Proxy Advisory Firms

Every public company must let its shareholders vote on things like electing directors, approving executive pay, and ratifying mergers. Most shareholders, especially large fund managers holding thousands of stocks, don't have time to research every ballot item at every company they own. Proxy advisory firms — the two largest are Institutional Shareholder Services (ISS) and Glass Lewis — fill that gap: they research the issues at each company's annual meeting and publish a recommended vote (for, against, abstain) on each item.

Because so many institutional investors follow these recommendations closely, sometimes voting almost mechanically in line with them, proxy advisors have outsized influence over outcomes that are formally decided by shareholder vote — director elections, pay packages, merger approvals, and shareholder proposals on topics like climate disclosure. A negative recommendation from ISS on an executive pay plan, for instance, can swing enough votes to defeat it even though the advisor itself owns no shares.

This influence has made proxy advisors a target of criticism from companies and regulators, who argue that outsourcing voting judgment to two firms concentrates too much power over corporate governance in institutions that aren't themselves accountable to shareholders.