Shining Light on Proxy Advisers Would Boost Accountability

A long-simmering question about the power of proxy advisory firms is finally boiling over.

On July 1, a federal appeals court in Washington, DC, invalidated SEC rules that had modestly increased oversight of proxy advisers. The court ruled that the Securities and Exchange Commission lacked authority to treat their voting recommendations as regulated “solicitations” under the securities laws.

Just weeks earlier, Texas enacted a sweeping new law requiring proxy advisers to explain how non-financial factors such as ESG affect their voting recommendations—especially when opposing management proposals.

These two developments point in opposite directions. One removes federal oversight. The other imposes state regulation. But both underscore the same concern: Proxy advisory firms wield enormous influence over corporate governance, often without transparency, accountability, or due process.

During a recent hearing before the House Financial Services Committee, where I testified on auditing, a fellow witness raised a deeper concern. His company had received an adverse recommendation from a proxy adviser—without notice, dialogue, or a chance to correct the record. When he voiced his frustration, a member of Congress quipped: “Welcome to my world. The L.A. Times publishes things right before a vote. They don’t let me see it in advance..”

It was a moment of levity, but also a moment of confusion. Journalism operates under the First Amendment, where open discourse—even when flawed—is part of the democratic process and requires robust protection. Proxy voting, by contrast, is a function of securities regulation. It governs how trillions of dollars in shareholder capital are stewarded in public markets. The stakes are different. The standards should be, too.

Proxy advisers are obscure firms with disproportionate influence over how shareholders vote. For millions of Americans whose retirement savings are tied up in mutual funds and pension plans, how these firms vote—often automatically—can directly affect long-term returns. Yet outside boardrooms and compliance departments, few people even know they exist.

Their influence has drawn criticism from business leaders across the political spectrum and from pragmatic policymakers in Washington. Proxy advisers could add great value to corporate governance—but only if they operate with greater transparency and accountability.

To understand how we got here, it’s worth recalling how proxy advisers rose to such prominence. In the 1970s and 1980s, regulators began requiring pension plans to vote on corporate governance matters. Later reforms pressured mutual fund managers to vote client shares while avoiding conflicts of interest. The result: widespread outsourcing of voting decisions to third-party proxy firms.

Today, just two firms—Institutional Shareholder Services and Glass Lewis—control 97% of the proxy advisory market. Their standardized “house views” on issues such as executive pay, board composition, and environmental, social, and governance disclosures allow them to scale across thousands of companies. But this one-size-fits-all model often sacrifices nuance, accuracy, and fairness.

Their recommendations carry real weight. In contested director elections, proxy adviser guidance can sway outcomes by 64% to 73%. Yet their credibility is often doubted. A 2020 survey by the Society for Corporate Governance found that 42% of public companies had identified factual errors or analytical flaws in proxy adviser reports. The society submitted 56 such cases to the SEC, underscoring systemic issues.

Despite their influence, proxy advisers operate with minimal oversight. They are not fiduciaries. They are not required to verify findings with the companies they assess. They rely heavily on automated tools and operate on lean budgets. They are susceptible to pressure from activists and political trends—backing ESG priorities one year, pulling back the next. Most troubling, they are not required to disclose conflicts of interest, even though they also sell consulting services to the very companies they evaluate.

Efforts to fix these flaws have been inconsistent. In 2020, the SEC adopted rules requiring proxy advisers to share draft reports with companies and allow responses. The rules also aimed to curb “robovoting”—the practice of asset managers blindly following proxy guidance. But in 2022, the SEC reversed course, citing insufficient justification.

That reversal left a regulatory vacuum, which the recent federal court cases sustains. Some proxy advisers now offer tailored voting guidelines—for example, faith-based or board-centric options—but these tools only work if asset managers use them thoughtfully. Too often, they don’t. Delegation without diligence undermines the fiduciary duties owed to investors.

Millions of retail investors have no idea how their shares are voted on their behalf—often by algorithms, not people. Shareholders deserve better.

It’s time to restore accountability. Proxy advisers should be required to disclose their methodologies, correct factual errors before publication, and justify recommendations with sound economic analysis. They must disclose and manage conflicts of interest. Asset managers, in turn, must be expected to exercise judgment, rather than outsource it blindly.

A growing consensus holds that the proxy advisory industry has outgrown its regulatory framework. But the solutions are within reach: registration, disclosure, a ban on robovoting, and basic standards of accuracy and fairness.

That moment in the hearing—comparing proxy advisers to newspaper columnists—was telling. It revealed a tendency to conflate political discourse with fiduciary responsibility. But proxy voting isn’t politics. It’s a regulated mechanism for investor governance. It demands transparency, diligence, and integrity.

If proxy advisers evolve—and if regulators act—we can bring sunlight to a system that too often operates in the shadows. That’s a win not just for shareholders and companies, but for the capital markets themselves.

Author Information

Lawrence A. Cunningham is director of the John L. Weinberg Center for Corporate Governance at University of Delaware.

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