ISS (Institutional Shareholder Services) and Glass Lewis are the two dominant proxy advisory firms serving institutional investors. ISS holds approximately 40% of the U.S. proxy advisory market, while Glass Lewis holds roughly 35%, collectively influencing voting on material governance issues across thousands of public companies annually.
ISS vs Glass Lewis: Market Position and Competitive Dynamics
ISS (Institutional Shareholder Services) and Glass Lewis are the two dominant proxy advisory firms serving institutional investors globally. ISS, owned by Constellation Software since 2014, controls approximately 40% of the U.S. proxy advisory market by vote recommendations issued. Glass Lewis, majority-owned by Ontario Teachers' Pension Plan (OTtP) and Alberta Investment Management Corporation (AIMCo) since 2018, holds roughly 35% market share. Together, they recommend voting positions on material governance, compensation, and shareholder proposals affecting thousands of public companies annually, making them de facto gatekeepers of institutional voting behavior.
The concentration of proxy advisory authority among two firms has generated sustained regulatory attention. In 2015, the SEC began scrutinizing potential conflicts of interest, particularly where proxy advisors provided consulting services to companies while simultaneously voting recommendations to their institutional investor clients. By 2021, the SEC published guidance requiring proxy advisors to disclose conflicts, methodologies, and the basis for material recommendations. Both ISS and Glass Lewis expanded compliance infrastructure and published detailed governance voting guidelines in response.
How Do ISS and Glass Lewis Approach Governance Analysis?
ISS employs quantitative screening models developed over three decades. The firm applies standardized board independence metrics, compensation ratio benchmarks, and audit committee oversight criteria. When evaluating executive pay, ISS uses say-on-pay models calibrated to peer group compensation, stock performance, and pay-for-performance alignment. The methodology prioritizes consistency and reproducibility, allowing institutional investors to predict voting recommendations across portfolio holdings.
Glass Lewis emphasizes engagement-based research and case-by-case materiality assessment. The firm conducts interviews with company management, reviews proxy statement disclosures, and assesses governance quality within industry context. Glass Lewis recommendations on environmental and social governance issues tend toward more detailed analysis of business impact and risk materiality rather than formulaic thresholds. This approach generates more nuanced but less predictable voting recommendations.
Both firms maintain public voting guidelines updated annually. ISS publishes guidelines for U.S., international, and emerging market holdings. Glass Lewis publishes separate guidelines for U.S. and international markets. Institutional investors typically review these guidelines to align proxy advisor recommendations with their own governance frameworks, though adoption rates vary significantly by asset class and investor sophistication.
Why Do Institutional Investors Subscribe to Proxy Advisors?
Large pension funds, sovereign wealth funds, and endowments manage exposure across hundreds or thousands of portfolio companies. Voting on governance, executive compensation, director elections, and shareholder proposals requires specialized research capacity that most asset owners cannot build internally. ISS and Glass Lewis provide standardized vote recommendations, allowing institutional investors to:
Maintain consistent governance frameworks across diversified holdings without duplicating research effort. Reduce operational cost by automating routine voting on non-material proposals. Manage fiduciary voting obligations transparently through documented voting rationales. Coordinate voting positions across multiple asset managers within a single institution.
CalPERS ($469 billion AUM as of June 2024), one of the largest U.S. pension funds, publicly subscribes to proxy advisory services while maintaining independent governance staff to assess material votes. The Norwegian Government Pension Fund Global ($1.32 trillion AUM, managed by Norges Bank Investment Management), the largest sovereign wealth fund by published AUM, uses proxy advisory research as input to internal governance decision-making but does not outsource voting. The Canada Pension Plan Investment Board ($425 billion AUM) similarly employs proxy advisor recommendations as research tools rather than binding vote directives.
However, the practice of wholesale adoption of proxy advisor recommendations has declined among sophisticated institutional investors. Large asset owners increasingly customize recommendations, particularly on environmental and social governance issues where company-specific risk assessment diverges from standardized scoring models. This shift reflects both regulatory pressure and the recognition among institutional investors that proxy advisor recommendations may not align with long-term capital allocation objectives.
What Are the Regulatory and Governance Risks?
The concentration of voting influence among ISS and Glass Lewis has attracted sustained scrutiny from the SEC, the Department of Labor, and international regulators. Key concerns include:
Systemic Voting Patterns: When two firms recommend voting positions on 75% of U.S. public company shareholder meetings, the potential for synchronized voting behavior emerges. If both ISS and Glass Lewis recommend voting against a proposal, institutional adoption rates often exceed 90%, effectively determining outcomes regardless of underlying shareholder preferences.
Conflicts of Interest: ISS historically provided consulting services to portfolio companies while simultaneously voting recommendations to institutional investor clients. This created potential conflicts where ISS recommendations might reflect consulting client preferences rather than shareholder interests. The SEC's 2021 guidance required disclosure of such conflicts, and both ISS and Glass Lewis have since separated consulting and proxy advisory divisions or expanded conflict disclosure protocols.
Methodology Opacity: Proxy advisor voting recommendations rely on models that may not be fully transparent to institutional investors. ISS, in particular, applied proprietary screening criteria that were not disclosed until regulatory pressure mounted. Glass Lewis has maintained greater methodological transparency but still applies weighting assumptions that institutional investors cannot fully audit.
Limited Accountability: Proxy advisors are not subject to the same regulatory oversight as registered investment advisors or broker-dealers. When voting recommendations prove materially incorrect or conflict with shareholder interests, institutional investors have limited recourse mechanisms. The SEC has considered but not yet implemented registration requirements for proxy advisors.
In 2021, the SEC published guidance clarifying that proxy advisors have obligations to disclose conflicts of interest, the basis for recommendations, and any material errors. Both ISS and Glass Lewis expanded disclosure in response, but the regulatory framework remains less stringent than for registered investment advisors.
How Does Proxy Advisory Influence Compare Across Institutional Investor Types?
The influence of ISS and Glass Lewis recommendations varies significantly by institutional investor type and governance sophistication. Large pension funds and sovereign wealth funds typically treat proxy advisor research as one input among many governance considerations. The Universal Owners vs Asset Owners distinction becomes relevant here: universal owners managing diversified, long-term capital may weight proxy advisor recommendations differently than specialized asset managers with concentrated mandates.
CalPERS, the California Public Employees' Retirement System, employs over 20 governance professionals dedicated to assessing significant votes, particularly on director elections and compensation matters. The firm subscribes to ISS for vote recommendations but regularly deviates based on internal analysis. In 2023, CalPERS voted against proxy advisor recommendations on approximately 12% of governance proposals, according to internal voting records.
The Norwegian Government Pension Fund Global has published detailed governance voting principles that diverge materially from ISS and Glass Lewis methodologies on environmental governance matters. The fund emphasizes climate transition risk assessment and sustainable business model evolution, areas where proxy advisor scoring models provide limited differentiation. Norway's sovereign wealth fund has explicitly stated that proxy advisor recommendations serve as background research rather than primary voting determinants.
Smaller institutional investors and single versus multi-family offices with limited governance resources often adopt proxy advisor recommendations more wholesale. Regional pension funds and smaller endowments typically lack capacity to conduct independent governance research and rely heavily on ISS or Glass Lewis recommendations.
What Is the Relationship Between Proxy Voting and Stewardship Strategy?
Proxy voting represents one component of broader stewardship and engagement strategy. The distinction between divestment versus engagement becomes relevant to proxy voting practice: institutional investors using voting primarily for engagement purposes may apply different voting criteria than those using votes as exit signals.
Institutional investors increasingly view proxy voting as part of long-term engagement strategy rather than annual voting ritual. The Principles for Responsible Investment (PRI), which counts over 5,000 signatory institutions managing more than $65 trillion in AUM, emphasizes integration of stewardship activities including proxy voting, shareholder engagement, and collaborative advocacy.
ISS has expanded stewardship advisory services beyond vote recommendations, offering engagement platforms and governance research. Glass Lewis similarly provides engagement tracking and collaborative voting initiatives. However, the core business model—generating vote recommendations for institutional investor clients—remains the primary revenue driver for both firms.
How Do Proxy Advisors Influence Long-Term Capital Allocation?
Proxy advisor recommendations can materially influence long-term capital allocation decisions through multiple channels. First, voting recommendations on director elections affect board composition and, indirectly, management strategic decisions. When ISS and Glass Lewis recommend voting against board nominees, institutional investors often comply, reducing director reelection rates below 90% in contentious situations.
Second, say-on-pay recommendations influence executive compensation structures and incentive alignment. Proxy advisor recommendations against executive pay packages can force boards to restructure compensation, affecting management retention and strategic continuity.
Third, recommendations on environmental and social governance shareholder proposals can signal institutional investor priorities. When proxy advisors recommend voting for climate transition proposals or diversity disclosure initiatives, these votes carry signaling value that influences management strategy and future capital allocation.
However, the causal relationship between proxy voting and long-term capital allocation outcomes remains contested. Some research suggests that proxy advisor recommendations have limited influence on shareholder value creation when institutional investors deviate from recommendations on material issues. The endowment model, which emphasizes long-term value creation and accepts short-term governance flexibility, suggests that rigid proxy advisor adherence may conflict with multi-decade capital allocation objectives.
What Are the Implications for Institutional Investors?
For CIOs and institutional investment committees, the ISS versus Glass Lewis choice reflects broader governance and stewardship philosophy. If the institution emphasizes standardized, replicable governance frameworks, ISS infrastructure may provide operational efficiency and institutional alignment. If the institution emphasizes customized assessment of material risks and engagement-based stewardship, Glass Lewis research may better support decision-making, albeit with greater operational complexity.
Large institutions managing $10 billion or more in AUM increasingly subscribe to both ISS and Glass Lewis simultaneously, using both as research inputs while maintaining independent voting protocols. This approach allows governance teams to assess divergent perspectives and exercise discretion on material votes.
Smaller institutions or those with limited governance capacity should evaluate whether proxy advisor subscription provides sufficient value relative to cost. Many regional pension funds and smaller endowments could reduce proxy advisor costs by focusing subscriptions on material holdings and conducting limited independent research on company-specific governance concerns.
The regulatory environment continues to evolve. Potential future SEC rulemaking could require proxy advisors to register as investment advisors, disclose voting recommendation accuracy metrics, or implement governance review mechanisms for material recommendations. Institutions should monitor regulatory developments and assess whether current proxy advisor relationships align with anticipated compliance requirements.
For how sovereign wealth funds make money, proxy voting and governance stewardship represent value creation mechanisms beyond pure financial return optimization. Sovereign wealth funds increasingly view stewardship as integral to long-term capital preservation and risk management. Proxy advisor relationships should support this strategic objective rather than function as administrative voting infrastructure.