President Donald Trump on Thursday mandated a review of two main proxy advisory firms — enterprises that guide shareholders on voting — that had previously drawn the criticism of Tesla CEO Elon Musk and others in Corporate America.
The executive directive specifically names the two largest entities in the marketplace: Institutional Shareholder Services (ISS) and Glass Lewis.
Proxy advisory companies such as ISS and Glass Lewis furnish suggestions on how large investors like pension plans ought to vote on corporate matters and at shareholder assemblies — sometimes to the dissatisfaction of other shareholders or even corporate leaders.
Trump’s executive directive instructs the Securities and Exchange Commission to examine ISS and Glass Lewis, particularly scrutinizing their utilization of diversity, equity, and inclusion (DEI) and environmental, social, and governance policies (ESG).
“Even if no immediate rules evolve, boards, institutional investors, and the firms themselves take note,” Kerry Berchem, a partner at Akin and co-leader of the firm’s corporate governance and activism practice, told CNN. “This can affect conduct indirectly — firms may modify suggestions, boost openness, or adjust methods to evade conflict with watchdogs.”
The order is a success for Musk, who has complained about ISS and Glass Lewis’ part in advising shareholders. The advisory firms have earlier suggested that investors oppose corporate actions at Tesla like granting Musk a bigger pay deal.
Some on Wall Street have also previously expressed worry about proxy advisory firms’ impact on shareholders’ choices. JPMorgan Chase CEO Jamie Dimon has argued against the companies, deeming them “incompetent.”
Why is Trump focusing on ISS and Glass Lewis?
ISS and Glass Lewis “utilize their considerable clout to promote and prioritize radical politically-driven objectives,” including DEI and ESG, according to the order.
These proxy advisory companies have offered analysis and counsel that incorporates ESG investing, which has been criticized by many conservatives.
Under pressure from the Trump administration, Corporate America has seen a widespread shift away from DEI and ESG policies that were more broadly accepted a few years ago.
“President Trump and many Republican allies have made clear their apprehensions about ‘woke capitalism’ — the notion that corporations, investors, or advisors push social or political objectives (like ESG, DEI, climate policies) that he deems contrary to shareholder financial interests or established US economic priorities,” Berchem said.
“President Trump’s action won’t instantly alter proxy advice, but it signals examination, surely unnerves the sector and subtly shifts the balance of power toward corporate boards,” she added.
What do ISS and Glass Lewis do?
ISS, established in 1985, and Glass Lewis, established in 2003, guide major institutional investors like BlackRock, pension funds, and a variety of other asset managers. ISS and Glass Lewis are held by corporations in Germany and Canada, respectively.
Institutional investors who oversee up to trillions of dollars can put funds into so many corporations that, concerning annual shareholder meetings and ballots, they require greater perception on what to decide.
Proxy advisory firms perform research and suggest how to vote on decisions including, but not limited to, executive remuneration, board setup, climate and ecological matters, and prospective mergers and acquisitions.
“I doubt whether American corporate governance ought to be decided by for-profit international entities that might possess their own firm beliefs about what constitutes sound corporate governance,” Dimon wrote in his 2023 yearly message to shareholders.
What’s ahead?
A representative for ISS stated in a report that the organization recognizes the executive order and will assess it as it ponders forthcoming steps: “ISS does not dictate or establish corporate governance standards and remains deeply dedicated to operating professionally, ethically, independently, and in the prime interest of our clients, as we have done previously.”
A representative for Glass Lewis stated in a report: “While we are still evaluating the entire order, we value the clarity it affords in grasping what the administration anticipates of all firms in the proxy advisory domain. Glass Lewis has consistently operated with the highest ethical standards with our clients being the focus of all we undertake.”
Trump’s executive order underscores just how powerful ISS and Glass Lewis have grown, Lawrence Elbaum, an M&A partner at Sullivan & Cromwell and co-head of its shareholder activism defense practice, informed CNN.
“It’s closely following endeavors by different states and other groups to try to restrain ISS and Glass Lewis’ sway,” Elbaum remarked. “So I am not taken aback to observe the executive order.”
Lawyers from Sullivan & Cromwell are representing Trump in a New York criminal matter. Elbaum is not connected with the legal defense.
The proxy advisory firms have faced pressure in recent months. Florida’s attorney general, James Uthmeier, is suing ISS and Glass Lewis, asserting the companies are breaching state antitrust regulations.
Trump’s executive order also directs the Federal Trade Commission to investigate whether ISS and Glass Lewis are in breach of antitrust statutes.
Nevertheless, Elbaum advised caution, until any governmental reviews are concluded, it is difficult to ascertain what precisely will happen to the advisory firms.
“I would assert this EO is an initial push toward a ‘victory’ for Musk and Dimon, but ultimately we shall not know whether there has been a ‘victory’ until this unfolds further as the governmental agencies carry out their assignments,” Elbaum concluded.
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