President Donald Trump has ordered a review of two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis. These firms advise shareholders on how to vote on corporate matters, which has drawn criticism from figures like Tesla CEO Elon Musk.
The executive order asks the Securities and Exchange Commission to examine how these firms handle diversity, equity, and inclusion (DEI) policies, as well as environmental, social, and governance (ESG) guidelines. Trump’s focus on ISS and Glass Lewis signals concern over what he and some Republicans call “woke capitalism,” where corporations push political agendas that might conflict with traditional economic interests.
As Kerry Berchem, an expert in corporate governance, noted, even if there are no immediate changes, the potential scrutiny could lead these firms to alter their recommendations or improve transparency. This could shift the balance of power toward corporate boards, making them more cautious in their decisions.
ISS and Glass Lewis, influential players in the market, help institutional investors like pension funds make voting decisions. They provide insights on issues like executive pay and corporate mergers. With institutional investors handling trillions of dollars, their reliance on these advisory firms highlights the significant impact they can have on corporate governance.
Recently, there’s been a growing sentiment against the influence of proxy advisory firms. Jamie Dimon, CEO of JPMorgan Chase, has expressed concerns about their impact on shareholder decisions, labeling them as “incompetent.” These criticisms reflect broader worries from some business leaders about the direction of corporate governance and its alignment with shareholder interests.
Data shows that there is increasing public scrutiny of the practices of proxy advisory firms. In 2022, 23 states proposed legislation to regulate their influence more closely. This comes amid lawsuits against ISS and Glass Lewis for alleged antitrust violations, notably by Florida’s Attorney General, James Uthmeier.
While the executive order from Trump may not lead to immediate change, it represents a shift in corporate America’s approach to governance, moving away from DEI and ESG initiatives that many had embraced just a few years ago. The future of proxy advisory firms remains uncertain as they adjust to these pressures.
As Lawrence Elbaum, a partner at Sullivan & Cromwell, stated, while the direction of the firms is still being determined, the review process reflects ongoing concerns about the power these advisory firms wield in the corporate landscape.
In summary, Trump’s executive order highlights a pivotal moment in corporate governance. With influential voices questioning the role of proxy advisory firms, the conversation around corporate responsibility and investment strategies is evolving. The long-term effects are yet to be seen, but the grounding of corporate policies in shareholder interests is likely to become more pronounced.
To understand more about the rise of proxy advisory firms, you can refer to reports from trusted sources like the Securities and Exchange Commission.
