Businesses and watchdogs alike have rightfully criticized the major asset managers for their efforts to push ESG (environmental, social, and governance) investing criteria, but the proxy advising services have escaped scrutiny.
Until now. According to a leading editorial in the Wall Street Journal:
Corporations these days face an onslaught of environmental, social, and governance (ESG) proxy resolutions from progressive investors. But the real driving force behind this campaign is the proxy advisory duopoly, Glass Lewis and Institutional Shareholder Services (ISS). On Thursday the House Financial Services Committee will shine a much-needed spotlight on these firms and their conflicted business models.
Proxy advisory firms can provide valuable services to investors. Yet Glass Lewis and ISS, both foreign-owned, boast outsize clout in U.S. corporate elections and make up an estimated 97% of the proxy advisory market. A 2018 article in the Harvard Law School Forum on Corporate Governance found the two firms can swing between 10% and 30% of shareholder votes. Another study by the American Council for Capital Formation found that 175 asset managers, controlling more than $5 trillion in assets, voted with ISS more than 95% of the time.
ISS and Glass Lewis act as a liaison for corporations and activists. They advise institutional investors how to vote on shareholder proposals and board of director positions, and they advise companies how to maintain a positive image with institutions. That usually means providing concessions to left-wing groups. Lawmakers are beginning to take notice.
“Each of you offers a substantial number of services related to ESG investing,” 21 state Attorneys General wrote to the duopoly firms in January. “The value of these services would be undermined if you were to admit in your advisory services that ESG factors are not material to a firm’s financial performance…
Former Securities and Exchange Commission Chairman Jay Clayton sought to rein in the duopoly by defining proxy advisory recommendations as “solicitations” under securities laws. This would have allowed them to be sued for making factual errors or misleading statements. His rules also required the firms to disclose their conflicts of interest.
ISS sued to block the rule, but why oppose the rules if it is as transparent as it claims? In any case, the Democratic SEC majority under Chairman Gary Gensler rescinded the rules in 2022. The duopolists want to impose onerous reporting burdens on public companies, ranging from climate to racial equity, while avoiding accountability and disclosure themselves.
All of which means there’s an opening for Congress to codify Mr. Clayton’s reforms. The states are also on the case, with AGs noting in their letter that proxy firms may be violating their contractual obligations to pension funds to maximize the “economic value of the investments.” Strive has launched a competing proxy advisory service, and antitrust action might be warranted.
ISS CEO Gary Retelny recently wrote an apologia in the Harvard Law School Forum on Corporate Governance claiming that “our proxy advice is apolitical.” That’s not what the public record shows. Corporate boards and investment advisers can be sued if they violate their fiduciary duty. Why should the duopoly get a pass?
