By Ross Kerber
Dec 16 (Reuters) – A new White House order aiming to rein in proxy advisory firms marks a major step in a broader Republican effort to weaken the role of investors and put more power in the hands of CEOs, corporate governance analysts and attorneys said.
U.S. President Donald Trump told the U.S. Securities and Exchange Commission and other agencies last week to increase oversight of proxy advisers Institutional Shareholder Services and Glass, Lewis & Co, which help mutual fund companies and other big institutional investors decide how to vote at corporate elections.
Their clients hold significant positions in some of the biggest Fortune 500 companies in the world, making their advice influential.
Trump’s order said the proxy firms often use their power “to advance and prioritize radical politically-motivated agendas,” including supporting environmental and social issues at the expense of shareholder returns. The directive goes to the heart of a debate that has split U.S. and European shareholders: how much should issues like climate change or workforce diversity factor into investment decisions.
MORE THAN MONEY
“This is about a lot more than fiduciary responsibility. This is geopolitical warfare through financial markets,” said Sarah Wilson, CEO of British proxy adviser Minerva Analytics. She said Minerva’s clients, largely based in the European Union and United Kingdom, want to keep their Russell 3000 holdings but worry Trump’s order and similar actions by Republican-led states could interfere with their investment process.
“Our clients aren’t rabid socialists at the gates, they want good returns over time that are well risk-adjusted,” Wilson said.
Trump’s order, among other things, directs the SEC to consider “revising or rescinding all rules” related to shareholder proposals, worrying investor activists one of their key tools to pressure companies could be taken away.
Shareholders often exercise their opinions by backing proxy measures calling for things like limits on CEO pay or on voting for board directors, seen as increasing accountability. If the agencies follow through with Trump’s order, it could serve to reduce shareholder power by making it harder for investors to pressure companies through proxy campaigns.
Sanford Lewis, an attorney who represents shareholder activists, said the order is based on the premise that issues like diversity or the environment don’t relate to financial performance, even though many investors and proxy advisers do think strong ESG policies improve a company’s long-term value.
The White House, Lewis said, is “trying to push their view onto investors.”
TAKING POLITICS AWAY
U.S. business trade groups meanwhile praised the order, saying it would take politics out of business decisions and protect returns. Charles Crain, managing vice president of policy for the National Association of Manufacturers, said Trump’s planned efforts will guard against the firms’ outsized influence and address issues including what he called “investment advisers’ over-reliance on these under-regulated entities.”
Michael Littenberg, an attorney for Ropes & Gray, said the order should be seen as part of a broader debate over how to balance robust markets and investor protections.
“We are in the midst of what is likely to be a once-in-a-generation governance recalibration,” he said.
A White House official, speaking on condition of anonymity, said the order is meant to strengthen investors’ focus on maximizing returns. “The only thing this executive order interferes with is the monopolistic practices of foreign-owned proxy advisors that seek to advance radical politically-motivated agendas,” the official said.
PUNCHING BAGS
Germany’s Deutsche Boerse bought most of top proxy adviser Institutional Shareholder Services in 2020. Glass Lewis is owned by Canadian private equity firm Peloton Capital and its chairman Stephen Smith.
Since taking office earlier this year, Trump and his appointees have moved to diminish shareholder influence on several fronts, including giving boards more control of annual meeting ballots and putting new filing requirements on big index fund managers BlackRock and Vanguard if they pressure management.
Proxy advisers have been targets of top CEOs like Elon Musk and Jamie Dimon, and drawn support from various Democratic officials and pension fund leaders. In the face of a broader backlash to their support of ESG investing, the firms have taken steps like supporting fewer environmental shareholder resolutions.
Those shifts haven’t spared them ongoing scrutiny in Washington even before Trump’s order, and from Republican-led states, although both firms have had some legal success like beating back a new Texas law that would have restricted their ability to offer ESG advice.
In that sense, Trump’s order continues the pressure to diminish shareholder engagement, said Dan Crowley, partner at law firm K&L Gates in Washington.
The order “perpetuates the fiction that investors care either about ESG considerations on the one hand or about pecuniary returns on the other, when the reality is that most large investors care about ESG considerations precisely because of the potential impact they have on long-term, risk-adjusted returns.”
(Reporting by Ross Kerber in Boston. Additional reporting by Simon Jessop in London. Editing by Dawn Kopecki and Nick Zieminski)
