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Shareholder advisory firms are bracing for a relentless attack on their business, as Donald Trump’s return to the White House heralds a tilt in the balance of power in corporate governance.
The so-called proxy advisers, which make recommendations for shareholders on all manner of corporate governance issues from executive pay to proposed mergers, have long been the bane of C-suite executives at major publicly traded companies.
But in recent years they have attracted scrutiny and criticism from conservatives who accuse proxy advisers of supporting environmental, social and governance (ESG) initiatives in corporate policy.
Now, Trump’s win and Republican control of Congress appear poised to empower their critics, including CEOs like JPMorgan’s Jamie Dimon, who want to see restrictions imposed on the firms.
The business is dominated by two firms, Institutional Shareholder Services and Glass Lewis. Both declined a request for comment.
Proposals circulating in Congress would require proxy advisory firms to register with the Securities and Exchange Commission (if they have not already) and establish that they could be held liable by the agency for false or misleading statements. A conservative think-tank has accused proxy advisers of advancing ESG policies.
And the National Association of Manufacturers, a lobbying group that represents ExxonMobil and other big companies, on Friday revived litigation against ISS, the world’s biggest shareholder advisory firm, appealing a court ruling that struck down restrictions on shareholder advisory firms.
Restricting these businesses “is a significant part of what we have to do, which is clean up the capital markets space,” Republican Congressman Bill Huizenga said in an interview. Huizenga is one of the Republicans in the running to be chair of the House Financial Services Committee.
“We need to have an agenda that is moving forward quickly to countermand a lot of what I would view as the damage that Gary Gensler has done over the last number of years,” he said, referring to the current SEC chair. “Part of that has been the weaponisation of the proxy advisers.”
Project 2025, the Heritage Foundation’s conservative policy manifesto, accuses ISS and Glass Lewis of using “heavily weighted ESG criteria in directing the proxy votes of pension plans”. The Heritage paper recommended legislation that would create more competition for ISS and Glass Lewis.
Perhaps one of the firms’ greatest risks is that they made an enemy of someone now in a position of extreme influence: Elon Musk. Earlier this year, both ISS and Glass Lewis recommended rejection of Elon Musk’s unprecedented bonus at Tesla that was valued at $56bn.
Tesla pushed back and Musk ultimately won the shareholder vote on his pay. He has now ingratiated himself with Trump and is now poised to become one of the most senior and prominent members of his new administration.
Historically, US Republicans have sided with companies in demanding restrictions on ISS and its main rival Glass Lewis. But another typically-conservative constituency, activist investors like Carl Icahn, have championed the services while relying on their positions in corporate takeover battles.
Democrats, meanwhile, have typically sided with big pension funds in California and New York that rely on ISS and Glass Lewis for their governance analysis on issues that come to a vote at annual shareholder meetings.
“We value [their] research because it lays out the information in a clear and consistent way so that our team can apply our own proxy voting guidelines,” said Michael Garland, assistant comptroller for corporate governance at the New York City retirement systems.
If ISS and Glass Lewis were to face regulations, he added, “we would be concerned about anything that would compromise the independence of the research”.
In 2020, during Trump’s first term in office, the SEC adopted rules to regulate ISS and Glass Lewis that could have compromised their research. The 2020 rules would have defined instances where omitting information could constitute fraud, among other things.
But these rules were rescinded in 2022 by Joe Biden’s SEC, setting up a few years of calm for ISS and Glass Lewis while Democrats were in power in Washington.
For at least a decade, companies have complained about how ISS and Glass Lewis make recommendations. Dimon has been especially critical, saying in 2015 that investors who follow ISS and Glass Lewis recommendations are “lazy”.
Earlier this year, Dimon again blasted ISS and Glass Lewis for “undue influence” over companies and raised concerns about their foreign ownership. Deutsche Börse AG is ISS’s majority owner and Glass Lewis is owned by Peloton Capital, a Canadian private equity firm.
Activists investors have defended proxy advisers when the 2020 SEC rules were being written. “We think the proposed rules are a big step backward rather than forward in the area of corporate governance,” Carl Icahn said in a 2020 letter to the SEC. Elliott Management also raised “significant concerns” about the SEC rules.
Congressman Bryan Steil sponsored a bill that clamped down on proxy advisers and passed the House in September as part of a larger legislative package. “I am optimistic we could see this legislation move sooner rather than later,” Steil said in an interview, referring to the new Congress.
