By Ross Kerber
Dec 16 (Reuters) – A new White House order aimed at cracking down on proxy advisory firms marks a key step in a broader Republican effort to weaken the role of investors and put more power in the hands of CEOs, analysts and corporate governance advocates said.
US President Donald Trump told the US 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 large institutional investors decide how to vote in corporate elections.
Their clients hold significant positions in some of the largest Fortune 500 companies in the world, making their advice influential.
Trump’s order said that proxy firms often use their power “to advance and prioritize politically motivated radical agendas”, including supporting environmental and social issues at the expense of shareholder returns. The directive goes to the heart of a debate that has divided US and European shareholders: the extent to which issues such as climate change or workforce diversity should factor into investment decisions.
“This is about much more than fiduciary responsibility. This is a geopolitical war through the financial markets,” said Sarah Wilson, CEO of British proxy consultant Minerva Analytics. She said Minerva’s clients, mostly based in the European Union and the United Kingdom, want to keep their Russell 3000 shares but worry that Trump’s order and similar actions by Republican-led states could interfere with their investment process.
“Our clients are not rabid socialists in the ranks, they want good returns over time that are well adjusted to risk,” Wilson said.
Trump’s order, among other things, directs the SEC to consider “revising or revoking all rules” related to shareholder proposals, worrying investor activists that one of their main tools to pressure companies could be removed.
Shareholders often exercise their opinions by supporting proxy measures that call for things like limits on CEO pay or on voting for board directors, seen as increased accountability. If the agencies follow Trump’s order, it could serve to reduce shareholder power by making it harder for investors to pressure companies through proxy campaigns.
Sanford Lewis, a lawyer who represents shareholder activists, said that the order is based on the premise that issues such as diversity or the environment do not relate to financial performance, even if many investors and proxy advisors think that strong ESG policies improve the long-term value of a company.
The White House, Lewis said, is “trying to push their point of view on investors.”
Meanwhile, US business trade groups praised the order, saying it would remove politics from business decisions and protect revenues. Charles Crain, managing vice president of policy for the National Association of Manufacturers, said Trump’s planned efforts will guard against the overwhelming influence of firms and address issues including what he called “the over-reliance of investment advisers on these unregulated entities.”
Michael Littenberg, a lawyer at Ropes & Gray, said the order should be seen as part of a wider debate about how to balance robust markets and investor protection.
“We are in the midst of what is likely to be a once-in-a-generation recalibration of governance,” he said.
A White House official, who spoke on condition of anonymity, said the order is intended to strengthen investors’ focus on maximizing returns. “The only thing this executive order interferes with is the monopolistic practices of foreign-owned proxy advisors who seek to advance politically motivated radical agendas,” the official said.
Germany’s Deutsche Boerse bought most of Institutional Shareholder Services’ top proxy advisor 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 reduce shareholder influence on several fronts, including giving boards more control of annual meeting votes and placing new filing requirements on large index fund managers BlackRock and Vanguard if they put pressure on management.
The proxy advisers have been targeted by top CEOs such as Elon Musk and Jamie Dimon, and have drawn support from several Democratic officials and pension fund leaders. Faced with a wider backlash for their support for ESG investing, firms have taken steps such as supporting fewer environmental shareholder resolutions.
Those moves have not spared them continued scrutiny in Washington even before Trump’s order, and from Republican-led states, although the two firms have had some legal success such as beating back a new Texas law that would have restricted their ability to offer ESG advice.
In this sense, Trump’s order continues the pressure to reduce the commitment of shareholders, said Dan Crowley, a partner in the law firm K&L Gates in Washington.
The order “perpetuates the fiction that investors care either about ESG considerations on the one hand or pecuniary return 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)
