial, to 
Promote the End of Diversity and Inclusion Programs, as Well as 
to Promote Overreach Into Corporate Governance.''
    By way of example, Republicans are using proxy advisory 
oversight as a guise to engage in climate change denial at a 
time when major insurance companies are leaving Florida and 
California due to the cost of doing business related to climate 
change.
    Oversight is being used as a guise to end lawful, socially-
acceptable corporate diversity and inclusion programs, as 
evidenced by the fact that my Republican colleagues in 
leadership have ended the Financial Services Committee's 
Subcommittee on Diversity and Inclusion at a time when it is 
still needed to encourage diversity in the financial services 
industry. This is further evidenced by the fact that my 
Republican colleagues continue to seat all White males as panel 
witnesses when there are women and people of color who are 
capable, competent, and qualified to testify.
    Oversight of the proxy advisory industry is about an 
overreach into corporate governance to prevent shareholders who 
are owners from having their policy opinions become policy 
after all shareholder owners have had an opportunity to vote. 
Oversight of the proxy advisory industry is little more than 
overreach as a means to hold back valuable climate change 
policies, roll back diversity and inclusion efforts, and take 
back the right of shareholder owners to have a voice in 
corporate governance. Sadly, too many of my Republican 
colleagues are marching to the beat of a rollback, take-back, 
discombobulated drummer at a time when our country needs to 
march forward. Mr. Chairman, I yield back.
    Chairman Huizenga. The gentleman yields back. With that, 
the gentleman from Tennessee, the Vice Chair of the 
subcommittee, Mr. Rose, is recognized for 1 minute.
    Mr. Rose. Thank you, Chairman Huizenga. Since 2003, 
elements of the Securities and Exchange Commission's regulatory 
regime have acted to entrench investment advisers' reliance on 
and perhaps even the need for proxy advisory firms. Our 
witnesses today: Glass Lewis, a for-profit company owned by a 
Canadian private equity firm and a Canadian businessman; and 
ISS, a majority German-owned for-profit company, are largely 
unregulated and have significant control over shareholder 
voting in U.S. capital markets. The rise of proxy advisory 
firms and the outsized influence they wield have real 
consequences for investors, the vast majority of whom are 
interested in maximizing returns, not on identity politics or 
studying the weather.
    I am interested in hearing from our witnesses today about 
their voting policies and patterns, their conflicts of 
interest, and whether their recommendations are in the best 
interests of Main Street investors. Thank you, Mr. Chairman, 
and I yield back.
    Chairman Huizenga. We will now turn to our witnesses today: 
Mr. Steven Friedman, the general counsel at Institutional 
Shareholder Services (ISS); Mr. Eric Shostal, the senior vice 
president of research and engagement at Glass Lewis; and 
Professor Shivaram Rajgopal, the Kester and Byrnes Professor of 
Accounting and Auditing at Columbia Business School, whom I 
believe was in front of our Capital Markets Subcommittee just 
last year.
    We thank you for taking the time to be here. You will each 
be recognized for 5 minutes to give an oral presentation of 
your testimony, and without objection, your written statements 
will be made a part of the record.
    Mr. Friedman, you are now recognized for 5 minutes for your 
testimony.

 STATEMENT OF STEVEN FRIEDMAN, GENERAL COUNSEL, INSTITUTIONAL 
                   SHAREHOLDER SERVICES (ISS)

    Mr. Friedman. Chairman Huizenga, Ranking Member Green, and 
distinguished members of the subcommittee, thank you for the 
invitation to testify today on behalf of Institutional 
Shareholder Services, also known as ISS. My name is Steven 
Friedman, and I am ISS's general counsel. I have worked for ISS 
for nearly 20 years, having originally joined the company in 
September 2003, with a brief break in my tenure in the early 
2010s.
    Cognizant of the interest this subcommittee has shown on 
this topic, and also, recently-proposed legislation to reform 
the proxy advisory industry, I hope my testimony today 
contributes to a constructive and fact-based discussion about 
proxy advisers by: number one, explaining ISS's important, but 
limited, role in the proxy voting process; number two, 
describing how ISS is currently regulated in the United States 
and our responsibilities as a fiduciary to our institutional 
investor clients; and number three, conveying the facts about 
the work that ISS has been privileged to do in serving our 
institutional investor clients since our founding over 35 years 
ago.
    Today, ISS is a leading provider of corporate governance 
and investment research, data, and analytics to the financial 
market participants around the globe. As was the case in our 
founding in 1985, proxy advisers remain a market-based solution 
to common proxy voting challenges that are faced by 
institutional investors. We have seen market forces at work and 
entrants come and go, including, most recently, the launch of a 
new proxy advisory service by a self-described anti-ESG asset 
management firm.
    As part of our core offerings, ISS provides institutional 
investors with objective, timely, and expert proxy research and 
vote recommendations based on the proxy voting policies 
selected by the clients. In many cases, our institutional 
investor clients develop custom policies that reflect their 
individual investment objectives and strategies and their own 
approaches to capital stewardship.
    In fact, during Calendar Year 2022, approximately 80 
percent of the shares that were processed by ISS on behalf of 
our clients were linked to a client's custom policy. For 
clients who choose not to use a custom policy, ISS offers a 
range of proxy voting policy options, including what we call a 
benchmark voting policy, as well as a range of specialty voting 
policies. By offering this range of options, ISS empowers our 
clients to exercise their rights as shareholders in accordance 
with their own investment parameters and risk return 
assessments.
    Put simply, ISS and other proxy advisers play an important, 
but narrow, role in the proxy voting process. It is the client 
who creates or selects the voting policies and guidelines which 
reflect their own fiduciary obligations and investment 
strategies. Our job is to synthesize data, analyze proxy 
statements, and formulate vote recommendations that flow from 
the client's chosen policies and guidelines. Proxy voting is a 
form of investment advice. ISS is a registered investment 
adviser under the Investment Advisers Act of 1940. This statute 
and related rules provide a mature and comprehensive regulatory 
regime that covers virtually every aspect in our business and 
that effectively addresses transparency, accountability, 
accuracy, and conflict mitigation in the proxy advisory system.
    Our fiduciary duties follow the contours of our 
relationship with our clients, so it is important to understand 
what those relationships entail and what they don't entail. ISS 
does not choose the ballot or agenda items upon which we render 
advice. ISS provides our services only to clients who have 
hired us to do so. And then, we analyze only the companies and 
the issues that are designated by our clients in accordance 
with their voting policies and their selected guidelines. The 
voting decision for each resolution at a company meeting is the 
responsibility of the company's shareholders.
    Our business model rests on factual accuracy. Our 
incentives are to ensure that our investor clients have access 
to accurate information, and thus, our incentives are aligned 
with the interests of both institutional investors and the 
companies and the issuers that we cover. Our record of accuracy 
is one of which we are proud. The 2016 GAO report concluded 
similarly, and the congressional and SEC records are replete 
with commentary from investors who affirm that conclusion.
    Our clientele is not monolithic, and accordingly, neither 
are our services. Investors have different investment 
strategies, risk tolerances, and time horizons. Even when 
investors' ultimate objectives are the same, the investment 
strategies they pursue to achieve those objectives may differ.
    And even when they pursue the same investment strategy, 
investors often have different views on the relevance of 
specific information to the risk-return analyses, then 
different ways of assessing how proxy voting serves their 
investment goals. This includes the extent to which 
environmental, social, or governance factors affect financial 
returns, and how such considerations align with their 
underlying goals and mandates.
    This diverse mix of investment approaches is a hallmark of 
our capital markets and makes them robust. We are proud to 
serve our investor clients in a prudent, open, and honest 
manner, consistent with our duties. And with that, I thank you 
again, for the opportunity to testify today.
    [The prepared statement of Mr. Friedman can be found on 
page 34 of the appendix.]
    Chairman Huizenga. Thank you. I appreciate that.
    Mr. Shostal, you are now recognized for 5 minutes for your 
oral remarks.

STATEMENT OF ERIC SHOSTAL, SENIOR VICE PRESIDENT, RESEARCH AND 
                    ENGAGEMENT, GLASS LEWIS

    Mr. Shostal. Thank you, Chairman Huizenga, Ranking Member 
Green, and members of the subcommittee. I appreciate the 
opportunity to testify here today on behalf of Glass Lewis. My 
name is Eric Shostal and I am the senior vice president for 
research and engagement.
    Glass Lewis was founded in 2003 to provide competition in 
proxy research in the voting industry. We are proud to have 
grown to become a company that now serves over 1,300 
institutional investors globally. Glass Lewis is not a 
political or an advocacy organization. We are a business that 
helps our clients, sophisticated institutions that own and 
manage shares and companies, to make voting decisions in an 
efficient and effective manner. Glass Lewis is committed to 
adhering, at all times, to a high standard associated with our 
fiduciary duty for institutional investor clients.
    Proxy voting is a means by which shareholders have a say in 
the companies they own. It is a fundamental, longstanding part 
of the system of corporate law that has served this country so 
well. No one is required to hire a proxy advisory firm. 
Institutional investors often do so because it makes more sense 
for them to outsource the task of reading and analyzing the 
proxy statements of potentially thousands of companies they are 
asked to vote on each year. This, of course, lowers costs, 
while allowing them to be prudent stewards and mitigate risks 
to their beneficiaries and clients who may be pension plan 
participants or retail investors saving for college or 
retirement.
    I came to Glass Lewis to lead its research efforts about 3 
years ago after spending part of my career as a stewardship 
professional on the institutional investor side. Serving as the 
head of the research team at Glass Lewis has been an 
extraordinary privilege. I work alongside some of the most 
hardworking, experienced, and talented colleagues I have come 
across in my nearly 20 years in corporate governance, and 
having just completed my third proxy season in this role, I am 
truly in awe of their skill, their work ethic, and their 
dedication to our mission.
    This past year, I have seen an organized campaign to push 
back on shareholder votes on environmental, social, and, to a 
lesser extent, corporate governance shareholder proposals. And 
to be clear, we do not file shareholder proposals, and we have 
no control over what types of proposals shareholders submit, 
nor do we decide which proposals go to a vote. That is a 
process, as you know, that is governed by the SEC, which has 
allowed more, what we call, ``E&S proposals,'' onto company 
ballots in recent years.
    Even with this recent increase, however, shareholder 
proposals represent about 1.3 percent of the proposals we 
provide voting research and analysis on each year. A subset of 
these relate to E&S issues. In recent years, Glass Lewis 
benchmark policy has supported about 40 percent to 50 percent 
of such proposals. Why do we support these proposals? We do so 
because many of our clients see these issues as material risk 
factors, factors that need to be considered as a prudent 
fiduciary to mitigate risk and to promote the long-term 
economic interests of shareholders.
    As a State treasurer explained at a recent House hearing, 
``This approach is backed by academic research, but it is also 
common sense.'' Companies that value their workers have less 
turnover and higher productivity. Companies that build strong 
governance structures will be more resilient and valuable over 
the long term. Companies that prepare for changing weather 
patterns and changing market demands will be better protected 
from physical and transition risks.
    Consistent with this, our benchmark policy clearly 
explains, ``Glass Lewis evaluates all environmental and social 
issues through a lens of long-term shareholder value, not 
politics, not wokeness, but shareholder value.'' Our benchmark 
policy and our record of recommendations under it are simply 
not consistent with the claims that we are doing this to 
further some environmental or social agenda.
    At the same time, I do want to emphasize that much of our 
current debate rests on the basic misunderstanding about how 
proxy advisers work and what our benchmark policy is. No Glass 
Lewis client is required to vote under our benchmark policy, 
and most, in fact, do not do so. Our benchmark policy is just 
one voting option our clients can choose. Because our clients 
do not all have the same investment strategies or views on 
proxy voting issues, Glass Lewis offers clients a menu of 
voting options from a climate policy, to a Catholic policy that 
reflects the unique fiduciary responsibilities of the Catholic 
institutions, to a corporate governance-focused policy for 
shareholders that are more skeptical of material E&S issues. In 
fact, most of our clients see our custom voting policy that 
aligns with their votes and their own views in investment 
strategies. Our role is to provide objective research to help 
our clients vote as they see fit. We take this responsibility 
very seriously, and we are proud of the work that we do on 
behalf of our clients.
    Thank you again for the opportunity to be here today. I 
would be happy to answer any of your questions.
    [The prepared statement of Mr. Shostal can be found on page 
48 of the appendix.]
    Chairman Huizenga. Thank you. I appreciate that.
    And Professor Rajgopal, you are recognized for 5 minutes.

  STATEMENT OF SHIVARAM RAJGOPAL, ROY BERNARD KESTER AND T.W. 
     BYRNES PROFESSOR OF ACCOUNTING AND AUDITING, COLUMBIA 
             UNIVERSITY GRADUATE SCHOOL OF BUSINESS

    Mr. Rajgopal. Thank you. Thank you to Subcommittee Chair 
Huizenga, Ranking Member Green, and the other members of the 
subcommittee for the opportunity to testify before you today on 
a topic of utmost importance: The state of U.S. corporate 
governance and the role that proxy advisers play in that 
debate. My name is Shiva Rajgopal, and I am the Kester and 
Byrnes Professor of Accounting and Auditing at Columbia 
Business School. It is an absolute honor and a treat to be 
here.
    Virtually every testimony that I have seen and read from 
the opponents of ESG and proxy advisers appears to assume four 
things: management always works to maximize shareholder value; 
management's decision horizons are perfectly aligned with the 
shareholder's investment horizon; management knows who its 
shareholders are and what they actually want; and managerial 
accountability to its capital providers is as good as it can 
ever be and all is well with the world.
    Now, I have substantial doubts about each of these 
premises. The state of U.S. corporate governance is not as 
perfect as assumed for several reasons. In any company that 
isn't a stock index of note--let's say, the S&P 500 or the 
Russell 1000 or 3000--a large portion of the equity is held by 
passive asset managers who may not have the time or the 
incentives to understand the idiosyncratic governance-related 
problems of each company they vote on. CEO pay, on average, 
still does not track performance, in my view, despite vigorous 
assertions to the contrary by management.
    I will just cite three examples. First, most CEO pay in the 
U.S. follows the so-called competitive pay policy model that 
gives CEOs more shares when the stock price is low, and vice 
versa, so that policy severs the link between CEO pay and 
performance. Second, CEO pay over the tenures is barely 
different for underperforming firms relative to the others. 
Finally, in around a third of the companies that we looked at, 
managers got equity at discounted prices even when they 
destroyed shareholder value. Observable characteristics of 
boards increasingly look homogenous or similar on account of 
regulations, perhaps proxy advisory guidelines, and social 
norms. What boards actually do in the boardroom is unobservable 
to outsiders, and the consequences of their poor decision-
making may not be obvious for years.
    So, what is to be done with the topic at hand, proxy 
advisers? Proxy advisers are certainly not perfect by any 
means, so let me start with my concerns. We currently 
effectively have a duopoly of two agencies, and we need to find 
ways to get others to enter the space. It is unclear whether 
they have adequate staff to monitor governance issues or 4,000 
stocks trading in the U.S. and many more overseas. Whether 
their consulting business subsidizes the advice business is 
also unclear, and for my taste, I think proxy advisers are 
still more deferential to management than warranted.
    But having said that, I support some initial regulations, 
such as asking them to register with the SEC. Recent SEC 
rulemaking already requires more detailed and standardized 
conflict of interest disclosures for ISS and Glass Lewis. ISS, 
as you heard, is already registered with the SEC, and I believe 
Glass Lewis is not, but I suggest caution beyond that point.
    If you hobble proxy advisers too much, the feeble health of 
shareholder democracy will simply suffer a body blow. Some 
institutions will simply opt out of voting on proxy proposals, 
making management even less accountable. This could further 
exacerbate highly-concerning trends in executive compensation, 
which proxy advisers, to their credit, have helped to address 
by curbing egregious pay packages and highly-compromised board 
structures.
    Hence, I oppose provisions that simply add more costs to 
institutional investors monitoring management, including those 
that ask for an appointment of an ombudsman management suing a 
proxy adviser, singling out ESG funds or ESG proposals for 
special punitive treatment, or provisions that make it harder 
to table repeat proposals or those that require advisers to 
seek management input on adviser recommendations. We must 
remember that proxy advisers are paid for by the customers they 
serve: the institutional investors. And as far as I can tell, 
the paying customers are not the ones asking for more 
regulation of proxy advisers, so enabling and facilitating 
efficient shareholder engagement is a market-based solution to 
a market-derived demand for enforcing managerial 
accountability.
    In closing, I would reiterate that any bill that makes 
proxy advisory services or voting more onerous is a step 
backward in seeking accountability from corporate managers, 
which ultimately, eventually, helps us, the retail investors. A 
reasonable compromise is to take a few regulatory steps in 
terms of registration, and maybe support oversight by the SEC 
and institutional investors to encourage continued improvement 
in the quality and the accountability of proxy advisers.
    The state of U.S. corporate governance is not as rosy as 
often projected. Anything that interferes with shareholder 
democracy obstructs the ability of institutions to seek 
corporate accountability, which, in turn, hurts the pocketbooks 
of retail investors and retirees investments. Thank you. I am 
looking forward to answering your questions.
    [The prepared statement of Professor Rajgopal can be found 
on page 45 of the appendix.]
    Chairman Huizenga. The gentleman's time has expired.
    We will now turn to Member questions, and the Chair 
recognizes himself for 5 minutes.
    I do want to say thanks again to our witnesses for 
appearing here today. I will note to the staff to add, 
``climate denier,'' to the list of fantasy accusations. I will 
also note that I am one of the founding members of the 
Conservative Climate Caucus, which is pursuing free market 
solutions rather than just simply government cudgels to address 
any climate issues.
    Mr. Friedman, in your testimony you referenced ISS's custom 
voting policies. I would like to better understand ISS's 
process for customizing these policies. In general, how similar 
are the custom policies to the benchmark policies?
    Mr. Friedman. Congressman, thank you for that question. The 
answer is that it really depends on the client and what their 
interests are, and that really is our focal point.
    Chairman Huizenga. Are those custom policies similar to 
each other? We are only able to see on your website a few of 
those policies, and none of them are custom.
    Mr. Friedman. Right. The custom policies belong to our 
clients, and they are, as the name implies, customized to them. 
The range of customization really is a function of how each 
client looks.
    Chairman Huizenga. Just help me understand, is there a menu 
of options for investors to choose from? Again, that is not on 
your website, so obviously, somebody has to contact you.
    Mr. Friedman. Sure. And we have folks, a custom analyst 
team that works with clients to understand where their focal 
points are. The issues that really get addressed in any policy, 
ultimately, are the issues that show up on the ballot.
    Chairman Huizenga. Okay. I am reminded of the saying of 
Henry Ford regarding the Model T, which is, ``You can have any 
color you want as long as it is black.'' I guess we are trying 
to understand whether there actually are choices and options in 
that.
    Mr. Shostal, let me turn to you. In 2022, Glass Lewis based 
its recommendations in part on whether a company is adequately 
pursuing, ``broader goals,'' defined as, ``net zero emission 
goals.'' What financial or economic analysis did Glass Lewis 
undertake before including this in its recommendations?
    Mr. Shostal. Thank you, Chairman Huizinga. If you could 
clarify, is that the statement from our policy?
    Chairman Huizenga. Yes, I believe that it is.
    Mr. Shostal. I would clarify that a lot of the discussions 
that we provide are clarifications in terms of our thinking 
around how a board should be responding to climate risk, and 
really, we look at kind of a range of options. How does the 
board oversee climate risk? For example, what sort of goals and 
target----
    Chairman Huizenga. So, materiality may not necessarily be 
part of it?
    Mr. Shostal. No, it actually is a part of it, if I may, 
actually, absolutely, it does because one of the points that we 
look at is, for example, does a company set greenhouse gas 
goals targets? I think a lot of what we have talked about are 
Scope 3 emissions, and there are costs associated with those, 
and we speak to those.
    Chairman Huizenga. I am going to move on somewhat, but I 
would like to talk through a specific example. This year, ISS 
supported a shareholder proposal that Toyota disclose its 
lobbying related to climate change. This was brought by a 
Danish firm and some other environmental groups out of Europe. 
Glass Lewis did not recommend support for this proposal.
    Mr. Friedman, can you walk me through very quickly the 
economic analysis ISS performed to conclude that having Toyota 
disclose its climate-related lobbying was in the economic 
interests of the company and its shareholders?
    Mr. Friedman. Congressman, I am not familiar with the 
particulars of that example that you are citing, but again----
    Chairman Huizenga. That is fine. That is an acceptable 
answer.
    Mr. Shostal, are you able to explain your company's 
analysis in reaching a very different conclusion?
    Mr. Shostal. Yes. I think it is quite simple. So many of 
these issues are governance principles, and when we think about 
political spending or lobbying shareholder proposals, it is 
about good governance. Is the company managing well its 
approach to political spending? We are completely agnostic as 
to how a company spends its money, absolutely, but it is about 
transparent----
    Chairman Huizenga. Was there economic analysis done?
    Mr. Shostal. On a lot of the issues that we provide 
recommendations on, for example, how many meetings a director 
attends, there may not be an economic analysis.
    Chairman Huizenga. Coming from Michigan, I know the car 
industry pretty well, and there is a huge debate within the 
auto industry about hybrids versus electric vehicles (EVs). And 
many people believe that Toyota--this was viewed as a 
punishment for them not being aggressive enough in EVs because 
they believe strongly in hybrid, and they believe that is 
actually the wave of the future. Again, I am concerned that the 
economic analysis of this is where we are losing so much of the 
impact of where this is going and these types of things that 
lead many of us to conclude that it is political policy or 
social policy that drives it rather than economic analysis.
    My time has expired. With that, per his tradition, the 
ranking member will pass his initial time off to the gentleman 
from Nevada, Mr. Horsford, who is now recognized for 5 minutes.
    Mr. Horsford. Thank you, Mr. Chairman, and thank you to the 
ranking member. I would just argue that social policy is 
economic policy. It is a business imperative. It is a reality. 
We are sitting here having a hearing, and it is a hearing on 
environmental sustainable governance, but it is really about 
anti-ESG. And I just really find it astounding that this is 
what we are spending our time on as a committee, when our 
constituents want to know about so many other important issues 
that we are not addressing.
    The rights of shareholders to take a vested interest in the 
companies they invest in are intrinsic to the idea of partial 
ownership. If we are going to begin to limit the ability of 
shareholders to affect the corporations they own, then are they 
truly owners? During the shareholder voting season, investors 
should be able to focus on whatever values they decide. I don't 
believe that these proxy advisory firms are handing down edicts 
from on high, and, frankly, I don't believe the government 
should be either. If the shareholder believes the value set is 
crucial to the financial health of their company, then why 
should we prevent them from obtaining that information?
    Those types of short-sighted attempts to limit disclosures 
will actually prevent investors from making informed decisions, 
economic decisions, business-imperative decisions. One of the 
starkest examples of information with a direct relationship to 
risk turns on equity is a company's diversity. Every day, our 
country grows more diverse, and it is about time that the C-
suites and our boardrooms in corporate America caught up to the 
country with which they hope to conduct business. I would say 
that this is a noble goal in its own right. It is also simply 
good business.
    I have worked with corporate America on diversity/equity 
initiatives promoting workforce. I ran the largest job training 
program in the State of Nevada for 10 years before I came to 
Congress, in partnership with all the major hotels in Las Vegas 
and the biggest union. I know the importance of diversity. It 
is a strength.
    And yet this Congress, led by Speaker McCarthy and those on 
the other side, are choosing to use it as a wedge issue and not 
an asset. When businesses all across the country were suffering 
during the pandemic, the research institute, BoardReady, found 
that companies with diverse boards grew by 4 percent. Unlike 
every other cohort that could be assembled, these companies 
actually came out of that turbulent time stronger than before.
    Professor Rajgopal, I would like to take a moment to 
examine the link between diversity, equity, and inclusion 
efforts and financial performance. In your experience, do you 
think that these companies are stronger because they have 
diverse leadership, or do you think these strong companies have 
diverse leadership because they understand the financial 
benefits of expanding the lived experience of their C-suites?
    Mr. Rajgopal. Congressman, the way the----
    Mr. Horsford. Rather quickly, because I only get a few 
minutes every time I am on this panel.
    Mr. Rajgopal. Yes. I would say yes, and the link is through 
corporate culture, and corporate culture has been shown to 
affect all kinds of good things about a company: innovation, 
productivity, compliance, ethical behavior, and performance in 
general.
    Mr. Horsford. For investors, does that distinction matter?
    Mr. Rajgopal. Certainly, it does. The state of corporate 
culture is probably one of the biggest unrecognized off-balance 
sheet assets, I would say.
    Mr. Horsford. And why would it be material to an asset 
manager to examine the human capital of a company prior to 
investing in them?
    Mr. Rajgopal. I know several hedge funds that actually make 
a lot of money filtering on corporate culture, so clearly, it 
is material to at least those hedge funds.
    Mr. Horsford. Mr. Friedman, does ISS make the final 
decision on how a shareholder votes on a proposal, or are your 
recommendations nonbinding?
    Mr. Friedman. They are. The clients control their vote.
    Mr. Horsford. Could you discuss in depth how investors are 
even able to tailor the recommendations they receive from your 
benchmark policy?
    Mr. Friedman. Yes. Congressman, thank you. Conceptually, 
the ability to customize, to take a view on any particular 
issue that shows up on the ballot, really is the free choice of 
the client, and they can look at issues such as----
    Mr. Horsford. Free choice of the client, of the investor, 
or of the shareholder?
    Mr. Friedman. That is correct.
    Mr. Horsford. And we are having a hearing that would do 
what? Attempt to take that free choice away from the party that 
claims to be a ballot free to vote.
    Chairman Huizenga. The gentleman's time has expired.
    Mr. Horsford. I yield back.
    Chairman Huizenga. The gentleman from Texas, Mr. Sessions, 
is recognized for 5 minutes.
    Mr. Sessions. Mr. Chairman, thank you very much, and to our 
witnesses, I want to thank you for taking the time to be with 
us here today.
    I would like to reference back to yesterday, to a hearing 
of the full Financial Services Committee, where Ted Allen, the 
vice president of policy and advocacy for the Society of 
Corporate Governance, stated that the Society conducted a 
member survey in 2019 and found that 42 percent of its members 
reported or noticed errors in the research of the proxy firms 
that served those companies. What would each of you say to 
that?
    Mr. Friedman. Thank you, Congressman, for the question.
    Mr. Sessions. Yes, sir.
    Mr. Friedman. I would say that I am not familiar with that 
particular study, but I can say that the statistic that was 
cited does not reconcile with the work and the assessments we 
do, because we do look at errors. As I said earlier, what is 
critical is getting it right. That is what our clients who 
are----
    Mr. Sessions. So it is not material to you, sir?
    Mr. Shostal. Thank you for the question, Mr. Sessions. I am 
actually struck by that because we are actually members of the 
Society of Corporate Governance, and as you know, we welcome 
engagement with them, so we would be very happy to hear more 
about that. And I would say that it is actually not consistent 
at all with what we are considering----
    Mr. Sessions. Not consistent with your----
    Mr. Shostal. With what we are hearing back from the 
corporates. We engage with over 1,000 corporates a year, and we 
do not get that level of feedback.
    Mr. Sessions. Thank you.
    Professor, do you have a feeling about this statement?
    Mr. Rajgopal. Yes. In my experience, it is probably a 
handful, less than 1 percent. Are these errors or are these 
differences of opinion?
    Mr. Sessions. Thank you. The first two gentlemen, please, 
who represent companies, are your results audited by any 
outside firms?
    Mr. Friedman. The results of the reports themselves?
    Mr. Sessions. Your work.
    Mr. Friedman. There is not an audit of our proxy research--
--
    Mr. Sessions. So, no outside firm audits your work?
    Mr. Friedman. That is correct, not in the traditional sense 
when you do have, what we call it a----
    Mr. Sessions. Let the record reflect that there is no audit 
of your work, sir.
    Mr. Friedman. On an individual basis, as you know, the 
season is so compressed, it would be nearly unworkable to audit 
every proxy paper. But I will say that we are members of the 
Best Practice Principles----
    Mr. Sessions. I'm sorry. If you can go back just for a 
second?
    Mr. Friedman. I'm sorry?
    Mr. Sessions. Go back. Your microphone cracked for a 
minute. If you could please say that again. Thank you.
    Mr. Friedman. It would be unworkable to review every single 
proxy paper, given the condensed proxy season. As you know, 
over 3 months, we have to evaluate about 4,000 companies. But I 
would say that we are audited in the context that we are 
members of the Best Practice Principles for Shareholder Voting 
Research, so there is an independent oversight in----
    Mr. Sessions. I am in no way offering any observations 
about it. I just simply ask questions, and your response that 
you have given me, both of you, is that neither of your firms 
are audited by any outside firm. I would like to say that you 
being here today is important for us to ask questions, and I 
appreciate the chairman for bringing you here. But I think that 
the sensitivity related to these--I am going to send you both a 
copy of the presentations that were made yesterday so that it 
will allow you an opportunity to see what this committee has 
been told and provided, which would include amounts of times 
and numbers of people who provide feedback on proxies, and I 
think that it is very important for us to pay attention.
    This is voting is what it is, and it is corporate 
governance at its very essence. And I am delighted that our 
young chairman has taken the time to have you here today. I 
will send you a letter in the next week or so, and I would ask 
that you respond back to it on your viewpoints about the 
findings that we were provided yesterday.
    Thank you very much, Mr. Chairman. I yield back.
    Chairman Huizenga. Will the gentleman yield?
    Mr. Sessions. I will yield.
    Chairman Huizenga. Briefly. Okay. I appreciate that. I did 
have one other quick example; I cut myself off with my time 
when we were talking about Toyota, but we have also seen 
similar conflicts between Glass Lewis and ISS regarding 
shareholder proposals at Occidental Petroleum, ConocoPhillips, 
Phillips 66, and Equinor, and that is the type of thing we need 
to dig into.
    The time has expired. And with that, the Chair recognizes 
the ranking member of the full Financial Services Committee, 
the gentlewoman from California, Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much. Professor Rajgopal, it has 
been suggested that proxy advisers are puppet masters 
controlling how asset managers or institutional investors vote 
the shares. It has also been suggested that proxy advisers have 
undue influence on shareholder engagement. What are your views 
on this? Are the investor clients or proxy advisers required to 
follow proxy adviser recommendations?
    Mr. Rajgopal. No, because in my experience, most of the big 
institutional investors, and even the medium-sized ones, have 
their own research teams. So, they probably use input that 
these two gentlemen's firms give them, but they don't 
necessarily mechanically follow some of that work.
    And if I may, I think there is an issue with correlation 
and causation. Let's say you are a doctor and you think I 
should lose weight, and you think this based on blood tests and 
whatever. I know what I eat, and I know I don't exercise, and I 
know I need to lose weight. Is that mechanical voting? So, if 
you just look at the data, it looks like you are asking me to 
lose weight, and I have come to the conclusion that I should 
lose weight, but this is just correlation; it may not be 
causation.
    Ms. Waters. Thank you very much. You and I discussed this 
yesterday at the roundtable I held, and I want to visit this 
issue again for the record. As you know, the SEC's proposed 
climate risk disclosure rule applies to only publicly-listed 
companies. Would you comment on the benefits of extending these 
disclosure requirements to other similarly-situated companies, 
like privately-held operating companies or companies that are 
owned by private equity firms? How would such disclosure inform 
and benefit the investors in those companies?
    Mr. Rajgopal. If high-emission companies are seen as bad by 
public investors, this opens up, as we discussed in the 
technical jargon, a market for arbitrage. These assets 
effectively get sold to private owners, and then, they 
effectively escape the reporting system. We do have the EPA, 
which does a little bit along these dimensions, but not enough.
    And if I may talk a little bit about private equity in 
general, there is good private equity and there is bad private 
equity. Good private equity makes money by squeezing out 
operational efficiencies, and that is fantastic. We want good 
allocation of resources. Bad private equity makes money by 
socializing costs--financial engineering, sale, lease backs, 
dividend recaps--and we need to know which is which. And right 
now, we have none of that information, because this is 
completely opaque, so some disclosure would help.
    Ms. Waters. Thank you. I would like to end my questions by 
asking you to discuss the benefits of competition in our 
capital markets and the need to mitigate or eliminate conflicts 
of interest. Some have argued that we need more perspectives on 
proxy votes, that the proxy advisory industry isn't 
sufficiently competitive, and that there are some needed fixes 
to ensure conflicts of interests are mitigated when proxy 
advisory firms offer consultant services to corporate 
management. Are these real risks?
    Mr. Rajgopal. I haven't seen the financial statements, so I 
don't know whether the conflict of interest issue is real or 
not, but we have historical precedent. Let's not forget the 
audit industry, remember under Sarbanes-Oxley, was actually 
required to decouple consulting and auditing. So, it is 
theoretically possible, hence, my statement earlier that we 
should probably look for some disclosures along those line.
    Ms. Waters. Are reforms needed in this space?
    Mr. Rajgopal. Say it again?
    Ms. Waters. Reforms, are they needed?
    Mr. Rajgopal. Yes. I think the Clayton SEC did put in 
something about standardized conflict-of-interest rules, so 
maybe we should look at those disclosures. Maybe that is enough 
for now, but at least we need to have a conversation about that 
for sure, yes.
    Ms. Waters. I guess further, how do we ensure that we don't 
break what is working for our markets?
    Mr. Rajgopal. No, I agree. Hence, I said that the state of 
U.S. governance is not as rosy as it looks, and you might 
effectively cut off your nose to spite your face. The bigger 
problem is the state of corporate accountability. We can fix 
proxy advisers here and there, tweak a little bit, but let's 
not forget the bigger issue. This should be a hearing about the 
state of U.S. corporate governance, in my view.
    Ms. Waters. Thank you very much. I yield back.
    Chairman Huizenga. The gentlelady yields back. The 
gentlewoman from Missouri, Mrs. Wagner, who is also the Chair 
of our Capital Markets Subcommittee, is recognized for 5 
minutes.
    Mrs. Wagner. Thank you, Mr. Chairman, and, Mr. Chairman, 
much like you did, I would like to start part of my questioning 
by setting the record straight. We have heard many, many 
erroneous accusations over the past 2 days from my friends on 
the other side of the aisle that we are somehow seeking to 
thwart the free market and upend capitalism. That is 
categorically false, Mr. Chairman. What we are seeking is more 
accountability and transparency in the proxy process by the 
duopoly of proxy advisory firms testifying before us today.
    It was, I will remind everyone, a Republican President, 
Teddy Roosevelt, who was made famous from trust busting, so it 
is definitely in line with free market capitalism to stop 
monopolies and duopolies created by the administrative state. 
As one of our witnesses in yesterday's hearing, Mr. Zycher, I 
think, so eloquently stated, ``The issue is whether regulatory 
agencies should be creating conditions in which they are forced 
to accept the recommendation of proxy advisory firms. The SEC 
has promulgated regulations, which has led to an environment in 
which firms are forced to use proxy advisers, they are forced 
to adopt the recommendations of proxy advisers, and proxy 
advisers have no responsibilities in a fiduciary sense.'' This, 
Mr. Chairman, is a question that this committee must consider.
    Now, my question is to Mr. Shostal. After looking through 
your website, it is difficult to tell how Glass Lewis develops 
its policies and procedures to formulate its voting guidelines. 
Is there a particular reason why your firm does not disclose 
your historical recommendation data or how you formulate voting 
policies? What engagement does Glass Lewis undertake with 
companies that are the subject of its proxy voting 
recommendations?
    Mr. Shostal. Thank you for your question. I appreciate it. 
We could talk for 10 minutes about this. I will try to be 
efficient.
    Mrs. Wagner. We do not have that, so quickly?
    Mr. Shostal. Exactly. We will rappel our transparency 
around our process for voting guidelines first. We have, first 
of all, 43 regional voting guidelines globally to reflect----
    Mrs. Wagner. You have no historical data, sir. None. You 
don't talk about how you formulate your policies.
    Mr. Shostal. Actually, I will correct the record that we 
do, and we provide seasoned reviews. The team is now creating 
seasoned reviews for the U.S. market, and there are historical 
data points on how we voted and how the market responded in 
terms of shareholder results.
    Mrs. Wagner. But it is not how you got your recommendation 
of your data. How do you engage with the subject of your proxy 
voting recommendations?
    Mr. Shostal. The data is available for our clients who 
choose to procure it, but we aggregate it because our clients 
want to know what the voting trends are, and I would be happy 
to share it with the subcommittee.
    Mrs. Wagner. Okay. Moving on, Mr. Friedman, ISS conducted 
climate surveys of institutional and corporate use issuers in 
both 2021 and 2022. Those surveys yielded a total of 329 
respondents and 417 respondents, respectively. There are over 
4,000 issuers in the United States. Do you believe that the few 
hundred respondents to your survey represents a meaningful 
amount of data to develop your voting guidelines?
    Mr. Friedman. Congresswoman, the process by which we 
develop our policies and those guidelines really is open and 
inclusive. We do make that survey as well.
    Mrs. Wagner. But it is very miniscule, sir, very small, 
because it seems to me that you are not collecting nearly 
enough input or information. Tell me, how does ISS formulate 
the survey questions it asks?
    Mr. Friedman. First of all, we are looking at what new 
issues may be coming up in the market in terms of new corporate 
governance issues or issues that may show up on the ballot in 
the next season. To get an understanding of how the market as a 
whole, are institutional investors----
    Mrs. Wagner. Okay. What engagement does ISS undertake with 
companies that are the subject of its proxy voting 
recommendations?
    Mr. Friedman. We have processes to engage with corporations 
both during season and outside of season, and our research 
team----
    Mrs. Wagner. Well, they don't think so. From what I can 
tell, ISS's website tells companies to engage through its, 
``Help Center.'' What type of engagements take place with the 
companies and shareholder activists----
    Mr. Friedman. Again, the process, Congresswoman----
    Mrs. Wagner. ----through the Help Center on a website that 
doesn't even have data on it? Your own website tells companies 
to engage through your Help Center. Do you ever proactively 
reach out to companies to better understand the impact of 
shareholder proposals prior to making recommendations, or does 
it only use publicly-available information, for instance, that 
is available on the company's website?
    Now, I am out of time. I would like that question answered, 
and I would like my prior questions answered, and I have more 
to submit for the record, Mr. Chairman.
    Chairman Huizenga. Thank you. The gentlelady can submit 
that to the Chair, which we will pass along, and we anticipate 
timely responses to that.
    The gentlelady from Michigan, Ms. Tlaib, is now recognized 
for 5 minutes.
    Ms. Tlaib. Thank you so much. Any time two firms control 
more than 90 percent of a market, concern is entirely 
appropriate. We know that, but I do believe that targeted 
reforms are necessary. But I want to talk about some of the 
concerns that get raised around the burden of shareholder 
proposals on public companies. And so, to each witness, how 
many shareholder proposals do most companies receive annually? 
I will start with you, Mr. Friedman.
    Mr. Friedman. Yes. Congresswoman, I apologize, I don't have 
the exact number, but as I know Mr. Shostal mentioned in his 
opening testimony, the percentage of shareholder proposals as a 
function or as a percentage of the total number of ballot items 
that show up is extremely tiny. The bulk of the----
    Ms. Tlaib. Yes. As of 2019, most companies haven't received 
any shareholder proposals in a given year. Is that right, 
Professor? If a company does receive a shareholder proposal, 
how many do they normally receive?
    Mr. Rajgopal. Yes. Some old data maybe, but it gives you an 
indication, I think 13 percent of the Russell 3000 companies 
got a proposal. That is once in 8 years, right, 1 divided by 
point-13. A lot of this relates to the very large caps, the 
Amazons, and the Microsofts, and the Teslas. If you look at the 
whole gamut, it is pretty smart.
    Ms. Tlaib. How often are shareholder proposals binding on a 
company? Does anybody know that?
    Mr. Rajgopal. Binding?
    Ms. Tlaib. Binding.
    Mr. Rajgopal. Nothing is binding.
    Ms. Tlaib. That is right.
    Mr. Rajgopal. It is completely advisory.
    Ms. Tlaib. Now, I want to talk about some of the benefits 
that have resulted from shareholder proposals. In many cases, 
shareholder proposals have helped establish what are now 
considered industry best practices, such as independent board 
leadership and annual elections for other directors.
    Professor, can you discuss some of the policies that are 
today viewed as best practices, that were initially driven by 
shareholder proposals?
    Mr. Rajgopal. Annual voting of directors, splitting the 
board, Chair of the board, and the CEO, which is still highly 
contentious, comes up every year in most companies and doesn't 
pass, and eventually, hopefully, will at some point. There are 
many, many, many, many proposals. For example, Wells Fargo, 
that is a classic case study. Actually, I think it was a New 
York pension fund. That said, we should have a clawback for all 
kinds of problems with Wells Fargo. Eventually, Wells Fargo 
blew up, so the idea that this was complete, nice, is, I think, 
overstated.
    Ms. Tlaib. Absolutely. Mr. Friedman, you touched on in your 
testimony, am I correct, that in an overwhelming majority of 
cases, your company's vote recommendations are based on your 
clients' voting policies?
    Mr. Friedman. Yes, that the overwhelming majority of votes 
are tied to a client custom policy as opposed to an ISS 
proprietary policy. That is correct.
    Ms. Tlaib. Yes. Again, there are constant concerns, and 
what I am hearing is mind-boggling. You all are doing advisory 
work, but somehow you decide how their clients vote.
    Mr. Shostal, is it correct that your clients choose their 
proxy voting policy, including possibly their own custom voting 
policies that you then use to make your voting recommendation, 
sir?
    Mr. Shostal. Yes, absolutely. In our experience, a vast 
majority of our clients select a custom voting policy.
    Ms. Tlaib. Moving beyond the content of specific 
recommendations, whether or not a client of a proxy adviser 
actually follows the adviser's recommendation and another 
matter entirely, Mr. Friedman, Mr. Shostal, do your clients 
have to follow your recommendations?
    Mr. Friedman. No, they do not.
    Ms. Tlaib. That is right.
    Mr. Shostal. No, they do not.
    Ms. Tlaib. How often do your clients follow through with 
any of your recommendations? Is it simply automatic?
    Mr. Friedman. It is not simply automatic, and, again, 
recognizing that the bulk of the shares are tied to a custom 
policy which the client has chosen. And even if it is an ISS 
proprietary client policy that they have chosen, we would 
expect, generally, some alignment there. But they are not 
obligated to, and there are certainly cases where they do 
diverge.
    Ms. Tlaib. Professor, what do you think this hearing is 
really about? You can tell us. Go ahead.
    Mr. Rajgopal. To me, it should be about the state of U.S. 
corporate governance, and proxy advisers, as I said, are not 
perfect.
    Ms. Tlaib. No. What do you think they are afraid of here, 
shareholders that have information?
    Mr. Rajgopal. The obvious answer is to go private.
    Ms. Tlaib. No, seriously, does anybody have any idea why? 
We are guessing here. I am really taken aback. There are no 
targeted reforms. There is no discussion as if shareholders 
don't deserve information and guidance, and I don't understand 
what is going on here. Does anybody?
    Mr. Rajgopal. If the contract is, give me your money and go 
away, that doesn't work here.
    Ms. Tlaib. It's the same thing with tenants, ``Give us your 
rent, and we don't care about the condition of the place.'' It 
is just absolutely mind-boggling. It really is. I am really 
disappointed that we are doing this. Thank you all for your 
time.
    Chairman Huizenga. Just for informational purposes, this 
morning's hearing listed 20-some items of bills that were being 
explored regarding this issue.
    The gentleman from Tennessee, Mr. Rose, is now recognized 
for 5 minutes.
    Mr. Rose. Thank you, Mr. Chairman. Mr. Chairman, I would 
like to submit an article for the record written by Mr. 
Rajagopal expressing support for increased oversight of proxy 
advisory firms, including SEC registration and disclosure of 
conflicts of interest.
    Chairman Huizenga. Without objection, it is so ordered.
    Mr. Rose. Mr. Friedman, and Mr. Shostal, yes or no, do you 
agree with Mr. Rajgopal that you should register with the SEC 
and disclose conflicts of interest?
    Mr. Friedman. Yes.
    Mr. Shostal. Proxy advice is already regulated by the SEC, 
and we, on a global basis, have a range of policies from 
conflicts practices.
    Mr. Rose. I will take that as a, ``yes,'' as well. Mr. 
Friedman, I would like to discuss ISS's board-aligned voting 
policy. I find its name strange, considering that the policy is 
not truly a vote with the board policy. The policy will only 
defer to the board on specific proposals so long as the board's 
position supports what ISS perceives to be, ``adequate,'' ESG 
disclosure.
    Mr. Friedman, what metrics are used by ISS to determine 
whether an ESG proposal is adequate, and what is ISS's 
definition of, ``adequate?''
    Mr. Friedman. Congressman, the framework that we use, 
again, and that borderline policy is one, and it is not 
intended to be and I don't think has been presented as one, 
that it will vote or support every single management 
resolution. I think, frankly, if that was an approach that a 
client of ours wanted, which they certainly would be free to 
take, we probably would need a distinct policy. But we are 
looking at the facts and circumstances of every resolution that 
shows up on the ballot and whether it is the borderline policy 
or any of the other policies that we are applying on behalf of 
the client. The factors are laid out in those policies, and we 
apply those factors to the facts at hand, recognizing that 
every proposal is different, every company is different, and 
reach your recommendation on that basis.
    Mr. Rose. Okay. Mr. Friedman, ISS's board-aligned policy 
guidelines state that it is focused on the, ``creation and 
preservation of economic value.'' Shouldn't all policies for 
institutional investors be focused on this?
    Mr. Friedman. Yes, and I believe that the policies are, but 
I do think there can be a divergence of views amongst 
investors, for a range of reasons, because of their own 
investment strategies, time horizons, things that they think 
are more or less important, that reasonable minds can disagree 
when they make these assessment, and so that is the value. And 
in our experience, our clients who are institutional investors, 
sophisticated, who themselves have fiduciary duties, I think 
they are investing for value and voting based on value, but 
with recognizing how they assess it and think about it. There 
is a diversity of thought there.
    Mr. Rose. And just to reiterate something you said there, 
your customers are institutional investors. Is that right?
    Mr. Friedman. That is correct.
    Mr. Rose. Okay. Shifting to you, Mr. Shostal, why did Glass 
Lewis create the governance-focused policy?
    Mr. Shostal. From our client feedback. In fact, it was 
developed with a number of red State pension funds when they, 
around pecuniary issues, surfaced in the last 12 months. They 
gave us feedback. We implemented a policy that they could start 
using and then further customize. It was a starting point so 
that a number of red States could leverage this thematic 
policy.
    Mr. Rose. Okay. And, Mr. Friedman and Mr. Shostal, for both 
of you, yes or no, doesn't the existence of these other 
policies call into question the objectivity of the benchmark 
policies?
    Mr. Friedman. I would love to get more context, but the 
simple answer is, no, it does not.
    Mr. Shostal. Could you repeat the question, please?
    Mr. Rose. Does the existence of these other policies call 
into question the objectivity of the benchmark policies?
    Mr. Shostal. Absolutely not. I think it reflects the free 
market perspective that many investors have different 
perspectives. We need to develop different policies. I think 
there is an overabundance of focus on benchmark policy, but, as 
we have said, it does not reflect the majority of our clients 
that are using custom voting policies.
    Mr. Rose. Okay. Mr. Friedman, in the remaining seconds I 
have here, when issuing recommendations under your board-
aligned voting policy, has ISS made any recommendations against 
the board of directors' position on ESG proposals?
    Mr. Friedman. The answer is this policy is new, and I don't 
believe it evolved in----
    Mr. Rose. My time has expired. And if I could, I would like 
to get both of your firms to answer that question for the 
record. Thank you. I yield back.
    Mr. Friedman. I will be happy to do so.
    Chairman Huizenga. The gentlewoman from Georgia, Ms. 
Williams, is recognized for 5 minutes.
    Ms. Williams of Georgia. Thank you, Mr. Chairman, and thank 
you to all of our witnesses for joining us today.
    My goal on this committee is to ensure that underserved and 
underrepresented communities have a strong advocate when it 
comes to issues that impact their economic mobility. As a 
Congresswoman from Georgia's 5th Congressional District, I 
represent many large, profitable companies headquartered in my 
hometown of Atlanta. Despite the success that these companies 
continue to have, Atlanta still has the largest racial wealth 
gap in the entire country. There are countless obstacles that 
prevent people of color from building wealth, but a lack of 
agency over their investments should never be one.
    Hardworking Americans, particularly marginalized 
individuals, deserve to have a say in the companies that they 
are invested in. Shareholder proposals play an extremely 
important role in allowing investors and marginalized people, 
who are not represented on corporate boards, to have a seat at 
the table. In fact, many common practices that improve 
corporate governance and increase profitability, like 
independent board leadership, board diversity, sustainability 
reporting, and non-discrimination policies, came out of early 
shareholder proposals. These policies are now widely considered 
to be best practices and are hallmarks of well-run businesses.
    Proxy advisers are essential to make sure that shareholders 
are fully equipped to vote based on their best interests and 
priorities. And apparently, Republicans want shareholders to be 
as uninformed as possible, concentrating companies' decision-
making power in the hands of a few board members and taking 
power away from investors. Limiting the input of marginalized 
people by placing all of the power in the hands of those who 
already hold it is nothing new.
    Republicans in my home State of Georgia passed S.B. 202 in 
2021, which preferences the type of voting by people they do 
like and limits the kinds of voting by people they don't like. 
The implementation of S.B. 202 in Georgia caused the largest 
racial turnout gap in decades, and now Republicans want to copy 
and paste this nationally and across all industries. This 
hearing is a prime example that they are trying to forcibly 
limit, once again, the voices of marginalized people, and 
direct the power to board members who share their policy 
positions and views.
    As I mentioned before, shareholder proposals are a critical 
tool used by investors and stakeholders, which raise material 
issues for companies that can save money and improve company 
performance. They provide an opportunity for shareholders, 
especially those from marginalized communities who have 
historically been shut out from corporate boards, to voice 
their views, a fundamental right for anyone who buys stock in a 
company.
    Professor Rajgopal, can you explain why shareholder 
engagement is a fundamental right for investors?
    Mr. Rajgopal. As I said earlier, the contract in governance 
is that I give you money, capital, and what have you done for 
me the next year or next quarter, and one of the ways to get 
that dialogue going is a shareholder proposal. If you actually 
get rid of shareholder proposals, extreme things will happen. 
Either the number of lawsuits will go up, or you will have 
activists, like Elliott and the others, banging on your door, 
so this is not a bad compromise. This is some that we have 
right now.
    Ms. Williams of Georgia. And how do shareholder proposals 
provide an avenue to empower investors from marginalized 
communities? Do they have the potential to impact the racial 
wealth gap?
    Mr. Rajgopal. Maybe. One of the ideas here is the license 
to operate, meaning, if you operate in a State or a 
municipality implicitly, society gives you the license to go do 
that. Maybe that is the angle to motivate what you are saying.
    Ms. Williams of Georgia. Thank you.
    Mr. Friedman, you have been with ISS for nearly 20 years 
and you cited in your testimony that ISS is a registered 
investment adviser under the Investment Advisers Act (IAA). 
This means that you are required to render advice that is in 
the client's best interest. One of the proposed discussion 
drafts would make changes to the IAA requiring a passive fund 
to vote in accordance with instructions from the beneficial 
owner, the issuer, or abstain from voting. How would this 
proposal hurt oversight of corporate governance by investors?
    Mr. Friedman. Congresswoman, I think ultimately, the 
investors and whatever the nature of the investors, their 
ability to have the information they need and to vote in 
accordance with what they believe is in the best interest of 
their own beneficiaries, I think it is just critical. So, I 
would be concerned that anything that undermines that would be 
problematic for the investment community.
    Ms. Williams of Georgia. And how will this proposal 
sideline the interest of any investors from marginalized 
communities whose hard-earned money is invested in such a fund?
    Mr. Friedman. Congresswoman, I guess, respectfully, I 
understand the question. It is not, I think, and sort of to the 
point of ISS's role in what we do as being an information 
agent, not one that we really have an organization.
    Ms. Williams of Georgia. And I am out of time, but I would 
love to follow up on this with answers in writing. Thank you.
    Chairman Huizenga. I am going to request unanimous consent 
to enter an article from The Wall Street Journal, I believe it 
was today, ``Cracking the Proxy Advisory Duopoly.''
    Without objection, I also will be submitting a request for 
unanimous consent to enter a letter from the National 
Association of Manufacturers, who testified earlier today in 
the Capital Markets Subcommittee, to the record, highlighting 
the proxy firms' continued conflicts of interest, propensity 
for errors, and unwillingness to engage with companies.
    Without objection, it is so ordered.
    And I request unanimous consent to enter a letter to the 
record from the Business Roundtable, highlighting concerns 
about the influence proxy advisory firms wield in the 
shareholder voting process.
    Without objection, it is so ordered.
    The gentleman from Pennsylvania, Mr. Meuser, is recognized 
for 5 minutes.
    Mr. Meuser. Thank you very much, Mr. Chairman. I appreciate 
it. Thank you as well to our witnesses for appearing today.
    Proxy voting has been very highlighted this week by this 
committee and has proven to be an alarming situation. Proxy 
advisers, in theory, advise shareholders on how to vote and lay 
out their options. However, proxy advisers have demonstrated a 
bias aimed at furthering self-serving goals. Two firms, Glass 
Lewis and ISS, as we all know, make up about 95 percent of the 
proxy advising and voting. They advocate for ESG mandates and 
requirements, then get paid to manage ESG integration in the 
companies that they voted such mandates into, demonstrating 
what appears to be a conflict of interest and not the interests 
of shareholders to whom they provide such advice.
    Mr. Shostal, an Ernst & Young report in March shows that 
ESG data provided generate revenues in excess of $1 billion 
globally in 2020. It is on the rise. In 2022, Glass Lewis 
launched ESG scores and data in their proxy paper to further 
highlight ESG themes, all while Glass Lewis revenue comes from 
its consulting with companies about how to manage their ESG 
integration.
    Mr. Shostal. Thank you for the question. We did launch ESG 
data points at the behest and request of our institutional 
investor clients, who sought timely information of data that 
was collected at the time of the proxy statements release. Did 
a company evolve its DEI program? Did the company have a new 
climate action plan, for instance? We do not provide consulting 
advice.
    Mr. Meuser. So, you don't solicit those that you consulted 
towards ESG?
    Mr. Shostal. No.
    Mr. Meuser. Okay. You are a proxy advisory, correct?
    Mr. Shostal. The data can be used, again, to the point of 
custom policy for clients who choose it.
    Mr. Meuser. Okay. So, one door does the advisement and the 
other door across the hall does the sales?
    Mr. Shostal. There is no advisement. As I have stated, 
there is no consulting on ESG. Glass Lewis does not do 
consulting on ESG. The clients have sought data points that are 
actionable----
    Mr. Meuser. You do the proxy voting, though?
    Mr. Shostal. ----so that they can make voting decisions, 
but it is not used in the benchmark policy.
    Mr. Meuser. Okay. You are under oath, right?
    Mr. Shostal. It is not used in the benchmark policy.
    Mr. Meuser. Okay. Well, that is contrary to the information 
that we have. You folks do the voting proxy----
    Mr. Shostal. It is informative. The ESG profile page is 
informative, but it is not used in the benchmark voting policy.
    Mr. Meuser. Okay. So, we are playing more games here. Those 
companies that you serve as a proxy adviser for, you then 
solicit to manage their ESG integration?
    Mr. Shostal. We don't do any consulting. We scrape the data 
from their proxy statements and their annual report at the time 
of the solicitation period, and we build a profile page.
    Mr. Meuser. Okay. Glass Lewis specifically references the 
fact that its proxy papers will include critical sustainability 
measurements of global compact scores, ESG scores, and business 
involvements. Glass Lewis is simultaneously selling ESG 
products and providing proxy voting research and 
recommendations. So, everything I am reading here is totally 
incorrect?
    Mr. Shostal. The institutional investors can use that data 
for custom voting policy application, not benchmark policy.
    Mr. Meuser. You don't have to hide your business.
    Mr. Shostal. Let me further explain what they use it for. 
They also use it for engagement purposes, for example, if they 
identify a company that is a laggard, in their view, on climate 
disclosures----
    Mr. Meuser. We will just have to dig into this further 
along the way.
    Mr. Friedman, is it standard practice for ISS Corporate 
Solutions to solicit companies that receive the negative voting 
recommendation from ISS during the previous year? Just answer 
that question plain.
    Mr. Friedman. It is not a standard practice----
    Mr. Meuser. No?
    Mr. Friedman. ----but ISS Corporate Solutions, which is a 
subsidiary of ISS----
    Mr. Meuser. Okay. Where do you get your revenue from?
    Mr. Friedman. Our revenue comes from a multitude of 
business lines----
    Mr. Meuser. Do you engage in proxy voting for those so-
called clients?
    Mr. Friedman. To be clear, Congressman, we provide proxy 
research and recommendations to institutional investors. We 
have a subsidiary entity, Corporate Solutions, which does work 
and provides services.
    Mr. Meuser. It is alarming that any business needs to dance 
around what its standard practices are for its work, and its 
advisement, and its actions, and where its revenues come from. 
That is alarming, too.
    Mr. Friedman. Congressman, with respect----
    Mr. Meuser. I yield back, Mr. Chairman.
    Chairman Huizenga. The gentleman yields back. The 
gentlewoman from Texas, Ms. Garcia, is recognized for 5 
minutes.
    Ms. Garcia. Thank you, Mr. Chairman, and I apologize to the 
witnesses that I had to step out and I may have missed a couple 
of questions, but I will try not to be repetitive of anything 
you have already been asked.
    First, I do want to thank you all for being here, and 
responding to some of our questions, and making your 
presentations because I think that we can all agree that there 
is some sort of proxy advisory form that is necessary. And I 
would love to work with my colleagues across the aisle on such 
measures. However, Republicans are going about reforms, in my 
judgment, in the wrong way today. It seems that, once again, 
Republicans are siding with Big Business and corporate 
management by attacking proxy advisers simply because they 
offer advice and recommendations that may contradict corporate 
managers' wishes.
    This hearing today is another example of what some of our 
Republicans are calling so-called anti-woke agenda, attacking 
ESG disclosures in anything that contradicts Big Business and 
their wishes.
    If a proxy adviser offers a vote recommendation to a 
shareholder that contradicts SEOs' wish list, it doesn't 
automatically make it woke. In fact, I still can't figure out 
what, ``woke,'' really means. Let's be clear: Proxy advisers 
serve an important role in the market. They offer independent 
advice and analysis on shareholder proxy votes. Proxy advisers 
often represent smaller investors, and they level the playing 
field for these investors who might not have the resources on 
their own to extend extensively research every single 
shareholder proposal up for a vote.
    I can tell you I have looked at some of these, and even as 
a lawyer, I can't understand what they are saying. With that in 
mind, I would like to proceed with some questions, and I want 
to start with the professor. Professor, is it, ``Rajgopal?''
    Mr. Rajgopal. ``Raj,'' phonetic. Yes.
    Ms. Garcia. I will call you, ``professor.''
    Mr. Rajgopal. That is good.
    Ms. Garcia. You wouldn't believe this, but some people 
still call me, ``Garcer,'' rather than, ``Garcia,'' so I am 
sensitive about that. Do proxy advisers always recommend in 
favor of climate or social proposals?
    Mr. Rajgopal. I would need to go look at the data, but I 
would assume not.
    Ms. Garcia. You would assume not. So, this whole credit 
global statement that is all that they are doing, and they are 
harmful, and et cetera, doesn't really stand up. Do you decide 
which shareholder proposals come up for a vote as a proxy 
adviser?
    Mr. Rajgopal. I don't think they do.
    Ms. Garcia. You don't think they do? What factors do you 
think they consider?
    Mr. Rajgopal. They have qualitative data on the website, as 
was alluded to. Their models are proprietary, whatever math 
they do, so I am guessing they are looking at CEO compensation, 
board structure, and performance. Something along those lines 
would be the three big ones, I would say.
    Ms. Garcia. So, it is not automatic that there will be a 
part of anything related to the advancing an ESG or a, ``woke 
agenda.'' They look at facts and their recommendations on 
everything that they do, do they not?
    Mr. Rajgopal. That is what I would do, and ESG is as 
pecuniary as anything else.
    Ms. Garcia. Okay. I really cannot read your nameplate, sir. 
Are you the one with----
    Mr. Friedman. Steven Friedman with ISS.
    Ms. Garcia. Right. The same question.
    Mr. Shostal. Mr. Shostal from Glass Lewis.
    Ms. Garcia. The same question.
    Mr. Friedman. I'm sorry, Congresswoman. Could you please 
repeat that?
    Ms. Garcia. Right. The advisers don't automatically 
recommend an ESG agenda or any, ``woke agenda.''
    Mr. Friedman. That is absolutely correct, and, in fact, we 
have multiple policies. On any particular issue, we may 
actually recommend different opposing vote tracks to different 
clients who have chosen different policies and different 
perspectives and then, of course, the custom policies, where it 
really is exactly how the client thinks about that. That is a 
little bit of a long answer, but the answer is that it's simply 
not the case that we are supporting, that we are recommending 
in favor of all so-called E&S proposals.
    Ms. Garcia. What criteria do you use before you make a 
recommendation?
    Mr. Friedman. Again, the criteria vary according to the 
different policies, but fundamentally, we are looking at sort 
of materiality and looking at how things will impact the 
company, and, again, really from the perspective of the 
shareholders, and how they are thinking about those particular 
issues, and how they choose to weigh them.
    Ms. Garcia. Mr. Chairman, if the last witness----
    Chairman Huizenga. Sorry, but the gentlelady's----
    Ms. Garcia. No, I am asking if we could make sure that the 
remaining witness submits his response in writing.
    Chairman Huizenga. Submit the question to the Chair and we 
will pass that along.
    Ms. Garcia. Good. Thank you. Sorry about that; I ran out of 
time.
    Chairman Huizenga. We are going to skip a couple of other 
Members on the Republican side and go to Mr. Sherman, who is 
recognized for 5 minutes.
    Mr. Sherman. Thank you. Yesterday and today seem to be a 
Republican-led attack on the free market system. Everybody who 
buys into a mutual fund can decide which mutual fund they go 
into, and if you think BlackRock votes its shares the wrong 
way, go to State Street or Vanguard. I don't have time to list 
all of the choices. Then, each of these companies can go to 
whatever investment proxy advisory firm they want.
    Professor, are there particular barriers to entry that 
prevent there being a wide variety of proxy advisory firms?
    Mr. Rajgopal. Not a legal one, but there might be economic 
barriers to entry. This is a low-margin business, so who wants 
to enter, right? I don't know whether it is a low-margin 
business, but I would hypothesize that if it is a low-margin 
business, perhaps, nobody wants to enter.
    Mr. Sherman. I don't know what would be a low-market--I 
give advice away for free, so I am in this market now. Free 
advice--how to vote any proxy, I just undercut the market. I 
will ask the other two witnesses, starting at the far right 
there, is there much of a barrier to entry to get into your 
business?
    Mr. Friedman. Congressman, we don't see artificial barriers 
to entry, and as I mentioned in my opening statement, there 
actually is a new proxy advisory service.
    Mr. Sherman. And Vivek Ramaswamy has created that. Is that 
correct?
    Mr. Friedman. That is correct.
    Mr. Sherman. Is he known for being, ``woke?''
    Mr. Friedman. As I read about him, no, I believe he wrote a 
book on, ``anti-woke.''
    Mr. Sherman. Professor, do you think Mr. Ramaswamy 
qualifies as, ``woke?''
    Mr. Rajgopal. Not at all. He is colorful, but not, 
``woke.''
    Mr. Sherman. So, you can get advice from one side or the 
other, you can invest in one mutual fund or another, and how 
else would these major firms go about deciding how to vote 
their proxy? Go back into history. Was there a time when the 
major mutual funds and pension funds would almost automatically 
just vote the way management asked them to? Professor?
    Mr. Rajgopal. Yes, that is my understanding.
    Mr. Sherman. I can see why the most powerful people in 
America would like it that way. These are the managements of 
the biggest companies, and they want the shareholders to be 
hobbled and blinded and to rubber-stamp whatever they are 
doing. I will ask the witness who hasn't responded to one of my 
questions, how else would these companies know how to vote if 
they didn't get advice?
    Mr. Shostal. To your point, it would be extremely costly 
and ineffective for institutional investors, who specialize in 
developing investment products, to actually do the work of 
analyzing the thousands of agenda items.
    Mr. Sherman. Is there anything preventing someone from 
creating a mutual fund that only invests in fossil fuels or 
always votes for fossil fuels? Professor, is there anything 
that prevents you from creating the worst-sleep or not-woke 
mutual fund?
    Mr. Rajgopal. Vivek has a fund called DRLL, which does 
exactly what you are asking about--DRLL is the ticker symbol.
    Mr. Sherman. They invest in fossil fuel, and they 
consistently vote for a non-Biden approach on these issues. So, 
we either have a system where investors get to do what they 
want with their own money or we have a system where government 
tries to prevent that from happening in an effective way. And, 
my God, the anti-capitalist party is the party that was once 
the party of Ronald Reagan, who would be so embarrassed to be 
here today. I yield back.
    Chairman Huizenga. The gentleman yields back. The gentleman 
from Wisconsin, Mr. Steil, is recognized for 5 minutes.
    Mr. Steil. Thank you very much, Chairman Huizenga, for 
holding today's hearing and for waiving me on to the 
subcommittee.
    The proxy advisory industry has some pretty obvious 
shortcomings, and Chairman Gensler's efforts to shortcut 
critical safeguards are fueling an ongoing wave of social 
activism. I think it ultimately hurts American investors, 
particularly those concerned about their retirement income. It 
is why we introduced pretty substantive legislation regarding 
proxy advisers. The process would require proxy advisers to 
make important disclosures about methodology, staffing, and 
conflicts of interest. It also gives companies the ability to 
correct false or misleading statements, and alters and 
restricts the use of robo-voting. I think some of these are 
pretty commonsense reforms to improve an industry with immense 
power over our economy and, in particular, Americans' 
retirement savings.
    And before I start my questions, Mr. Chairman, I seek 
unanimous consent to enter into the record: an editorial from 
The Wall Street Journal on this topic; a study by the Milken 
Institute; and two articles by Professor Rajgopal regarding my 
legislation.
    Chairman Huizenga. Without objection, it is so ordered.
    Mr. Steil. I would like to thank Professor Rajgopal for 
some of his supportive statements on my legislation. In your 
analysis, you wrote the following: ``Registration seems like a 
pretty good idea to me, partly because it is ironic that an 
industry devoted to assisting institutional investors govern 
companies is itself highly opaque and unregulated.'' Is that 
right? You said that?
    Mr. Rajgopal. Absolutely. That is what I said in my opening 
statement.
    Mr. Steil. And you said, ``An interested user who visits 
the ISS website will find next to no information about their 
revenues, segments under which the revenues earned, and how ISS 
arbitrates between conflict in the provision of such services 
across both sides of the market they serve.'' Is that correct?
    Mr. Rajgopal. Yes.
    Mr. Steil. And then, you just said that you think it is a 
low-margin business. How would you know that if you don't 
know----
    Mr. Rajgopal. I said that I don't know.
    Mr. Steil. You don't know, so we are just hypothesizing 
whether or not it is a low-margin business. A lot of consulting 
businesses that I know are pretty high-margin businesses, so I 
don't know either. The revenues are opaque. It is not reported. 
We are not under SEC oversight. I think we should be. That is 
what Chairman Clayton put forward, a rule that was obviously 
gutted by Chairman Gensler, to allow our two largest proxy 
advisers to operate kind of in this opaque manner.
    If I can start with you, Mr. Friedman, in your testimony, 
you state that ISS provides institutional investors with 
objective, timely, and expert proxy research and vote 
recommendations. If I can, I am going to dive in on the expert 
proxy research. What is the process for formulating a vote 
recommendation, and does ISS conduct an analysis to determine 
if a proposal could induce an issuer to violate State or 
Federal laws?
    Mr. Friedman. Congressman, thank you for the question. The 
basic process is we have a global research team, and that team 
will take the policy at issue for the particular client.
    Mr. Steil. Let me get to the specifics, though. Do you 
analyze whether or not the proposal would violate State or 
Federal law?
    Mr. Friedman. That is not something that would typically be 
part of our analysis.
    Mr. Steil. So, you don't review if something is illegal or 
not in your advice?
    Mr. Friedman. Congressman, there is a process. When it 
comes to shareholder proposals with the SEC, to the extent that 
there are a variety of grounds upon which the SEC is able to 
advise a company, that proposal does not need to show up on the 
ballot.
    Mr. Steil. Understood. So, you just accept the SEC. For 
example, in the Travelers case, I would say that would have 
required Travelers to engage in illegal behavior by pricing 
insurance based on race. The SEC allowed that proposal to go 
forward. Once the SEC allowed that proposal to go forward, 
there is no further check or analysis as to whether or not such 
a passage would be legal or illegal by ISS.
    Mr. Friedman. I do think relying on the SEC is legal 
analysis.
    Mr. Steil. So, you rely on the SEC, with no further check. 
If I come over to you as it relates to Glass Lewis, do you have 
a further check? As it relates to legal or illegal action by a 
shareholder proposal, do you review State or Federal law?
    Mr. Shostal. As a matter of fact, I think we have engaged 
with Travelers, if you recall, so we had the opportunity to 
discuss with them their legal concerns. And we concluded it is 
a non-binding preparatory proposal, but there were certain 
aspects of the proposal that didn't feel necessarily warranted, 
but there were aspects with the companies. There were pecuniary 
issues. First of all, the company had some settlement----
    Mr. Steil. Understood. Let me shift gears, because I have 
such limited time. Do you analyze the best economic interests 
of shareholders when you analyze the shareholder proposals?
    Mr. Shostal. Would you like an example?
    Mr. Steil. I am just saying----
    Mr. Shostal. Yes, absolutely. As a matter of fact, a water 
utility in New Jersey, recently headquartered in New Jersey, 
got a racial equity proposal, and we balanced the company's 
human capital management policies against the company's stated 
$1.4 billion cost of implementing the proposal, and we have 
recommended against the proposal and supportive management. 
That happens----
    Mr. Steil. I am cognizant of my time. I would just love to 
see more transparency in how you conduct the analysis under 
which I think additional transparency would not only benefit 
you----
    Chairman Huizenga. The gentleman's time----
    Mr. Steil. ----but I think would benefit the American 
people.
    Chairman Huizenga. The gentleman's time has expired.
    Mr. Steil. Mr. Chairman, I yield back.
    Chairman Huizenga. With that, the ranking member of the 
subcommittee, the gentleman from Texas, Mr. Green, is 
recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. Permit me to ask a 
couple of questions. Mr. Friedman, I will start with you. 
Sometimes diction can have an impact on one's perception. To 
call someone an, ``activist investor,'' conscious of a certain 
image, would you give me an example of the typical investor 
that you happen to represent? By the way, investors are owners, 
so we are talking about activist owners now, people who 
actually own the business. Give me an example of a typical 
owner that you might represent?
    Mr. Friedman. Congressman, thank you. Our clients are 
institutional investors, and they really are a range of 
investors from small, medium, and large. You can expect----
    Mr. Green. A small, give me the size of a small, just any 
small?
    Mr. Friedman. It could be an investment adviser who has a 
small shop with a handful of employees, up to the largest asset 
managers in the world, and everyone in between.
    Mr. Green. Largest in the world, give me an example in 
terms of dollars associated with that being capitalized.
    Mr. Friedman. No, I don't have that information.
    Mr. Green. Just an estimate. I am not holding you to it.
    Mr. Friedman. Congressman, I would----
    Mr. Green. Is it a billion or they were----
    Mr. Friedman. I would imagine it is billions, if not 
trillions.
    Mr. Green. Billions, if not trillions of dollars.
    Mr. Friedman. Please don't quote me on this.
    Mr. Green. They are not typically people walking around 
with a sign protesting outside of some corporation that they 
would like to see change policies?
    Mr. Friedman. That is not my assessment of our client base.
    Mr. Green. Okay. Thank you very much. Let's go to the next 
gentleman, please. Your clients?
    Mr. Shostal. I think just institutional investors have 
different perspectives on what may be material, whether it is 
we have discussed----
    Mr. Green. But without getting into that, I am just 
interested in the size right now, the size?
    Mr. Shostal. As Mr. Friedman shared, there is going to be a 
broad range of investors, some large pension funds. For 
example, European large pension funds may be more active or 
activist, and conversely, there are going to be some much 
smaller----
    Mr. Green. These large firms, do they have lawyers?
    Mr. Shostal. I would imagine so.
    Mr. Green. Do you think they have accountants?
    Mr. Shostal. I would imagine.
    Mr. Green. Do they have in-house advisers?
    Mr. Shostal. Again, don't quote me, but I would imagine so.
    Mr. Green. I don't assume that you check off a list, but if 
you are a billion-dollar company, you probably do have a 
battery of lawyers, more than likely. Do you find that they are 
well-equipped to ask the appropriate questions related to the 
advice that they seek?
    Mr. Shostal. In my experience, yes, based on once they have 
evaluated what is material in their investment belief and 
philosophy, that then trickles down not just into the 
investment process, but into the stewardship in the voting and 
engagement process.
    Mr. Green. Now, I have a document that was published by my 
colleagues on the other side. It evidences some of the 
legislation that they are proposing. There is an H.R. that 
doesn't have a number, that is a bill to authorize the 
exclusion of shareholder proposals from proxy or consent 
solicitation material if the subject matter of the shareholder 
proposal is environmental, social, or political. If that is 
enacted, could that have an impact on some of the clients that 
you might represent, Mr. Friedman?
    Mr. Friedman. Ultimately, our clients vote as it relates to 
the service we provide. It is whatever is on the agenda, so to 
the extent there are more or less different proposals on the 
agenda, it certainly would be an issue for them to consider. 
But where we sit in the process is to help them within the 
framework of their chosen policies to assess those agenda 
items----
    Mr. Green. I understand, but this proposal would exclude 
environmental. If you had an insurance company, would it be of 
some benefit to them to know about environmental issues in 
Florida, for example?
    Mr. Friedman. Yes, I think many shareholders would find 
that to be extremely valuable, but in fairness, there are some 
who may not see----
    Mr. Green. I understand there would be some who would not, 
but those who do, that contact you, you do represent them, too, 
don't you?
    Mr. Friedman. We do provide services to a range of 
institutions. Yes, that is correct.
    Mr. Green. Okay. And finally, do you find that your clients 
believe that evidence related to diversity and inclusion is 
important? Yes or no?
    Mr. Friedman. For many, it is.
    Mr. Shostal. For many, it is, yes.
    Mr. Green. Thank you. I yield back.
    Chairman Huizenga. The gentleman's time has expired. I 
appreciate the witnesses for giving us their time today and 
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.
    And with that, this hearing is adjourned.
    [Whereupon, at 4:08 p.m., the hearing was adjourned.]

                            A P P E N D I X


                             July 13, 2023
                             
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 [all]