SCOOP: House Financial Services Hearing puts large index firms on notice: “shareholder value, not politics”
Congress, led by Rep. French Hill (R., Ark.) and the House’s Committee on Financial Services, is putting large index firms on notice.
A recent hearing, titled Proxy Power and Proposal Abuse: Reforming Rule 14a-8 to Protect Shareholder Value, scrutinized Rule 14a-8 under the Securities Exchange Act of 1934 — which governs shareholder participation in corporate governance.
“As our securities laws were being considered during the Great Depression and years after, corporate governance policymakers sought to ensure that stockholders had an active voice over any entrenched management, inattentive directors, or a controlling group,” Hill explained during the hearing.
"The intent was that all stockholders could assert their ownership rights around key components of running the business and capital allocation,” Hill — himself a former banker, explained.
Now, Hill wants to ensure that lawmakers “also consider the role of proxy advisory firms on capital markets as a whole. While these firms can offer some valuable perspective, over the past two decades, their influence on corporate governance and voting on particular shareholder proposals has grown significantly.”
"We must ask ourselves if these firms are fulfilling their intended purpose of serving in the best interests of shareholders or if they are distracting from the primary goal of enhancing long-term shareholder value,” he continued.
"As we evaluate the current landscape surrounding Rule 14a-8, it’s essential we also assess the impact of recent regulatory interpretations and guidance and how those have led us to where we are today,” he continued. “Particularly, we will look at the SEC’s Staff Legal Bulletins 14L and 14M, which have had a significant impact on influencing how companies and shareholders engage with the proposal process.”
The hearing also focused on challenges with the large passive index funds, with multiple members talking about the need to put shareholder value over politics. One of Chairman Hill’s expert witnesses — Jim Copland of the Manhattan Institute — testified that these funds have pushed socially progressive policies on firms, saying, “Increasing concentration of ownership in large passive index fund families that have historically taken “shareholder engagement” stances, especially on environmental or social-policy issues.”
Copland also pointed out that the problem is ongoing, saying, “As recently as 2023, however, two of the three largest index-fund managers had been supporting a majority of ESG-related shareholder proposals.”
One legislative proposal that gained Copland’s endorsement would have the passive funds try to pass voting rights through to their investors, and if an index fund can’t determine the voting preferences of the underlying investor, then the asset manager should cast the votes in the same proportion as other non-passive shareholders.
This “mirror voting” rule would ensure that the passives are essentially neutral, similar to abstaining from a vote.
Elsewhere during the hearing, Rep. Byron Donalds (R., Fla.) — the frontrunner to be Florida’s next governor — spoke with New York City’s comptroller, Brad Lander, about the failures of government-run grocery stores across America. “These grocery stores have less product available…the standards in them are, quite frankly, disgusting,” Donalds said, adding that “by the way, I’m from Brooklyn, New York…a low-income neighborhood…the city of New York used to distribute food; they got out of that business when I was a kid.”
Lander, for his part, defended government-run grocery stores — and elsewhere wouldn’t condemn the phrase “globalize the Intifada,” to which Donalds said simply: “this is why the city of New York is going down the toilet.”
Both during and after the hearing, Hill’s fellow Financial Services Committee members spoke favorably about Copland’s arguments and the broader point of passive index funds pushing progressive politics. In an interview with the Washington Reporter, Rep. Marlin Stutzman (R., Ind.) said that he thinks that “Congress is going to have to play a role [addressing the problem of passive index funds], because if it damages the value of a company, and there are damages that can be shown by these groups, there needs to be accountability.”
A Congressional Republican source told the Reporter that “this hearing should have been a wake up call to BlackRock, Vanguard, and State Street. Republicans are sick of these index funds getting a pass for pushing progressive policies that companies and even most shareholders don’t want. Sure, BlackRock has toned down the wokeness now that Trump is in charge, but Hill Republicans know Blackrock will revert back to form when Democrats take power.”
In addition to the House Financial Services Committee, the Senate has also taken up legislation addressing the problem of the big three passive index firms pushing politics over shareholder value, with Senator Dan Sullivan (R., AK) introducing the INDEX Act that would “require investment advisors of passively-managed funds to vote proxies in accordance with the instructions of fund investors.”
Following the hearing, Rep. Andy Barr (R., Ky.) told the Reporter that “the proxy-advisory business should be about advancing proposals that lead to the maximization of financial returns for shareholders, not prioritizing DEI, ESG, and political ideologies.”
“That’s why we are evaluating reforms to oversight of these proxy advisory firms to create more transparency around their recommendations and the methodologies behind their decision making process,” Barr added.
During the hearing itself, Rep. Zach Nunn (R., Iowa) also added that he wants to “consider the influence of proxy firms over voting outcomes.”
“The practice of robo voting,” he added, “especially how robo voting works, is not only troubling, but where investors automatically adopt a proxy advisors recommendation, [that] silences the First Amendment rights of our retirees. I've got a bill out there; it's called the Protecting American Savings Act. It requires the SEC to finalize rules prohibiting the use of robo voting with respect to votes related to proxy advisors.”