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ARTICLE: Companies find a regulation to love with bill to curb shareholder power

Updated: Sep 27, 2018

This piece originally appeared on June 27, 2018 on Politico Pro and was written by Patrick Temple-West.

Republicans will suspend their crusade to roll back financial regulations on Thursday as the Senate Banking Committee considers imposing new government oversight on businesses that are key to the surge in socially conscious investing.

After years of lobbying by pro-business groups, lawmakers will weigh whether to require the firms that advise shareholders on how to press issues such as environmentalism and executive pay to register with the Securities and Exchange Commission. That could saddle the firms with costly reporting requirements.

The bill, H.R. 4015 (115), which passed the House in December with support from 12 Democrats, would call on the investment advisory firms to disclose potential conflicts of interest as well as certain financial information. It would also force them to share their voting recommendations with companies before they are given to investors, giving executives time to mount defenses against the proposals.

The legislation has global implications, since the two firms that dominate the advisory business — Institutional Shareholder Services and Glass Lewis — have many overseas clients. And it could threaten the business of so-called environmental, social and governance investing, which has boomed in recent years.

ISS CEO Gary Retelny called on Congress to reject the bill, saying it would be bad for shareholders.

“Through concerted pressure on lawmakers, corporations and their lobbyists are seeking to deny important shareholder rights for tens of millions of American workers," Retelny said in a statement to POLITICO. "Unless our lawmakers want to take away the voice and rights of shareholders and investors as true owners of the companies, [the legislation] should be defeated.”

Glass Lewis is also opposed to the bill, company spokesman Dimitri Zagoroff said.

Proponents of the law say dealing with shareholder proposals costs companies millions of dollars and argue that the two investment advisory giants need to be regulated because of their considerable power over investors.

San Francisco-based Glass Lewis, co-owned by the Ontario Teachers’ Pension Plan Board and Alberta Investment Management Corp., provided services to more than 1,200 big investors in 2016. ISS, owned by private equity firm Genstar Capital, covered about 39,000 company meetings in 115 countries in 2016, according to the Government Accountability Office.

The legislation comes as environmental, social and governance investing is growing rapidly. In an April report, Goldman Sachs analysts said ESG assets under management in mutual funds and exchange-traded funds grew 29 percent in 2017 and 10 percent in 2016. And Twitter posts mentioning ESG grew 19 fold in recent years, Goldman Sachs said.

“We believe the ESG Revolution is just beginning,” the analysts wrote.

ISS and Glass Lewis “generally support proposals addressing a variety of environmental concerns,” according to a Dec. 21 report from law firm Weil, Gotshal & Manges. Most notably, both firms supported a 2017 shareholder proposal at Exxon Mobil that required the company to issue a report about how climate change would affect it.

Now business groups are starting to attack both ESG investing and shareholder adviser firms.

The National Association of Manufacturers funded a research report released earlier this month that said companies are increasingly facing shareholder proposals about issues as wide ranging as clean energy, climate change, political contributions, indigenous rights and human trafficking.

“The evidence demonstrates that the adoption of such shareholder resolutions has no statistically significant impact on company returns one way or the other,” the report said. Still, it added, "Such proposals can often cost millions of dollars."

The manufacturers association is also co-funding an advocacy group launched in May, the Main Street Investors Coalition, that is pushing for the shareholder advisers bill before the Banking Committee.

Chevron, Exxon Mobil and Nasdaq are among the companies that have listed the bill as a lobbying priority this year, according to disclosures. Chevron and Exxon did not immediately respond to requests for comment. Nasdaq declined to comment.

“The legislation, if enacted, could impede some of the pressure on corporations to do more on ESG initiatives since the stakeholders who advocate for corporate ESG often use the shareholder proposal process to apply pressure and gain publicity,” said Douglas Chia, executive director of the Conference Board Governance Center, a nonpartisan research group. “It is interesting that the party that believes in less regulation, wants more regulation in this case."

In a Feb. 27 letter to Senate Banking Chairman Mike Crapo (R-Idaho) and the panel's top-ranking Democrat Sherrod Brown (D-Ohio), dozens of social impact investment firms and their allies said the shareholder adviser legislation poses a threat to good corporate governance.

“The proposed legislation is not constructive regulatory ‘reform,’ and is not supported by institutional investors,” said the letter from investors including the Florida State Board of Administration and TIAA.

The letter pointed out that a Trump administration report from October 2017 on capital markets reform did not recommend any legislative changes for shareholder advisory firms.

In December, the Congressional Budget Office said the advisory firms probably already meet many of the bill’s new registration, disclosure and personnel requirements and that their estimated costs to comply “would be small."

Proponents of SEC registration for ISS and Glass Lewis, such as the Business Roundtable, a group of CEOs, say the businesses need to be regulated because they have considerable sway in determining how investors will vote on corporate issues, ranging from compensation to merger deals.

"By improving oversight and accountability of proxy advisory firms, H.R. 4015 would improve the efficiency of U.S. capital markets and the quality of information available to shareholders and investors," the Business Roundtable said in a November 2017 letter to the House Financial Services Committee.

The advisory firms’ recommendations on executive compensation is a key frustration for companies, said Keir Gumbs, a partner at law firm Covington & Burling who advises corporations about governance issues.

The biggest win from the legislation for companies would be “getting access to ISS reports,” Gumbs said. “What companies are looking for more than anything else is to get those reports sent to them in advance.”

“Whether you like [these] firms or not, whether you think they are good or bad, the truth is it is better to have that information out there, if possible, so that companies can respond,” he said.

“The loser would be the proxy adviser firms because I imagine the reason they don’t give the reports to everyone in advance is because that’s a cost they have to incur,” Gumbs said. “Some business groups love to talk about regulatory costs. Well, here’s one that would be imposed on proxy advisory firms.”


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