Scott, Banking Republicans Raise Concerns Over Proxy Advisors’ Influence of U.S. Public Companies
“While your influence over corporate governance has grown substantially, your practices have increasingly departed from sound economic principles, undermining the interests of shareholders and the competitiveness of U.S. capital markets,” said the Chairman and his colleagues.
Washington, D.C. – Senate Banking Committee Chairman Tim Scott (R-S.C.), Subcommittee on Securities, Insurance, and Investment Chairman Mike Rounds (R-S.D.), and Protecting Main Street Investors Working Group Chairman Bill Hagerty (R-Tenn.) are raising concerns over proxy advisors’ influence over the corporate governance of U.S. public companies. In a letter to the leaders of Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co., the Banking Committee Republicans highlight the lack of transparency, accountability, and oversight facing the firms while their decisions impact U.S. public policy on important economic, environmental, and social issues.
The senators are demanding information to better understand the firms’ foundations for recommendations, the potential for conflicts of interest, and the processes used to develop and apply voting policies. Key excerpts from the letter are below:
Ideologically Driven Recommendations Untethered from Economic Analysis
“Public admissions from your leadership – in congressional testimony and in appearance before national media – reveal that your firms routinely issue vote recommendations, particularly on environmental, social, and political proposals, without any underlying economic analysis. For example, an ISS representative admitted on CNBC that ‘[t]he investment thesis is something we leave to the investors.’ Similarly, at a hearing before the U.S. House Committee on Financial Services last Congress, a Glass Lewis executive confirmed that the firm does not generally conduct economic analyses of shareholder proposals before issuing recommendations. These admissions are both remarkable and deeply troubling, especially given that your firms indirectly control roughly 40% of shareholder votes.”
Conflicts of Interest and Market Coercion
“ISS’s dual role as both a proxy advisor and a governance consultant presents inherent conflicts of interest. Specifically, it incentivizes companies to purchase expensive consulting services from ISS to secure favorable voting recommendations, which distorts governance decisions and undermines shareholder trust. ISS and Glass Lewis also have policies that effectively require supermajority support (i.e., greater than 70 and 80% of votes cast, respectively) for shareholder votes on executive compensation… These arbitrary standards effectively override state corporate law and punish companies for failing to meet thresholds that have no basis in statute or regulation. Compounding this issue is the fact that public companies that do not meet the proxy advisors’ supermajority thresholds often purchase consulting services from ISS to ensure a favorable say-on-pay recommendation the following year.”
Foreign Ownership and Political Bias
“ISS is 80% owned by a German entity, Deutsche Börse, which has stated that it aims to ‘allocate capital to sustainable initiatives,’ that ‘[c]ompanies are responsible – not just for their business but also for the transition to a sustainable society,’ and that its ‘acquisition of ISS is a further demonstration of Deutsche Börse’s commitment to ESG [environmental, social, and governance].’ Glass Lewis is owned by a Canadian private equity firm, Peloton Capital Management, whose website explicitly states that ‘people come before profits’ and that ESG remains a ‘key factor in investment decision-making.’ These public declarations by your parent companies reveal a foundational orientation toward ESG advocacy, which appears to influence the recommendations your firms provide.”
Lack of Transparency and Politicization of Proxy Recommendations
“A review of the ISS Voting Analytics platform suggests partisan patterns in ISS’s recommendation history. Specifically, it appears that ISS did not recommend a vote in favor of even one environmental, social, or political shareholder proposal submitted by a conservative proponent in either 2023 or 2024, while it appears to have recommended a vote in favor of the majority of all other environmental, social, and political proposals in both years. Glass Lewis’s refusal to publicly disclose its voting recommendations makes similar analysis impossible, unless costly reports are purchased on a case-by-case basis. This lack of transparency prevents shareholders, regulators, and policymakers from properly scrutinizing your firm’s impact on capital markets.”
Retaliatory and Ideologically Prescriptive Practices
“For years, ISS and Glass Lewis have applied one-size-fits-all board diversity mandates, often issuing adverse recommendations against directors when demographic quotas were not met. This has occurred regardless of industry-specific talent pipelines or company-specific circumstances—ignoring commendable, proactive efforts by individual firms to recruit, promote, and maintain diverse talent.”
To read the full letter, click HERE.
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