Dive Brief:
- President Donald Trump signed an executive order last week aimed at “foreign-owned and politically-motivated proxy advisors,” and specifically named Institutional Shareholder Services and Glass Lewis as the EO’s targets.
- The EO, issued Dec. 11, directs the Securities and Exchange Commission, Department of Labor and Federal Trade Commission to make a variety of changes to the shareholder process and review ongoing state-level antitrust investigations into proxy advisors to “determine if there is a probable link” between their conduct and violations of federal antitrust laws.
- Among the directives, Trump’s EO calls for the SEC to review “all rules, regulations, guidance bulletins and memoranda related to proxy advisors,” and consider revising or rescinding any that are inconsistent with the order, especially ones which “implicate” DEI and ESG policies.
Dive Insight:
ISS and Glass Lewis collectively make up over 90% of the proxy advisor market, accounting for 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 have grown to collectively account for around 97% of the market share by 2024, according to a separate post from Harvard Law’s corporate governance forum.
Trump’s Dec. 11 order accuses the two firms of using their market share “to advance and prioritize radical politically-motivated agendas” like DEI and ESG.
“Unbeknownst to many Americans, two foreign-owned proxy advisors, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, play a significant role in shaping the policies and priorities of America’s largest companies through the shareholder voting process,” the order states.
In addition to reviewing all SEC publications that implicate DEI and ESG, the order directs SEC Chair Paul Atkins to consider revising or rescinding Rule 14a-8, which governs the shareholder proposal process; assess whether proxy advisors should be classified as registered investment advisers; and consider requiring additional disclosures for proxy advisors, particularly on ESG and DEI.
Last week’s order also directs the FTC to investigate whether proxy advisory firms “engage in unfair methods of competition or unfair or deceptive acts or practices and requires the Secretary of Labor to make changes to the Employee Retirement Income Security Act of 1974 to focus on pecuniary factors.
ISS said in a statement Monday that it will engage “constructively” with the SEC, DOL and FTC to “ensure each has an accurate understanding of ISS’ work.”
“Our clients are sophisticated institutional investors who determine how they wish to vote in accordance with their own differentiated investment objectives by selecting from a range of voting policies that guide our work on their behalf, or by creating customized policies for advice tailored to their own particular needs,” an ISS spokesperson said in a statement Monday.
“ISS does not dictate or set corporate governance standards and remains firmly committed to operating professionally, ethically, independently, and in the best interests of our clients, as we have done historically,” the proxy advisor said.
Shareholder advocacy nonprofit As You Sow said Friday that a potential repeal of Rule 14a-8, and potential changes to the shareholder proposal process, “entirely ignores the financial benefits and pecuniary outperformance resulting from shareholder proposals.”
“In a public market, investors appropriately raise issues of concern with companies and seek material information to inform their capital investment decisions,” As You Sow President and Chief Counsel Danielle Fugere said in an emailed statement. “Similarly, hiring proxy advisors to gather information and make recommendations is not a sinister plot that must be investigated and curbed, but an important mechanism to inform the sound investment of capital.”
The order comes after a federal judge issued a preliminary injunction on a Texas state law targeting proxy advisory firms — including ISS and Glass Lewis — that was ruled to be a form of viewpoint discrimination that “compels private speakers to adopt and parrot the government’s viewpoint on hotly contested topics.”
Following the injunction, Texas AG Ken Paxton started a new probe into the two advisory firms, which is likely implicated by last week’s order. Attorneys general in Florida and Mississippi have also started probes into the advisory firms over their DEI and ESG policies.
Glass Lewis did not respond to requests for comment in time for publication.
