There is growing speculation that President Trump will issue an executive order restricting proxy advisory firms such as Institutional Shareholder Services and Glass Lewis. The Wall Street Journal suggested that the executive order “could include a broad ban on shareholder recommendations or an order blocking recommendations for companies that hire proxy advisers for consulting work.” The question is why board members and company management would want this.
Several news reports have pointed to long-standing complaints from conservatives that proxy advisors and large institutional fund managers “often oppose board decisions and directors, or recommend votes.” Conservatives also argue that proxy advisers are focusing too much on climate and social issues.
However, recent research suggests that these complaints may be overstated.
A recent study by the Council of Institutional Investors (CII), “Proxy Advisers and Institutional Investors: Facts and Explanations,” points out that:
“In 2024, Institutional Shareholder Services (ISS) and Glass Lewis recommended 8% and 11% votes against S&P 500 companies' say-on-pay proposals, respectively, but only 1% of such say-on-pay proposals received support from less than a majority of shareholders. Had investors simply followed their proxy advisors' recommendations, the votes against these proposals would have been higher.”
Salary proposals represent only a small portion of votes that proxy advisers recommend against, but the high-profile negative recommendation they imposed on Tesla CEO Elon Musk's $1 trillion compensation package this month may have reignited the debate. Musk called his proxy advisors “corporate terrorists” who recommended a “no” vote on his compensation proposal, but shareholders approved it anyway. This calls into question how much real influence proxy advisors have over shareholder votes.
In fact, as the CII study states, “To the extent that some investors vote more frequently in accordance with the research and recommendations provided by proxy advisory firms, this is driven less by the proxy advisors' recommendations driving investors' voting decisions and more by the alignment of those recommendations with investors' preferences.” This appears to have been the case with Elon Musk's salary package.
So where do most corporate directors stand on the idea of an executive order restricting proxy advisor recommendations? The jury is still out. If the board and management are aligned with shareholders and seek to communicate appropriately with them, there should be no need for presidents to restrict voting advisory firms. Research already shows that ISS and Glass Lewis recommend voting in line with management's recommendations more than 90% of the time. It should not unduly interfere with management's plans. While the proxy voting process can certainly be improved, limiting the type of advice that proxy voting advisers give to shareholders is not necessarily the best approach.
Rather than lobbying others to make changes on their behalf, corporate board members may consider taking the following steps regarding proxy advisory services:
• Emphasize the importance of boards and management building trust and influence with shareholders. Rather than trying to prohibit recommendations from proxy advisors, boards and management could do more to demonstrate during the voting process that their recommendations are more important to the company's growth. Building trust with shareholders can help you influence how they vote on important issues. How much time and effort does the board spend to gain influence over shareholders? Without building trust, if shareholders trust consultants, they can't complain.
• Improve the clarity and accessibility of board and management voting recommendations. Stockholders may know less about future voting recommendations than they should. For highly important votes, it may be worthwhile to provide more extensive information about the impact of a particular proposal so that shareholders receive the proposal and understand what is at stake. Shareholders are getting a sense of transparency from their proxy advisors, so boards and management teams may need to make things even clearer to get the votes they want.
• Develop a strategy for how the board will communicate with shareholders when there is disagreement between directors and management on proposals. In rare cases where board members and management publicly disagree, it may be helpful to have a third party, such as a proxy voting advisor, advise investors about the situation. If proxy advisors are eliminated, both board members and management teams will need to spend resources making their case to investors. The board should develop a contingency plan to address this situation.
