Speculation abounds that President Trump will issue executive orders restricting proxy-advisory firms including Institutional Shareholder Services and Glass Lewis. The Wall Street Journal suggested that the executive orders “could include a broad ban on shareholder recommendations or an order blocking recommendations on companies that have engaged proxy advisers for consulting work.” The question is, why would board members and company management want this?
Several news reports point to years-old complaints from conservatives that the proxy advisors and large institutional fund managers “often recommend votes or side against boardroom decisions or directors.” Conservatives further argue that proxy advisors have put too much emphasis on climate and social issues.
Recent research, however, suggests that these complaints might be exaggerated.
A recent study from the Council of Institutional Investors (CII) titled “Proxy Advisors and Institutional Investors: Facts and Clarifications,” points out:
“In 2024, Institutional Shareholder Services (ISS) and Glass Lewis recommended voting against 8 percent and 11 percent, respectively, of say-on-pay proposals at S&P 500 companies, yet just 1 percent of such say-on-pay proposals received less than majority shareholder support. If investors were simply following proxy advisors’ recommendations, the votes against such proposals would be much higher.”
Although pay proposals are a very small percentage of votes that proxy advisors recommend against, it could be argued that the high-profile negative recommendation that proxy advisors levied against Tesla CEO Elon Musk’s $1 trillion pay package this month has re-ignited this debate. Musk called the proxy advisors that recommended voting “No” for his pay package “corporate terrorists,” but shareholders approved the compensation plan anyway. This questions the level of true influence proxy advisors have over shareholder votes.
In fact, as the CII study states, “to the extent that some investors more frequently vote in accord with the research and recommendations provided by proxy advisory firms, that is driven by the recommendations being consistent with those investors’ preferences, rather than the proxy advisor’s recommendations driving investors’ voting decisions.” This appears to have been true in the case of Elon Musk’s pay package.
So where do most corporate directors stand on the idea of executive orders restricting proxy advisor recommendations? The jury is still out. If boards and management are in alignment with their shareholders and wiling to communicate with them properly, there really should be no need for the president to restrict proxy advisors. Research already shows that ISS and Glass Lewis recommend voting in line with management proposals more than 90 percent of the time; that shouldn’t be overly disruptive to management’s plans. The proxy voting process can certainly be improved, but restricting the type of advice proxy advisors can give shareholders isn’t necessarily the best way to do it.
Corporate board members might consider taking the following actions regarding proxy advisory services instead of lobbying others to make changes on their behalf:
• Emphasize the importance of board and management building trust and influence with shareholders. Instead of trying to ban proxy advisor recommendations, boards and management could work harder to show that their recommendations are more critical to company growth during the voting process. Building trust with shareholders will help influence how they vote on critical issues. How much time and effort are boards putting into gaining influence with shareholders? If you don’t build trust, you can’t really complain if shareholders trust consultants.
• Improve the clarity and accessibility of board and management voting recommendations. Sometimes shareholders don’t know as much as they should about upcoming voting recommendations. For extremely important votes, it might be worth providing more extensive information about the impact of certain proposals and making sure that shareholders receive your recommendations and understand what’s at stake. Shareholders are getting what they perceive as clarity from the proxy advisors, so boards and management may need to clarify things even further to get the votes they want.
• Develop a strategy for how your board will communicate with shareholders when directors and management have proposal disagreements. In those rare cases where board members and management disagree publicly, it might be helpful to have a third party—e.g., proxy advisors—give investors advice on the situation. If proxy advisors are eliminated, both board members and management would have to use resources to make their case to investors. Boards should develop a crisis management plan that deals with this situation.
