Proxy Advisor

A proxy advisor is a firm that analyzes corporate governance issues and provides voting recommendations to institutional investors (pension funds, mutual funds, hedge funds) on how to vote their shares. The two largest US proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis, collectively influence trillions of dollars in shareholder voting. Their recommendations on board elections, executive compensation, and mergers often swing outcomes, making proxy advisors critical gatekeepers in modern corporate governance.

How proxy advisors work

Proxy advisors provide research and voting recommendations on a range of shareholder proposals:

Board elections. Advisors analyze board composition, independence, and track record, and recommend whether shareholders should vote for incumbent directors or for a proxy fight challenger’s slate.

Executive compensation. Advisors evaluate the CEO and executive team’s pay levels, structure, and alignment with company performance. They make say-on-pay recommendations to shareholders.

Merger and acquisition votes. Advisors assess proposed deals, analyzing whether the price is fair and whether the strategic rationale is sound. Their recommendation can swing a shareholder vote on a merger.

Governance proposals. Advisors recommend on proposals to alter the company’s governance structure — adopting or eliminating a poison pill, shifting from a classified board to annual elections, or linking executive pay to ESG metrics.

Shareholder proposals. Advisors recommend on shareholder-sponsored proposals on environmental, social, and governance issues.

An individual investor vote on these issues, multiplied across thousands of companies and millions of shares, is administratively impossible for institutional investors to handle. Proxy advisors offer a scalable solution: conduct the research, provide a recommendation, and let shareholders decide whether to follow it.

The power of the recommendation

In practice, institutional investors follow proxy advisor recommendations with remarkable consistency — often 80–90% of the time, even when the recommendation is nonbinding. Several factors contribute:

Cost and complexity. Conducting independent analysis on thousands of voting issues per year would be prohibitively expensive. Outsourcing to a specialized firm is economical.

Delegation and policy. Many institutions adopt proxy advisor recommendations as a policy, instructing their voting staff to follow them unless there is a specific reason to depart.

Perceived credibility. Proxy advisors are seen as neutral, analytical specialists, whereas companies and activists are self-interested. The advisors’ research is perceived as authoritative.

Inertia. Overriding a proxy advisor recommendation requires active decision-making by the investor. Inertia favors following the recommendation.

As a result, a proxy advisor’s recommendation can be decisive. In a close proxy fight, an ISS endorsement of the activist’s slate often leads to the activist victory; an ISS endorsement of the incumbent board leads to board victory. Companies and activists spend enormous resources lobbying proxy advisors ahead of votes.

Conflicts of interest and criticism

Proxy advisors have come under increasing criticism for several reasons:

Conflicts of interest. ISS and other advisors are owned by large index fund companies (ISS is owned by Morningstar) and provide other services to companies (consulting, governance training). These relationships can create conflicts between their role as neutral voting advisors and their business interests.

Limited independence and resources. Critics argue that proxy advisors’ research is often conducted by junior staff with limited deep knowledge of the company or industry, and that they apply formulaic governance principles without context.

Market power. The dominance of ISS and Glass Lewis creates a duopoly that may not be operating competitively or in investors’ interests. Some argue that their recommendations influence markets in ways that disadvantage companies and activists who lack resources to lobby effectively.

Lack of transparency. Historically, proxy advisors disclosed little about their methodologies, creating a “black box” effect where shareholders do not fully understand the reasoning behind recommendations.

Regulatory lag. For years, proxy advisors operated with minimal SEC oversight. As their power became apparent, the SEC began increasing scrutiny of their disclosure practices and potential conflicts.

Regulatory response

The SEC has recently increased its focus on proxy advisor conflicts and disclosure. Proposed rules would require proxy advisors to:

• Disclose their methodologies and potential conflicts of interest more transparently
• Give companies reasonable opportunity to review and comment on draft recommendations before final publication
• Establish stronger internal procedures to manage conflicts of interest

These proposals remain contested. Companies and governance reformers argue that proxy advisors need stronger oversight; some institutional investors argue that increased regulation could slow down the voting process or bias recommendations in favor of companies.

Beyond voting recommendations

Modern proxy advisors have expanded beyond voting recommendations to offer:

• Engagement services. Facilitating dialogue between investors and companies on governance issues.
• Governance consulting. Advising companies on board structure, compensation design, and disclosure practices.
• Research and analytics. Broad governance analysis and benchmarking services.

These expanded services further blur the line between the advisor’s role as neutral analyst and as a business service provider to the companies on whose governance they advise.

Alternative sources of voting guidance

Some large institutional investors — especially large pension funds and university endowments — have begun to develop independent voting policies and conduct their own governance analysis, rather than defaulting to proxy advisor recommendations. This shift, though gradual, is slowly reducing the dominance of proxy advisors, at least among the largest investors.

See also