President Donald Trump on Thursday ordered a review of two major proxy advisory firms — companies that advise shareholders on votes — that had previously drawn the ire of Tesla CEO Elon Musk and others in Corporate America.
The executive order singles out the two biggest players in the market: Institutional Shareholder Services (ISS) and Glass Lewis.
Proxy advisory firms like ISS and Glass Lewis provide recommendations on how major investors like pension funds should vote on corporate decisions and at shareholder meetings — sometimes to the consternation of other shareholders or even corporate executives.
Trump’s executive order directs the Securities and Exchange Commission to review ISS and Glass Lewis specifically scrutinizing their use of diversity, equity and inclusion (DEI) and environmental, social and governance policies (ESG).
“Even if no immediate rules change, boards, institutional investors and the firms themselves take notice,” Kerry Berchem, a partner at Akin and co-leader of the firm’s corporate governance and activism practice, told CNN. “This can influence behavior indirectly — firms may alter recommendations, increase transparency, or adjust methodologies to avoid conflict with regulators.”
The order is a win for Musk, who has bemoaned ISS and Glass Lewis’ role in advising shareholders. The advisory firms have previously recommended that investors vote against corporate decisions at Tesla like giving Musk a larger pay package.
Some on Wall Street have also previously voiced concern about proxy advisory firms’ sway over shareholders’ decisions. JPMorgan Chase CEO Jamie Dimon has argued against the companies, calling them “incompetent.”
Why is Trump focusing on ISS and Glass Lewis?
ISS and Glass Lewis “use their substantial power to advance and prioritize radical politically-motivated agendas,” including DEI and ESG, according to the order.
These proxy advisory firms have offered research and advice that incorporates ESG investing, which has been slammed by many conservatives.
Under pressure from the Trump administration, Corporate America has seen a broad shift away from DEI and ESG policies that were more widely embraced a few years ago.
“President Trump and many Republican allies have made clear their concerns about ‘woke capitalism’ — the idea that corporations, investors, or advisors push political or social agendas (like ESG, DEI, climate policies) that he views as contrary to shareholder financial interests or traditional US economic priorities,” Berchem said.
“President Trump’s move won’t immediately change proxy advice, but it signals scrutiny, assuredly rattles the industry and subtly shifts the power dynamic toward corporate boards,” she added.
What do ISS and Glass Lewis do?
ISS, founded in 1985, and Glass Lewis, founded in 2003, advise major institutional investors like BlackRock, pension funds and a range of other asset managers. ISS and Glass Lewis are owned by companies in Germany and Canada, respectively.
Institutional investors that manage up to trillions of dollars can invest in so many companies that, when it comes to annual shareholder meetings and votes, they need more insight on what to decide.
Proxy advisory firms conduct research and advise on how to vote on decisions including, but not limited to, executive compensation, board structure, climate and environmental issues and potential mergers and acquisitions.
“I question whether American corporate governance should be determined by for-profit international institutions that may have their own strong feelings about what constitutes good corporate governance,” Dimon wrote in his 2023 annual letter to shareholders.
A spokesperson for ISS said in a statement that the company is aware of the executive order and will review it as it considers next steps: “ISS does not dictate or set corporate governance standards and remains firmly committed to operating professionally, ethically, independently, and in the best interests of our clients, as we have done historically.”
A spokesperson for Glass Lewis said in a statement: “While we are still reviewing the full order, we appreciate the clarity it provides in understanding what the administration expects of all firms in the proxy advisory space. Glass Lewis has always operated with the highest ethical standards with our clients being at the center of everything we do.”
Trump’s executive order highlights just how influential ISS and Glass Lewis have become, Lawrence Elbaum, an M&A partner at Sullivan & Cromwell and co-head of its shareholder activism defense practice, told CNN.
“It’s on the heels of efforts by different states and other constituencies to try to curb ISS and Glass Lewis’ influence,” Elbaum said. “So I’m not surprised to see the executive order.”
Attorneys from Sullivan & Cromwell are representing Trump in a New York criminal case. Elbaum is not affiliated with the legal defense.
The proxy advisory firms have come under pressure in recent months. Florida’s attorney general, James Uthmeier, is suing ISS and Glass Lewis, alleging the companies are in violation of state antitrust laws.
Trump’s executive order also directs the Federal Trade Commission to investigate whether ISS and Glass Lewis are in violation of antitrust laws.
Still, Elbaum cautioned, until any government reviews are completed, it’s hard to know what exactly will happen to the advisory firms.
“I would say this EO is an initial momentum toward a ‘win’ for Musk and Dimon, but ultimately we won’t know whether there’s been a ‘win’ until this plays out further as the government agencies do their work,” Elbaum said.
