examining the market power and impact of proxy advisory firms hearing committee on financial ...

441 Pages·2013·24.05 MB·English

EXAMINING THE MARKET POWER AND
IMPACT OF PROXY ADVISORY FIRMS
HEARING
BEFORETHE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OFTHE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
JUNE 5, 2013
Printed for the use of the Committee on Financial Services
Serial No. 113–27
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EXAMINING THE MARKET POWER AND
IMPACT OF PROXY ADVISORY FIRMS
HEARING
BEFORETHE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OFTHE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
JUNE 5, 2013
Printed for the use of the Committee on Financial Services
Serial No. 113–27
(
U.S. GOVERNMENT PRINTING OFFICE
81–762 PDF WASHINGTON : 2013
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice Chairman MAXINE WATERS, California, Ranking
SPENCER BACHUS, Alabama, Chairman Member
Emeritus CAROLYN B. MALONEY, New York
PETER T. KING, New York NYDIA M. VELA´ZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SHELLEY MOORE CAPITO, West Virginia GREGORY W. MEEKS, New York
SCOTT GARRETT, New Jersey MICHAEL E. CAPUANO, Massachusetts
RANDY NEUGEBAUER, Texas RUBE´N HINOJOSA, Texas
PATRICK T. MCHENRY, North Carolina WM. LACY CLAY, Missouri
JOHN CAMPBELL, California CAROLYN MCCARTHY, New York
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, Pennsylvania GWEN MOORE, Wisconsin
LYNN A. WESTMORELAND, Georgia KEITH ELLISON, Minnesota
BLAINE LUETKEMEYER, Missouri ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
ROBERT HURT, Virginia JOHN C. CARNEY, JR., Delaware
MICHAEL G. GRIMM, New York TERRI A. SEWELL, Alabama
STEVE STIVERS, Ohio BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee DANIEL T. KILDEE, Michigan
MARLIN A. STUTZMAN, Indiana PATRICK MURPHY, Florida
MICK MULVANEY, South Carolina JOHN K. DELANEY, Maryland
RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona
DENNIS A. ROSS, Florida JOYCE BEATTY, Ohio
ROBERT PITTENGER, North Carolina DENNY HECK, Washington
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
SHANNON MCGAHN, Staff Director
JAMES H. CLINGER, Chief Counsel
(II)
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SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice Chairman CAROLYN B. MALONEY, New York,
SPENCER BACHUS, Alabama Ranking Member
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California RUBE´N HINOJOSA, Texas
FRANK D. LUCAS, Oklahoma STEPHEN F. LYNCH, Massachusetts
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
MICHELE BACHMANN, Minnesota ED PERLMUTTER, Colorado
KEVIN McCARTHY, California DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BILL HUIZENGA, Michigan GARY C. PETERS, Michigan
MICHAEL G. GRIMM, New York KEITH ELLISON, Minnesota
STEVE STIVERS, Ohio MELVIN L. WATT, North Carolina
STEPHEN LEE FINCHER, Tennessee BILL FOSTER, Illinois
MICK MULVANEY, South Carolina JOHN C. CARNEY, JR., Delaware
RANDY HULTGREN, Illinois TERRI A. SEWELL, Alabama
DENNIS A. ROSS, Florida DANIEL T. KILDEE, Michigan
ANN WAGNER, Missouri
(III)
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C O N T E N T S
Page
Hearing held on:
June 5, 2013 ...................................................................................................... 1
Appendix:
June 5, 2013 ...................................................................................................... 37
WITNESSES
WEDNESDAY, JUNE 5, 2013
Bartl, Timothy J., President, Center on Executive Compensation ...................... 8
Holch, Niels, Executive Director, Shareholder Communications Coalition ........ 10
McCauley, Michael P., Senior Officer, Investment Programs and Governance,
Florida State Board of Administration (SBA) .................................................... 11
Morgan, Jeffrey D., President and Chief Executive Officer, National Investor
Relations Institute (NIRI) ................................................................................... 13
Pitt, Hon. Harvey L., Founder and Chief Executive Officer, Kalorama Part-
ners, LLC, on behalf of the U.S. Chamber of Commerce .................................. 7
Stuckey, Darla C., Senior Vice President, Policy & Advocacy, Society of Cor-
porate Secretaries and Governance Professionals ............................................. 15
Turner, Lynn E., Managing Director, LitiNomics ................................................. 17
APPENDIX
Prepared statements:
Bartl, Timothy J. .............................................................................................. 38
Holch, Niels ....................................................................................................... 150
McCauley, Michael P. ....................................................................................... 162
Morgan, Jeffrey D. ............................................................................................ 169
Pitt, Hon. Harvey L. ......................................................................................... 182
Stuckey, Darla C. ............................................................................................. 222
Turner, Lynn E. ................................................................................................ 345
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Garrett, Hon. Scott:
Written statement of Gary Retelny, President, Institutional Shareholder
Services Inc. .................................................................................................. 357
Letter from Susan Ferris Wyderko, President and CEO, the Mutual Fund
Directors Forum, dated June 4, 2013 .......................................................... 374
Moore, Hon. Gwen:
Written statement of Sean Egan, Chief Executive Officer, Egan-Jones
Rating Company ........................................................................................... 375
Sherman, Hon. Brad:
Written statement of Ann Yerger, Executive Director, the Council of
Institutional Investors .................................................................................. 376
Waters, Hon. Maxine:
Written statement of Anne Simpson, Senior Portfolio Manager, Invest-
ments, and Director of Global Governance, the California Public Em-
ployees’ Retirement System ......................................................................... 395
Written statement of Katherine H. Rabin, Chief Executive Officer, Glass,
Lewis & Co. ................................................................................................... 402
(V)
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EXAMINING THE MARKET POWER AND
IMPACT OF PROXY ADVISORY FIRMS
Wednesday, June 5, 2013
U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:01 a.m., in room
2128, Rayburn House Office Building, Hon. Scott Garrett [chair-
man of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Royce,
Bachmann, Grimm, Stivers, Fincher, Mulvaney, Hultgren, Wagner;
Sherman, Moore, Scott, Himes, Peters, Sewell, and Kildee.
Ex officio present: Representatives Hensarling and Waters.
Chairman GARRETT. Greetings. Good morning. This hearing of
the Subcommittee on Capital Markets and Government Sponsored
Enterprises is hereby called to order.
Today’s hearing is entitled, ‘‘Examining the Market Power and
Impact of Proxy Advisory Firms.’’ I thank our extended panel who
are here with us here this morning, and I thank the Members from
both sides, as well.
We will begin, as we always do, with opening statements, and
then look to the panel for your wisdom and input.
So at this point, I will yield myself about 9 minutes. I am not
sure I will use all of it.
With the 2013 proxy season currently in full swing, today’s hear-
ing examines the market power impact of proxy advisory firms and,
more broadly, whether the proxy system is working for U.S. compa-
nies and their shareholders.
Every year, investors vote over 600 billion shares through the
proxy system to elect boards of directors and take other corporate
actions, as well. Therefore, an accurate, efficient, and transparent
proxy voting system is important to ensuring that our capital mar-
kets remain competitive.
While proxy voting can play an important role in promoting good
corporate governance and enhancing shareholder values, the cur-
rent system for distributing proxy materials and voting shares has
become so complicated that few outside of the proxy process under-
stand how it actually works, including most retail investors, I
would guess.
In addition, corporate proxy disclosures have become more volu-
minous and complex than ever, and the Dodd-Frank Act and SEC
rules have significantly expanded the types of issues now subject
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2
to shareholder vote. As a result, many institutional investors and
investment advisory firms have come to rely exclusively on proxy
advisory firms to help them determine how to vote their clients’
shares on literally thousands of proxy questions companies pose
each and every year. And much like the overreliance on credit rat-
ing agencies during the financial crisis, the rise of proxy advisory
firms over the last decade is attributable in large part to the unin-
tended consequences of government regulation.
Back in 2003, the SEC issued rules requiring mutual funds and
their investment advisors to construct policies and procedures rea-
sonably designed to ensure that proxies are voted in their clients’
best interest. The next year, however, the SEC staff—rather than
the Commission itself—interpreted the rules in a manner that now
allows mutual funds and investment advisors to effectively
outsource their fiduciary obligation when voting their clients’ prox-
ies to supposedly independent proxy advisory firms.
What is the result? Well, as a result of the SEC’s actions, proxy
advisory firms now wield an enormous amount of influence over
shareholder voting here in the United States. Two firms in par-
ticular you all know—Institutional Shareholder Services (ISS), and
Glass, Lewis & Company—account for around 97 percent of the
proxy advisory industry.
Together, these two firms alone are reported to provide voting
recommendations to clients controlling between 25 and 50 percent
of the typical mid-cap or large-cap company shares. Studies indi-
cate that ISS and Glass Lewis are able to sway at least 20 to 40
percent of shareholder votes, particularly in high-profile corporate
elections.
Despite their outside influence, however, proxy advisory firms
have no duty to make voting recommendations in the best interest
of the shareholders, and they have no financial interest in the com-
panies about which they provide voting advice. It should come as
no surprise, then, that proxy advisory firms often make voting rec-
ommendations based on one-size-fits-all policies and checklists that
fail to take into consideration how voting recommendations affect
the actual shareholder value.
In fact, proxy advisory firms have increasingly teamed up with
others, such as unions and other activist shareholders, to push a
variety of social or political or environmental proposals that are
generally immaterial to investors and often reduce shareholder
value. For example, one recent study found that the stock market
reaction to say-on-pay voting recommendations supported by proxy
advisors has actually been statistically negative.
So by exploiting the proxy system to push special interest agen-
das, proxy advisory firms and activist shareholders have increased
the cost of doing business for many public companies and
disincentivized private companies from going public—all without a
corresponding benefit to the investor returns.
Questions have been raised regarding potential conflicts of inter-
est that proxy advisory firms may face when making voting rec-
ommendations, for example, as I alluded to a moment ago, activist
shareholders—now some of ISS’ and Glass Lewis’ biggest clients—
which increases the risk that these two firms will favor special in-
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