COMMENTARY: Senate Banking Hearing with SEC Chairman Must Address Proxy Advisory Firms

This article originally appeared in Morning Consult on December 10th, 2019. 

On Dec. 10, the Senate Committee on Banking, Housing and Urban Affairs will hold an oversight hearing on the Securities and Exchange Commission. Among all of the SEC’s priorities, the Senate Banking Committee should raise the topic of proxy advisory reform. With the public comment period open on proposed rule S7-22-19 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, this hearing is an ideal opportunity for Chairman Jay Clayton to address the implications of this rule, which stands to eradicate numerous flaws, distractions and blatant conflicts of interest inherent in the proxy voting process.

Many institutional investors completely outsource their voting responsibilities to proxy advisory firms by automatically agreeing with recommendations in the absence of a thorough review. This practice, coined “robo-voting,” appeared across 175 investment entities surveyed in a Harvard Law study. These entities manage over $5 trillion and follow proxy advisory firms’ recommendations 95 percent of the time. Absent substantive review of recommendations, proxy advisory firms wield disproportionate influence over the outcome of shareholder resolutions. What’s more, these firms receive payment no matter the outcome of the vote, or how it impacts fiscal performance.

To fuel a business model based largely on opinion, proxy advisory firms tailor recommendations based on various points of interest. Institutional Shareholder Services (ISS) offers five different voting recommendation reports that suit multiple agendas. These include Faith-Based Guidelines, Socially Responsible Investment (SRI) Guidelines and Sustainability Proxy Voting Guidelines. How is it that they are allowed to get away with introducing arbitrary, personal morals into the equation while providing cover for those who should be making decisions on a financial basis? This is the crux of the issue that proposed rule S7-22-19 seeks to remedy.

And frankly, corporate board members are tired of becoming embroiled in these battles. As a former member of the National Commission on Economic Growth and Tax Reform, I’m well-versed in how internal boardroom dynamics affect company performance at large. While topics that fall under environmental, social and governance (ESG) objectives raise important issues that should be carefully considered, prioritizing ESG can sometimes undermine a company’s priority to generate optimal returns.

A recent poll outlines this phenomenon in detail. According to PwC’s latest Annual Corporate Directors Survey, 56 percent of board directors say that investors devote too much attention to ESG investments. This is up from 29 percent in 2018. The fact of the matter is that the boardroom is not an appropriate forum for quarreling over which politicized issue merits a company’s financial backing or withdrawal.

Vocal activists repeatedly call for companies to invest here! — divest there! — appoint this person! — remove this one! Cacophonic cries do nothing but exhaust executives, preventing them from meaningfully engaging any particular topic. This badgering has become self-defeating. The slew of demands has weakened corporate executives’ ability to recognize, much less tackle, what’s important.

The institutional investors who direct funds on others’ behalf also have a hard time cutting through the noise. Increasingly, activists have weaponized institutional investment funds to impose an external agenda onto a private, for-profit entity with little consideration for how these moves will affect those who have invested their own dollars. Proxy advisory firms lend power to these demands. Chairman Clayton has an opportunity to highlight this during his testimony in front of the Senate Banking Committee.

Under Chairman Clayton’s direction, the SEC has finally broken ground limiting the influence of proxy advisory firms. The proposed rule stands to affect millions of Americans who contribute to hedge funds, passive index funds, pension plans and other long-term investments. I, for one, hope that it passes.

While I was the State Treasurer of Ohio, I witnessed how nonpartisan, fiduciary duty benefited our resource pool. Why should private entities, that can sway our economy on a national scale, be any more lax with their strategies? Political agendas have proven to be nothing more than a nuisance in the boardroom. Let’s let executives get back to their job, and leave politics to the politicians.

Ken Blackwell is a member of the Institute for Pension Fund Integrity and a senior fellow at the Family Research Council. He was the Ohio State Treasurer from 1994-99 and has also served as Ohio Secretary of State, Mayor of Cincinnati, Undersecretary in the Department of Housing and Urban Development and as an Ambassador to the United Nations Human Rights Commission.