Business Roundtable is an association of chief executive officers of leading U.S. companies working to promote a thriving economy and expanded opportunity for all Americans through sound public policy.
STATEMENT FOR THE RECORD FROM
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF BALL CORPORATION, AND
CHAIR OF THE BUSINESS ROUNDTABLE COMMITTEE ON CORPORATE GOVERNANCE
SUBMITTED TO THE
SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
“LEGISLATIVE PROPOSALS TO ENHANCE CAPITAL FORMATION, TRANSPARENCY, AND REGULATORY ACCOUNTABILITY”
MAY 17, 2016
Thank you, Chairman Garrett, Ranking Member Maloney and members of the subcommittee, for the opportunity to offer the views of America’s business leaders on the important legislation you are considering today.
I am John Hayes, Chairman, President and Chief Executive Officer of Ball Corporation. With more than 15,000 employees around the world, Ball Corporation is a leading provider of innovative, sustainable packaging solutions for beverage, food and household product customers, as well as aerospace technology, products and services. I am offering my views on behalf of Business Roundtable, an association of CEOs of major American companies operating in every sector of the U.S. economy. I serve as Chair of the Business Roundtable Committee on Corporate Governance.
Business Roundtable CEO members lead companies with $7 trillion in annual revenues and nearly 16 million employees. Business Roundtable member companies comprise nearly one-fifth of the total market capitalization of U.S. stock markets and invest $129 billion annually in research and development (R&D) – equal to 70 percent of U.S. private R&D spending. Our companies pay more than $222 billion in dividends to shareholders and generate more than $495 billion in sales for small and medium-sized businesses annually. Business Roundtable companies also give more than $8 billion a year in charitable contributions.
I am going to focus my comments on the Proxy Advisory Firm Reform Act of 2016, championed by Representative Sean Duffy of the 7th District of Wisconsin. Business Roundtable strongly supports this legislation because it would improve the efficiency of U.S. capital markets and improve the quality of information available to shareholders and investors. Let me tell you why.
Institutional investors, such as pension funds, which hold 76 percent of the outstanding shares traded on U.S. public markets, rely on proxy advisory firms to help advise them on how best to manage their fiduciary duty to vote their proxies in the best interests of the beneficial owners they represent. By voting their proxies in accordance with the recommendations of a third party, such as a proxy advisory firm, institutional investors can avoid potential conflicts of interest.
Two proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis & Co., account for 97 percent of the market share of the proxy advisory business and wield enormous influence. ISS clients, for example, directly influence an estimated 20 to 30 percent of the votes of a typical mid- to large-cap public company, while Glass Lewis clients typically influence 5 to 10 percent of the votes.
Business Roundtable CEOs are concerned ISS and Glass Lewis fail to avoid conflicts of interest, frequently promulgate factually inaccurate information and are neither transparent in their business dealings nor publicly accountable for the recommendations they provide.
ISS offers proxy voting recommendations while at the same time offering paid consulting services to the companies whose proxies they evaluate – by definition, there are inherent conflicts in this process. Glass Lewis, on the other hand, is owned by the Ontario Teachers’ Pension Plan, which invests in companies on whose proxies Glass Lewis makes recommendations. The owners, executives and staff of proxy advisory firms are free to invest in, or even serve on the boards of, public companies whose proxies they assess.
Ongoing Issues with Accuracy
In a survey of its CEO members conducted in 2013, Business Roundtable found that nearly all of its member companies have identified factual errors in reports prepared by proxy advisory firms.
Business Roundtable CEO members report that ISS generally distributes preliminary copies of its reports to companies, but Glass Lewis does not. ISS generally fixes the errors that are identified to them before the final reports are published, but some members reported that identical or similar factual errors were made in their reports across several years. Moreover, a significant number of members report that ISS has often given them insufficient time, sometimes as little as nine hours, to review their reports before publication.
According to a 2010 survey of HR Policy Association members and Center On Executive Compensation Subscribers, 53 percent of the chief human resource officers of large companies say that a proxy advisory firm had made one or more mistakes in a final published report on the company’s compensation programs in 2009 or 2010.
Lack of Transparency and Accountability
Neither ISS nor Glass Lewis fully discloses the methodologies used to develop their voting recommendations. They also do not disclose the academic research, if any, that is used in formulating their decisions and whether or not such decisions were based on the creation and preservation of shareholder value.
In its 2013 survey, Business Roundtable asked member CEOs about their experience with proxy advisory services. CEOs reported that neither ISS nor Glass Lewis disclose how they arrive at their recommendations, even in those instances where the company pointed out that a proxy advisory recommendation contains factually inaccurate information.
Business Roundtable Recommendations
Business Roundtable has long advocated for increased supervision of proxy advisory firms by the Securities and Exchange Commission (SEC). Business Roundtable also supports efforts to ensure that investment advisers are exercising appropriate oversight over the proxy advisory firms they retain, consistent with their fiduciary duties as registered investment advisers.
Business Roundtable supports reforms that would improve transparency and accountability of proxy advisory firms by requiring:
- Proxy advisory firms to register under the Investment Advisers Act of 1940 (Advisers Act), under a tailored regulatory framework that reflects the unique role they play in the proxy voting process;
- Conflict of interest disclosure by proxy advisory firms that describe specific conflicts and not just reliance on generalized statements about conflicts of interest;
- Proxy advisory firms to provide more transparency involving their internal controls, policies, procedures, guidelines and methodologies;
- Proxy advisory firms to provide public companies with copies of their draft reports sufficiently in advance of dissemination to their clients, to permit correction of inaccurate information;
- Proxy advisory firms to publicly disclose the final report about a public company 90 days after a shareholder meeting has occurred; and
- That new SEC rules or guidance emphasize the responsibility of each registered investment adviser to exercise appropriate oversight over its proxy voting process, to ensure that its voting decisions with respect to client securities are in the best interests of its clients.
The Proxy Advisory Firm Reform Act of 2016
Business Roundtable strongly supports the Proxy Advisory Firm Reform Act of 2016. It would require proxy advisory firms to register with the SEC and annually provide the agency with material disclosures, including:
- The procedures and methodologies that the applicant uses in advising its clients;
- The organizational structure of the applicant;
- Whether the applicant has a code of ethics; and
- Any potential or actual conflict of interest related to the ownership structure of the applicant.
The bill details the specific conflicts of interest that would be disclosed, including those related to the manner in which registered proxy advisory firms are compensated by clients, business relationships and ownership interests between proxy advisory firms and clients, the formulation of proxy voting policies by proxy advisory firms (particularly when large clients provide input), and any instances where proxy advisory firms issue proxy voting recommendations at companies where they also provide advisory services.
The legislation would also help resolve problems related to the reliability and accuracy of proxy advisory firm reports. For example, the bill would require that registered proxy advisory firms hire sufficient staff and allow issuers receiving proxy advisory firm recommendations to comment on the recommendations. Registered firms would also be required to hire an ombudsman to receive complaints about the accuracy of voting recommendations and be required to resolve the issues prior to proxy voting.
Finally, the bill would prohibit registered proxy advisory services from engaging in unfair, coercive or abusive practices. For example, the bill would prohibit registered firms from conditioning or threatening to condition a voting recommendation on the purchase by an issuer of services or products of the registered proxy advisory firm or affiliate.
Thank you for the opportunity to express the views of America’s business leaders on this important legislation. I hope that all members of the subcommittee will support Mr. Duffy’s Proxy Advisory Firm Reform Act.