Institutional investors that own between 70 and 80 percent of the market value of US public companies often rely on investment advisers voting on behalf of clients. The SEC and corporate executives are willing to curb the power of the two largest proxy advisory companies, ISS and Glass Lewis. In a new episode of their podcast Capitalisn’t, Kate Waldock and Luigi Zingales discuss the new proposed regulation with SEC commissioner Robert Jackson.





A long-hidden tension surrounding corporate governance is now open and explicit, and the result of this regulatory struggle will change the backbone of American capitalism.


On November 1, the biggest proxy advisory firm, Institutional Shareholder Service (ISS), sued the Securities and Exchange Commission to oppose its newly proposed rules related to proxy advice. The very same day, Glass Lewis, ISS’s main competitor, updated its guidelines for 2020 to increase the monitoring of certain corporate governance decisions, such as companies’ executive compensation programs.


Four days later, the SEC presented a new set of regulations that makes it more difficult for proxy advisers to advise their clients to vote against management. According to Reuters, this new regulation is “one of the biggest wins for the corporate lobby under President Donald Trump.” Robert Jackson, one of the two Democratic SEC commissioners who voted against the new rules, wrote that the new regulation “simply shields CEOs from accountability to investors. Whatever problems plague corporate America today, too much accountability is not one of them.” In a new episode of their podcast Capitalisn’t, Kate Waldock and Luigi Zingales discuss the new SEC regulation with Jackson.



The new rules are subjected to a 60-day public comment period, and ProMarket encourages its readers to send their opinion both to the SEC and to our email address. We will publish the best entries on our website (and the authors of those entries will also win a prize). 


A proxy vote is a vote by a person or a firm on behalf of a shareholder who cannot be present during the decision-making process.


The proposed rules will give the company executives a chance to look at the proxy advisers’ vote proposals before they are distributed to shareholders. Proxy advisory firms are supposed to explain in advance to corporate executives on the basis of which methodology and data they elaborate their voting recommendations. The SEC will also require that proxy advisory firms disclose if they are promoting standards that are very different from the SEC’s requirements and if they have any conflicts of interest.


“If the proposed rules are adopted, proxy advisers would face the prospect of suits against them by issuers that are displeased with their recommendation, and this prospect would operate to discourage recommendations that are unfavorable to managers and to impose costs that would be borne by investors,” Harvard Law School professor Lucian Bebchuk said to Politico.


The proxy advisory industry is a substantial duopoly that, as such, should be regulated, but its very nature is debated. Opinions regarding the advisory industry’s impact on corporate governance are far from unanimous. However, proxy advisory has rapidly become a crucial part of the American financial industry, despite its lack of transparency and its conflicts of interest. 



Securities markets have become increasingly sophisticated, but the vast majority of shareholders lack the time, resources, and skills to master this complexity. Moreover, shareholders do not usually attend all of the annual and special meetings that decide crucial issues of corporate governance, such as executives’ compensation policy and company values. Therefore, institutional investors that own between 70 and 80 percent of the market value of US public companies often rely on investment advisers voting on behalf of clients. Since investment advisers must vote in hundreds or thousands of shareholders meetings all within a few weeks, they also need support. Institutional investors and investment advisers hire a proxy advisory firm to gain some support in the voting decision process.


Very few large institutional investors, such as Blackrock, have the autonomous analytic skills required for elaborate firm-specific research, individual voting strategies, and explicit preferences. All the rest of the shareholders of the largest American corporations rely on someone else’s opinion to make decisions about how to compensate executives and many other issues that are supposed to be the very core of corporate governance.


SEC regulation requires that institutional investors (including mutual funds and index funds) submit a proxy vote for each company in which they own shares. The proxy industry is very concentrated—ISS and Glass Lewis are estimated to have a combined market share of 97 percent. An obvious regulatory question arises: How can only two companies’ recommendations on how to vote maximize returns for all different kinds of shareholders, with different priorities and investment strategies? Many scholars have questioned the opacity of ISS and Glass Lewis, wondering whether it could hide political agendas or conflicts of interest.



ISS is owned by a private equity firm, Genstar, with $17 billion in assets under management, that invests in middle-size companies. Being an investor and the owner of the biggest proxy advisory firm can generate conflicts of interest that are regulated by Genstar Capital’s “policy on mitigation of potential conflict of interest related to Institutional Shareholder Services.” ISS, like other smaller proxy advisors, does not limit its activities to proxy advisory but also offers consultancy services to companies that can generate additional conflicts of interest (terms and conditions are not very clear from its corporate website).


Glass Lewis, the second biggest player, is jointly owned by two Canadian pension funds: Ontario Teachers’ Pension Plan and Alberta Investment Management Corporation. Critics accuse Glass Lewis of promoting political goals—such as gender pay equity—that might conflict with value maximization for shareholders.


The 2020 Glass Lewis guidelines are also very strict on executives’ compensation policies and transparency. For instance, Glass Lewis “will generally recommend voting against the governance committee chair when: (i) directors’ records for board and committee meeting attendance are not disclosed; or (ii) when it is indicated that a director attended less than 75% of board and committee meetings but disclosure is sufficiently vague that it is not possible to determine which specific director’s attendance was lacking.”


In its November 5 release, the SEC argues that “We are concerned about the risk of proxy voting advice businesses providing inaccurate or incomplete voting advice (including the failure to disclose material conflicts of interest) that could be relied upon to the detriment of investors.” The new proposed set of regulations expands the scope of the term “solicitation” to include the proxy advisory services, which leads to an additional regulatory burden for ISS and Glass Lewis.



ISS and Glass Lewis already have some disclosure practices related to conflicts of interest. According to an SEC document, Glass Lewis adds a statement to the front cover of its proxy advice when it determines that there is a potential conflict of interest, and ISS adds a legend indicating that the subject of the advice “may be” a client of ISS’s subsidiary, ISS Corporate Solutions. It is not a big surprise that the SEC recommends increased transparency around conflicts of interest.


However, to curb proxy advisory influence and autonomy is in the interest not only of the integrity of markets but also of CEOs who have been questioning why they should be accountable to opaque advisory firms. As the Financial Times noted, the SEC’s new rules are exactly what the Business Roundtable, a group comprised of the CEO of large corporations, had advocated for years.


Reducing the influence of proxy advisors does not fix what seems to be the industry’s problem: its duopoly structure, as the US Chamber of Commerce claims in a recent publication. If proxy advisory firms will face more paperwork and potential legal consequences in recommending votes that executives don’t like, the most likely outcome will be less-hostile proxy advisers and less-accountable executives.  


The new SEC regulations will enter into effect only at the end of the public consultation process. Their implications will be most significant for US companies’ corporate governance, but they will also have relevant consequences beyond Wall Street.


In a nutshell, the proxy advisory issue is plain and simple: Regulators forced institutional investors to vote, and this new regulation created a new industry that, for a number of reasons, became a duopoly. The two corporations that dominate the market offer services whose utility and transparency are questionable. Policymakers and regulators are addressing the problem with more regulation, instead of more competition.


This is exactly the same dilemma that we face with digital platforms and industries such as digital advertising: Should policymakers regulate Google, Facebook, and Amazon more strictly? Or should they focus on breaking up Big Tech and force interoperability to let new entrants challenge incumbents?


The proxy advisory debate highlights the risks of the first option very clearly.


The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.