House Committee Examines Shareholder participation in Corporate Governance
Today,the House Committee on Financial Services,led by Chairman French Hill (AR-02) held a hearing examining Rule 14a-8 under the Securities Exchange Act of 1934,which governs shareholder participation in corporate governance. Members evaluated the influence of proxy advisory firms on capital markets, specifically their effect on corporate governance and shareholder voting outcomes.
On the impact of Sarbanes-Oxley and Dodd-Frank on Annual Proxy Statements:
“Together, these two laws [sarbanes-Oxley and Dodd-Frank] have driven up costs, increased the length and complexity of proxy statements, expanded the disclosure and oversight process, and fundamentally changed much of the shareholder access to the proxy system,” said chairman Hill.
On the Cost of Needless and Irrelevant Shareholder Proposals:
“Under this flawed system, companies are too often forced to waste valuable time and resources fighting proposals that are irrelevant to the company’s bottom line, hurting investors and workers alike,” said Congressman Hill.
Concerns Raised Over Proxy Advisory Firms and Public Market Access for Small Businesses
Recent discussions in Congress have highlighted concerns that proxy advisory firms and activist investors may be deterring businesses, notably small and medium-sized companies, from pursuing initial public offerings (IPOs).
according to Housing and Insurance Subcommittee Chair Mike Flood (NE-01), the decision for private companies considering an IPO often hinges on whether the benefits of accessing public markets outweigh the associated compliance risks. However, he notes that the shareholder proposal process is increasingly dominated by activist investors pushing political agendas unrelated to long-term value creation.Coupled with the significant influence and potential conflicts of interest within proxy advisory firms, this creates uncertainty and added costs that can make public markets less appealing.
House Small Business Committee Chairman Roger Williams (TX-25) echoed these concerns, stating that the combined dynamics of activist investors and proxy advisory firms create an habitat that discourages companies from going public.
Decline in US Public Companies Raises Concerns
The number of companies listed on U.S. public exchanges has declined by more than 50% since the mid-1980s, raising concerns about capital formation and economic efficiency. this trend was highlighted by SEC Commissioner Hester Peirce, who said that inefficient regulatory barriers hinder companies from accessing public markets,ultimately harming the public.
Peirce pointed to several factors discouraging public stock offerings, including heightened reporting standards under the Sarbanes-Oxley Act of 2002 and the U.S.’s unique litigation environment, which she described as imposing a “tort tax” on public corporate offerings, mergers, and disclosures. These factors create significant obstacles for companies considering going public.
Historically, shareholder proposals faced significant hurdles. Until 2017, no environment-related shareholder proposal received majority support over board opposition at any of the 250 largest publicly traded U.S. companies, demonstrating the challenges in enacting change through shareholder activism.
Mrs. Ferrell Keel, Partner at Jones Day, also contributed to the discussion, though specific details of her comments were not provided in the source material.