WAR ON THE G IN ESG
House Republicans want to change the way shareholder meetings work. Here's how.

The ideas range from making it easier for corporate leadership to summarily dispatch shareholder proposals, to limits on the role of the SEC.

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Ben Werschkul
·Washington Correspondent
Sun, July 16, 2023

House Republicans unveiled a push last week aimed at changing how shareholder meetings work as part of their larger campaign against socially-conscious investing.

The effort included a whopping 13 bills as well as two separate Congressional hearings devoted to the subject.

Some ideas would make it easier for corporate leadership to quickly dispatch shareholder proposals without a vote. Others would place limits on the role of the Securities and Exchange Commission (SEC). The proxy voting process — which conservatives say introduces too many "non-material" topics — is also an area of intense interest.

Republicans are looking to potentially pass some proposals by the end of the month but the ideas are unlikely to be embraced by Senate Democrats. Nonetheless, the keen focus on these often non-political gatherings could put further pressure on companies as they try to strike a balance between rising shareholder activism and the political backlash against so-called environmental, social, and corporate governance (ESG) principles.

"We must prevent shareholder activism from diverting attention and resources away from the core issues at hand," House Financial Services Committee chair Patrick McHenry (R-NC) said as he kicked off his party’s ‘ESG month’. He promises that these proposals are serious efforts to force change not simply so-called messaging bills designed to make a political point.

Warren Buffett's image welcomes Berkshire Hathaway shareholders to a picnic during the company's annual meeting in Omaha, Nebraska in 2011. (REUTERS/Rick Wilking)

Democrats, meanwhile, charge that Republicans are unduly influenced by fossil fuel companies, and these efforts are little more than an attempt to shut down the voices of women and minorities in the corporate governance process.

"The reason for this hearing is not because investors won’t vote for these resolutions, it’s because they will," said Rep. Brad Sherman (D-CA). Rep. Maxine Waters (D-CA) added sarcastically that the proposals are designed to "protect investors from their own ideas."

The shareholder proposal process is typically a non-binding affair — CEOs and boards are usually free to ignore them if they wish — but they can exert pressure on companies to change behaviors. Corporate directors often feel the pressure most acutely, as the same group of shareholders putting forward these proposals also vote on their appointment or removal from office.
A movement in response to a rising trend of shareholder activism

The campaign in Washington comes in response to a surge in shareholder activism in the pro- and anti- ESG directions.

An analysis by ISS Corporate Solutions found a record number of shareholder proposals through the first five months of 2023 with just 8.3% being approved so far.

A big factor in the surge is a rise of anti-ESG efforts. ISS found this type of proposal has grown by more than 400% since 2020 and a recent Harvard University analysis found that concerns there were decidedly focused on diversity matters with two-thirds of the proposals in 2023. Only about 10% concerned the environment.

The rising shareholder activism has come in part following a change in the rules after Joe Biden took office. During the Trump administration, then-SEC Chair Jay Clayton often discouraged proposals with an agency that was empowered to take actions like so-called "no action letters" to short-circuit some shareholder proposals.

Rep. Patrick McHenry (R-NC) is chair of the House Financial Services Committee. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Many of those rules were reversed in 2021 when Gary Gensler took office as chair of the SEC. In recent years, the agency has instead actively prodded corporate directors and shareholders to more forcefully consider issues like the climate.

Many of the latest bills introduced would re-implement some Trump-era rules but with the additional force of law.

One proposal would allow corporate boards to simply exclude a resolution "if the subject matter of the shareholder proposal is environmental, social, or political." Additional ideas take aim at proposals that are deemed repetitive with other GOP lawmakers focused on limiting the influence of asset management giants like BlackRock. Others would forbid the SEC from weighing in.
A focus on proxy advisory firms

Republicans have also unified around a key villain that they say is tipping the scales: Proxy advisory firms.

The two main companies in the space —Glass Lewis and Institutional Shareholder Services (ISS) — are far from household names but their purported influence came up again and again.

"I would love to see this duopoly broken up," said Rep. Bryan Steil (R-WI) in one of many heated moments in recent days.

These firms emerged over the past few years in concert with giant asset management giants like BlackRock and State Street who hold large stakes in companies across the economy due to the trillions that they manage for their clients.

Rep. Maxine Waters (D-CA) led Democrats lawmakers during a news conference to lambaste the GOP focus on corporate environmental and social policy investing. (Drew Angerer/Getty Images)

The proxy advisory firms' stated purpose is to provide information to the asset management companies about their investments but the charge from Republicans is that the companies have ESG-infused models that are essentially forcing the principles down companies’ throats.

The Business Roundtable has weighed in on what it says is an outsized influence for these firms. Kristen Silverberg, the group’s President and COO, wrote in a letter to lawmakers that "recommendations of proxy advisory firms often dictate the outcome of shareholder votes, and with them, some of the most important decisions facing public companies."

For their part, these firms deny any outsized influence, with both Glass Lewis and ISS appearing before lawmakers this week to defend themselves.

Steven Friedman, the general counsel at ISS promised lawmakers "we perform our work in a prudent, open, and honest manner, consistent with our fiduciary responsibilities."

Ben Werschkul is a Washington correspondent for Yahoo Finance.