Congress must act to bring real accountability to proxy advisory firms

Most Americans have never heard of Institutional Shareholder Services (ISS) or Glass Lewis, yet these obscure entities wield enormous power over their retirement savings and the future of U.S. capital markets. If you have a 401(k), a pension, or own a mutual fund, chances are your investments are being influenced by these two firms that you probably know nothing about, operating with practices that you never approved. For decades, we fought in Congress to protect Main Street investors and ensure our capital markets remain the envy of the world. But these proxy advisory firms represent a dangerous blind spot — unaccountable power brokers controlling trillions of dollars in investment decisions while operating in the shadows with virtually no regulatory oversight.

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ISS and Glass Lewis control roughly 97% of the proxy advisory market. Their recommendations on how shareholders should vote on corporate matters influence voting decisions by pension funds, mutual funds and other institutional investors that manage the retirement savings of millions of hardworking Americans. Given their influence, it’s unsurprising that multiple state attorneys general, including the attorney general of our home state of Missouri, are investigating ISS and Glass Lewis.

We applaud President Trump’s recent executive order that recognized the risks that ISS and Glass Lewis pose to U.S. capital markets and investors. We are pleased that the order requires the Department of Justice and Federal Trade Commission to review the aforementioned state investigations and examine the federal antitrust implications of ISS and Glass Lewis. We are also encouraged that SEC Chairman Paul Atkins is focusing attention on the weaponization of corporate governance. His leadership is essential to addressing how proxy advisors have distorted the system. But his work can only go so far without congressional action to ensure the SEC has clear statutory authority to bring these firms under proper regulatory control.

The regulatory vacuum surrounding proxy advisors is astounding. While public companies must comply with extensive SEC disclosure requirements and investment advisors face strict fiduciary standards, proxy advisory firms face almost no oversight. They make recommendations that can make or break a company’s strategic initiatives and determine whether boards get elected — all without having to demonstrate the accuracy of their research or answer for their mistakes. We understand that countless CEOs have discovered factual inaccuracies in proxy reports only after the damage was done. When proxy advisors get it wrong, there are no consequences.

The lack of meaningful regulation of proxy advisors means that there is also no constraint on their ability to promulgate arbitrary standards that fly in the face of actual legal standards — for example, requiring that companies that do not obtain super-majority approval on their Say on Pay votes demonstrate “responsiveness” the following year, even though the vote is by law designated as advisory in nature, with a simple majority threshold. This is just another example of how corporate policies are increasingly shaped not by what most shareholders want, but by the desires of a vocal minority of politicized shareholders aided and abetted by proxy advisors.

The conflicts of interest are equally troubling. These firms sell their voting recommendations to institutional investors while simultaneously selling consulting services to the very companies they’re supposed to evaluate objectively. It’s like having the same firm grade students’ papers while being paid by those students to help them write better essays. How can we trust recommendations from firms with such obvious conflicts?

Here’s another cause for concern: Both ISS and Glass Lewis are owned by foreign companies. Are we comfortable having foreign entities exert such an outsized influence over American corporations and the retirement savings of American workers? This arrangement raises serious questions about whose interests these firms truly serve.

Perhaps most troubling is how proxy advisors have become weapons for activists pursuing political and social agendas rather than maximizing shareholder value. These firms have increasingly pushed these agendas despite the fact that they have little or nothing to do with financial performance and everything to do with ideology.

Politicized investors, often holding minimal stakes in companies, exploit proxy advisors’ recommendations to hijack corporate decision-making and advance political objectives that ordinary investors never signed up for.

The real victims are everyday Americans whose retirement accounts, mutual funds and pension plans are used as pawns in these battles. When proxy advisors recommend voting against sound business strategies or qualified board members based on checkbox criteria rather than merit and performance, it’s ordinary investors who suffer through diminished returns and reduced growth.

This concentration of unaccountable power also discourages companies from going public. Why would entrepreneurs subject themselves to the costly compliance burdens of being a public company only to have two foreign-owned firms with no skin in the game dictate their corporate governance? The decline in IPOs isn’t just about regulatory costs. It’s about the hostile environment that proxy advisors have helped create, where management teams spend more time checking boxes for advisory firms than running their businesses.

It’s long past time for Congress to restore accountability and put investors first. The current system serves proxy advisory firms and politicized investors — not the millions of Americans whose financial futures depend on well-governed, profitable companies.