Recent news reports have made it increasingly obvious that lasting reform of the proxy advisory system will require congressional action. Proxy advisory actions — recommendations to investors, retirement funds, and large asset managers on how to vote their shares, and their clients’ shares, in public companies — directly affect the financial well-being of more than 100 million Americans.
For years, proxy advisory services have been provided by a duopoly comprising Glass Lewis and Institutional Shareholder Services, with a combined share of 97 percent of the market. This system is a classic game of “other people’s money.” The proxy advisors make recommendations that do not affect their own financial interests, allowing them to indulge their political preferences with little concern for the fiduciary interests of retirees and shareholders.
The result has been a steady stream of endorsements by these two firms of proxy proposals promoting “environmental, social, and governance” objectives, the central examples of which are climate-related mandates, fossil fuel divestments, racial and gender quotas for corporate boards, and other such blatant political initiatives often inconsistent with the maximization of shareholder value.
Congressional action is needed, because reform efforts by the Securities and Exchange Commission can run afoul of court interpretations of existing law, and because the policy preferences of the SEC itself are driven by the changing identities of the commissioners as Beltway political fortunes shift between the parties.
Indeed, it is because of deeply perverse past rulemaking at the SEC, both formal and informal, that the proxy advisory process was transformed into one in which large institutional shareholders in a given company have been virtually required to accept the recommendations of the proxy advisors. In particular, an important SEC rule (Rule 14a-8) was changed in November 2021 to require firms to consider resolutions of “wider societal interest.” The upshot of this system: Utterly without statutory authority, the proxy advisory duopoly became a de facto regulator of public companies.
The SEC under the first Trump administration attempted to constrain the influence of Glass Lewis and Institutional Shareholder Services over voting outcomes. In 2020, the SEC adopted several amendments to its proxy solicitation rules that would have required proxy advisors to notify public companies of their recommendations in advance and allow companies to contest the recommendations ahead of shareholder meetings.
These rule changes were never enforced, however, as they were quickly rescinded under Biden-era SEC Chairman Gary Gensler’s leadership and later struck down by the D.C. Circuit Court. The court’s ruling stymied the SEC’s ability to regulate proxy advisors, concluding that proxy advice does not constitute “solicitation” of shareholder votes and is not subject to SEC regulation under the Securities Exchange Act of 1934.
Illustrating again the need for congressional action, the SEC’s “wider societal interest” requirement was eliminated in February 2025. This seesawing of a crucial dimension of financial regulatory policy represents a fundamental threat to the financial interests of large numbers of investors, retirees, and firms. Because retirement funds and institutional investors have fiduciary responsibilities to their clients, litigation related to the rule changes and its attendant costs have predictably impeded investors’ ability to operate. Various states have also threatened investigations, litigation and disinvestment over such efforts to dilute the fiduciary responsibilities of pension funds and to discriminate against important local industries.
The private sector also is beginning to turn away from the proxy advisor game. The three largest asset managers — BlackRock, State Street, and Vanguard — have already retreated from their previous enthusiasm for ESG investing. BlackRock announced it is adding Egan Jones as a third proxy advisor option, expanding its Voting Choice initiative by adding two new Egan Jones proxy policies, one of which “does not prioritize environmental or social goals.” BlackRock’s emphasis on economic returns rather than ESG objectives is a frontal assault on the proxy consulting duopoly and its preferences for politicized proxy proposals.
Nonetheless, the central problem remains: The proxy advisors continue to exercise excessive power in the public markets, and they are uniquely unaccountable. Several members of the House Financial Services Committee have introduced legislation and discussion drafts to remedy the issue. Most notably, Rep. Bryan Steil (R-Wis.) has put forward draft legislation which would amend the Securities Exchange Act to provide the SEC explicit authority to regulate proxy advisory firms, authority that the SEC currently lacks under a statute almost a hundred years old, under the D.C. Circuit ruling.
Private-sector reform efforts are underpinned by a fundamental recognition that artificial constraints on investment options — “divest from fossil fuels!” — cannot improve investment returns to a portfolio over the longer term and are inconsistent with the diversification needed to maximize expected returns for given levels of risk. But private-sector reform is not a substitute for congressional action because of the vagaries of SEC rulemaking and the ever-shifting political environment in Washington. Only Congress, with the power to write laws, can bring clarity and stability to the proxy advisory system.
Benjamin Zycher is a senior fellow at the American Enterprise Institute.
