Proxy giants in the crosshairs

The nation's two dominant proxy advisory firms -- Institutional Shareholder Services Inc. and Glass Lewis & Co. -- have for decades advised and sometimes voted the shares of some of the largest hedge funds, mutual funds, and other organizations in shareholder votes on key issues and personnel.

But during the last few years, the companies find themselves under siege - targeted by an executive order by President Donald Trump, sued by Republican state attorneys general for prioritizing "ideological considerations" over their clients' financial interests, and dropped by two major banks that aim to replace them with AI-driven internal systems.

To their Republican critics, the proxy advisory firms use their power to push diversity, equity, and inclusion as well as environmental, social and governance changes while corporate executives have balked at their recommendations against higher executive compensation.

Five states with Republican legislatures have passed laws requiring proxy advisory firms to file disclosures if their recommendations are not based solely on financial interests, though the companies have successfully blocked the laws on First Amendment grounds thus far.

Some of those same states have filed lawsuits against ISS, and in the cases brought by Florida and Missouri, both leading firms, accusing them of deceptive trade practices, largely on the same grounds related to ESG or DEI recommendations. Those lawsuits, filed in each state's courts, are pending.

Board-friendly shifts

Opponents of the Trump administration initiatives and state actions say the efforts go beyond opposition to the ESG or DEI recommendations and are part of their longstanding effort to limit the ability of shareholders to challenge company executives and boards on a broader range of issues.

"They want to cut down on institutional investor efforts that are going to challenge management or hold management accountable," said Jill E. Fisch, a professor of business law at the University of Pennsylvania Law School. "All of that is designed to make voting challenges harder."

Elizabeth K. Bieber, a partner with Freshfields who advises companies on corporate governance, said the Trump administration's push and state actions had a minor impact on this year's proxy voting.

"The regulatory and political momentum regarding proxy advisory firms generated significant headlines and attention in 2026, but relatively little immediate change in shareholder voting behavior, or in the voting outcomes anticipated prior to the proxy season," she said.

Fisch agreed that there was little impact on proxy voting this year.

"But I don't know if that's a long-term takeaway," she said. "There were a lot of companies that were taking a cautious approach. They didn't want to be the first ones out there."

SEC reduces its role

SEC Chairman Paul S. Atkins, who has pushed for corporate-friendly changes since he took over the commission as part of efforts that he says will encourage more companies to go public, instructed staff not to object to company decisions to exclude shareholder proposals from proxy materials - a significant departure from a rule first adopted in 1942.

Under the new system, disputes between shareholders and boards would be resolved through litigation, although there were only six lawsuits and most settled before a judge ruled.

Atkins pronounced his experiment a success in a Thursday speech at the Society for Corporate Governance meeting in Nashville.

"My greatest takeaway is that the Commission staff's interposition between companies and shareholder proponents is unnecessary to effectively and efficiently resolve whether shareholder proposals should be included in proxy statements," he said.

"The system -- when left to function without regulators calling balls and strikes -- functioned as it should, impelling companies and shareholders to engage with one another directly," Atkins added. "Ultimately, this season proved both a turning point and a proof of concept."

He suggested that the SEC's Division of Corporation Finance should not be involved at all in the future, although no change is expected for the 2027 proxy season.

No big changes - yet

Marc S. Gerber, a partner with Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates who handles corporate governance issues, said companies were "judicious" about when to exclude shareholder proposals.

"Ultimately, the number of shareholder proposals that went to a vote this year was only down slightly from last year," he said.

Gerber added that if ISS and Glass Lewis didn't exist, institutional investors would have to do more work themselves or find a new proxy advisory firm.

While JPMorgan Chase & Co. and Wells Fargo & Co.'s investment management divisions have decided to do the work, "not every institutional investor has the ability to take on that additional cost," he said.

Gerber said the influence of the proxy advisory firms can be overstated, noting that many companies have won key votes despite their opposition.

"ISS and Glass Lewis have some influence but their recommendations do not carry the day every time or even the majority of the time," he added.

Fisch said the impact of shareholder proposals is limited, as there simply are few of them - much less those that are approved over the opposition of management and the board.

"It's a handful of proposals," she said. "They're not really a big deal. They are not what keeps companies from doing IPOs."

A decline in influence?

David A. Bell, a corporate partner with Fenwick & West LLP, said the proxy advisory firms still have "meaningful influence," as investors look to them for voting information and guidance, but that it is starting to decline.

Glass Lewis announced it plans to abandon traditional "one-size-fits-all" voting benchmarks for the 2027 proxy season, instead opting for differentiated, client-specific voting frameworks. ISS is supplementing its benchmark advice to clients.

"Those changes themselves appear to be driven both by regulatory scrutiny (of the advisory firms, and how their institutional investors use their services) as well as evolution of the stewardship practices of institutional investors," Bell wrote in an email.

Edwin Hu, an associate professor at the University of Virginia School of Law who wrote a recent paper with two other professors on the proxy advisory firms, said those changes could have a significant impact.

"That shift alone may reshape voting outcomes, and it also makes concerns about proxy advisors' ideology, which is a central motivation for many of these proposals, considerably less relevant," he said.