Reforming the proxy voting system and increasing oversight of large asset managers are among eight key policy priorities the Republican-led ESG Working Group plans to focus on during the 118th Congress, according to the group’s newly released interim report.
Formed in February by members of the House Financial Services Committee, the nine-person group is led by Rep. Bill Huizenga (R-MI), who is chairman of the Oversight and Investigations Subcommittee.
“Today’s preliminary report is clear about one thing, the Biden Administration is making it harder for Americans to retire,” Huizenga said in a statement. “Across the nation, boardrooms are being held hostage by those who push policies that will lower returns for Americans trying to build a brighter and more financially secure future. House Republicans will stand up, defend the free market, and the ability for Americans to make their own financial decisions as they see fit.”
Among the eight policy priorities outlined in the 16-page report released June 23 include:
- Reforming the proxy voting system to safeguard the interests of retail investors.
- Promoting transparency, accountability, and accuracy in the proxy advisory system.
- Enhancing accountability in shareholder voting by aligning voting decisions with the economic interests of shareholders.
- Increasing transparency and oversight of large asset managers to ensure their practices reflect the pecuniary interest of retail investors.
- Improving ESG rating agency accountability and transparency to safeguard retail shareholders.
- Strengthening oversight and conducting investigations into federal regulatory efforts that would “contort” the financial system into a vehicle to implement climate policy.
- Demanding transparency, responsibility and adherence to statutory limits from financial and consumer regulatory agencies.
- Protecting U.S. companies from burdensome EU regulations, safeguarding American interests in global markets.
Proxy Voting
An issue that figures prominently in the report is the role of proxy voting and proxy advisory firms. For instance, in noting that shareholders have the right to protect their investments and participate in corporate decision-making, the report contends that SEC rules “have allowed social activists to abuse the proxy system.” “With just $2,000 worth of company stock, these activists are submitting hundreds of resolutions related to environmental, social, and political issues, rather than focusing on the company’s growth and competitiveness,” the report states.
Consequently, the working group argues that the proxy voting system is in “dire need of reform to strengthen shareholder engagement, promote transparency, and eliminate inefficiencies.”
What’s more, the report contends that the outsized influence of proxy advisory firms on the proxy voting system is a growing concern, noting that the large proxy advisory firms have gained an “unprecedented level of control” and that their “dominance raises serious questions about bias and accountability, as these firms have the power to sway institutional investors’ voting decisions.”
The report also takes aim at the “Big Three” asset managers, who, the group notes, collectively manage approximately $20 trillion in assets. “Their substantial holdings in America’s largest companies, facilitated by the structure of index funds, grant them significant voting power and influence over corporate decisions. However, there are serious concerns about how these managers employ their voting power to advance political agendas that are unrelated to financial performance,” the report further states.
SEC’s Authority
Meanwhile, the report further outlines concerns about the SEC exceeding its statutory authority by mandating non-material ESG disclosures through regulations, thereby circumventing the legislative process.
To that end, Rep. Huizenga, along with Rep. Andy Barr (R-KY), who is chairman of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, just prior to release of the report announced the introduction of the Mandatory Materiality Requirement Act.
The legislation would amend both the Securities Act of 1933 and the Securities Exchange Act of 1934 to specify that an “issuer is only required to disclose information in response to disclosure obligation adopted by the Commission to the extent the issuer has determined that such information is important with respect to a voting or investment decision regarding such issuer.” The bill mirrors legislation that has been introduced in the Senate by Sen. Mike Rounds (R-SD).
“The SEC has a long, established history of using the materiality standard when proposing new disclosure requirements and it should not deviate from it,” stated Huizenga. “The Mandatory Materiality Requirement Act would codify this standard into law and prohibit the SEC from expanding beyond securities law and the authority granted to it by Congress.”
The Republican ESG Working Group’s interim report is available here.
Text of the Mandatory Materiality Requirement Act is available here.
