President Donald Trump on Thursday ordered a assessment of two main proxy advisory companies — firms that advise shareholders on votes — that had beforehand drawn the ire of Tesla CEO Elon Musk and others in Corporate America.
The govt order singles out the 2 greatest gamers available in the market: Institutional Shareholder Services (ISS) and Glass Lewis.
Proxy advisory companies like ISS and Glass Lewis present suggestions on how main buyers like pension funds ought to vote on company choices and at shareholder conferences — generally to the consternation of different shareholders and even company executives.
Trump’s govt order directs the Securities and Exchange Commission to assessment ISS and Glass Lewis particularly scrutinizing their use of variety, fairness and inclusion (DEI) and environmental, social and governance insurance policies (ESG).
“Even if no immediate rules change, boards, institutional investors and the firms themselves take notice,” Kerry Berchem, a accomplice at Akin and co-leader of the agency’s company governance and activism apply, advised NCS. “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’ position in advising shareholders. The advisory companies have previously recommended that buyers vote towards company choices at Tesla like giving Musk a bigger pay package deal.
Some on Wall Street have additionally beforehand voiced concern about proxy advisory companies’ sway over shareholders’ choices. JPMorgan Chase CEO Jamie Dimon has argued towards the firms, calling them “incompetent.”
Why is Trump specializing in ISS and Glass Lewis?
ISS and Glass Lewis “use their substantial power to advance and prioritize radical politically-motivated agendas,” together with DEI and ESG, in line with the order.
These proxy advisory companies have provided analysis and recommendation that comes with ESG investing, which has been slammed by many conservatives.
Under strain from the Trump administration, Corporate America has seen a broad shift away from DEI and ESG insurance policies that have been extra broadly embraced a few years in the past.
“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 stated.
“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, based in 1985, and Glass Lewis, based in 2003, advise main institutional buyers like BlackRock, pension funds and a vary of different asset managers. ISS and Glass Lewis are owned by firms in Germany and Canada, respectively.
Institutional buyers that handle as much as trillions of {dollars} can spend money on so many firms that, in the case of annual shareholder conferences and votes, they want extra perception on what to resolve.
Proxy advisory companies conduct analysis and advise on how one can vote on choices together with, however not restricted to, govt compensation, board construction, local weather and environmental points 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 stated in a assertion that the corporate is conscious of the chief order and can assessment it because it considers subsequent 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.” Glass Lewis didn’t reply to a request for remark.
Trump’s govt order highlights simply how influential ISS and Glass Lewis have develop into, Lawrence Elbaum, an M&A accomplice at Sullivan & Cromwell and co-head of its shareholder activism protection apply, advised NCS.
“It’s on the heels of efforts by different states and other constituencies to try to curb ISS and Glass Lewis’ influence,” Elbaum stated. “So I’m not surprised to see the executive order.”
Attorneys from Sullivan & Cromwell are representing Trump in a New York felony case. Elbaum will not be affiliated with the authorized protection.
The proxy advisory companies have come underneath strain in latest months. Florida’s legal professional normal, James Uthmeier, is suing ISS and Glass Lewis, alleging the businesses are in violation of state antitrust legal guidelines.
Trump’s govt order additionally directs the Federal Trade Commission to research whether or not ISS and Glass Lewis are in violation of antitrust legal guidelines.
Still, Elbaum cautioned, till any authorities opinions are accomplished, it’s exhausting to know what precisely will occur to the advisory companies.
“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 stated.