Dive Brief:
- Texas Attorney General Ken Paxton announced a probe into the nation’s largest proxy advisors, Institutional Shareholder Services and Glass Lewis, on Tuesday.
- Paxton said he had presented civil investigative demands to the firms “for potentially misleading institutional investors and public companies by issuing voting recommendations that advance radical political agendas,” according to the release.
- The Texas probe comes shortly after a federal court issued a preliminary injunction on the state’s latest anti-ESG law, which targeted proxy advisory firms and restricted use of ESG factors. The law was passed earlier this year, and ISS and Glass Lewis sued in July to stop the law from going into effect on Sept. 1.
Dive Insight:
Paxton’s office said in the release that it is targeting the two firms for their collective influence in the international proxy advisory market and alleged they “routinely issue proxy voting recommendations in conflict with the best financial interests of their fiduciaries.” The office cited recommendations in favor of management decisions to implement DEI practices, gender-based hiring practices and climate policies.
ISS and Glass Lewis commanded 48% and 42%, respectively, of the proxy advisory market’s assets under advice in 2021, according to the Harvard Law School Forum on Corporate Governance. The two firms grew to collectively account for 97% of the market share by 2024, according to a separate post from Harvard Law’s corporate governance forum.
“Proxy firms like Glass Lewis and ISS too often sacrifice sound financial guidance to advance left-wing political goals, cheating not only investors but the American people as a whole,” Paxton alleged in the release. “Proxy advisors play a massive role in shaping corporate governance decisions in our country, affecting tens of billions of dollars.”
An ISS spokesperson told ESG Dive Thursday that the firm is aware of the announcement, and “ISS is confident that it has complied with all applicable laws and will vigorously defend itself from any allegations of wrongdoing.”
The Texas state legislature passed Senate Bill 2337 earlier this year, that would require proxy advisors who advise companies headquartered, incorporated in or re-domesticating to Texas to make that advice solely on financial interests and publish a disclosure if ESG or diversity, equity and inclusion concerns play a role in the advice, law firm Foley & Lardner said in an analysis.
ISS and Glass Lewis argued in their lawsuit that the Texas law would violate the firms’ First Amendment right to free association and the First Amendment’s prohibition on viewpoint discrimination. The proxy advisors also argued that the law is unconstitutionally vague and preempted by the Employee Retirement Income Security Act of 1974.
In late August, U.S. District Court Judge Alan Albright of Texas’ Western District granted a preliminary injunction and ruled that the proxy firms are likely to succeed on the merits of their arguments on the law’s ERISA preemption and vagueness. Albright also ruled that the plaintiffs are also likely to succeed on the merits of their First Amendment challenge to the law.
Texas is not the only state going after ISS and Glass Lewis over their DEI and ESG policies. Florida Attorney General James Uthmeier announced a probe into the firms over such policies in March, and Mississippi Secretary of State Michael Watson said in May that the state’s securities division had begun investigating the proxy advisors over their ESG policies.
Glass Lewis did not immediately respond to a request for comment.
