President Donald Trump has initiated a comprehensive review of two prominent proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, following concerns from notable figures in Corporate America, including Tesla CEO Elon Musk. This executive order highlights Trump’s intention to scrutinize the practices of these firms, particularly regarding their use of diversity, equity, and inclusion (DEI) frameworks and environmental, social, and governance (ESG) criteria.
Proxy advisory firms play a crucial role by advising major institutional investors, including pension funds, on how to vote on significant corporate decisions during shareholder meetings. Their recommendations can sometimes irritate corporate executives or other shareholders. The new directive tasks the Securities and Exchange Commission with a detailed examination of how ISS and Glass Lewis handle DEI and ESG strategies in their advisory services.
Experts in corporate governance note that even if immediate rules change isn’t anticipated, the order has the potential to influence the behavior of boards, institutional investors, and the advisory firms themselves. Firms may opt to revise their recommendations or increase transparency to align with regulatory expectations, suggesting a shift in the landscape of corporate governance.
The order seems to resonate with Musk, who has openly criticized the advisory firms for their past recommendations, particularly those against corporate choices such as executive compensation packages for him at Tesla. Prominent figures on Wall Street, including JPMorgan Chase CEO Jamie Dimon, have also raised alarms about the influence of these proxy advisory companies, describing their impact as “incompetent.”
The executive order articulates a growing concern that ISS and Glass Lewis leverage their substantial influence to promote politically motivated agendas, particularly focused on DEI and ESG principles. This scrutiny aligns with a broader conservative pushback against what has been termed “woke capitalism,” where corporations purportedly pursue social and political objectives that may conflict with traditional shareholder interests.
While the order may not lead to immediate changes in proxy advice, it sends a clear message of potential regulatory scrutiny, which could modify the dynamics between corporate boards and proxy advisory firms. ISS and Glass Lewis, both offering insights to institutional investors managing trillions of dollars, have become increasingly critical players in shaping corporate governance.
Founded in 1985 and 2003 respectively, ISS and Glass Lewis provide guidelines on matters such as executive pay, board structures, climate policies, and major corporate decisions like mergers and acquisitions. Critics, including Dimon, have previously questioned whether the governance of American corporations should be influenced by for-profit entities located outside the U.S.
Reactions from the advisory firms reflect their awareness of the heightened scrutiny. ISS affirmed its commitment to ethical and professional standards, emphasizing that it does not dictate governance standards. Similarly, Glass Lewis acknowledged the clarity provided by the order regarding the administration’s expectations while reaffirming its ethical operational standards.
The executive order is not the first instance of pressure on proxy advisory firms. Recent legal action from Florida’s attorney general against ISS and Glass Lewis, alleging violations of state antitrust laws, has also spotlighted concerns surrounding their influence. Additionally, Trump’s directive calls for the Federal Trade Commission to investigate potential antitrust infringements by these firms.
In conclusion, while the immediate repercussions of the executive order remain unclear, analysts suggest it marks a significant moment in the ongoing debate regarding the roles of proxy advisory firms in corporate governance. The outcomes of government reviews and investigations will likely shape the future operational frameworks of ISS and Glass Lewis as they navigate this evolving regulatory landscape.
