A proxy advisor is an independent research firm that analyzes shareholder proposals and management recommendations, then issues voting guidance to institutional investors. Major providers include Institutional Shareholder Services (ISS) and Glass Lewis, collectively influencing trillions in assets.
What is a proxy advisor?
A proxy advisor is an independent research firm that analyzes shareholder proposals and management recommendations, then issues voting guidance to institutional investors. Major providers include Institutional Shareholder Services (ISS) and Glass Lewis, collectively influencing trillions in assets. Proxy advisors employ governance specialists who evaluate board composition, executive pay, shareholder resolutions, and other governance matters, delivering their recommendations in advance of annual shareholder meetings.
Institutional investors—pension funds, endowments, insurance companies, and other asset owners managing long-term capital—rely on proxy advisor research to inform voting decisions on corporate governance issues. However, the concentration of advisory influence in two firms has created governance tensions and triggered regulatory intervention globally.
How does the proxy advisory market work?
Institutional Shareholder Services and Glass Lewis dominate the sector. According to the SEC's 2020 Report on Proxy Advisory Firms, these two firms collectively controlled approximately 97% of the U.S. proxy advisory market. ISS, owned by Vestar Capital Partners (acquired in 2014), advises clients representing roughly $156 trillion in AUM. Glass Lewis, acquired by Ontario Teachers' Pension Plan in 2015, serves more than 1,350 institutional clients globally.
The business model is straightforward: asset owners pay subscription fees for research and voting recommendations ahead of shareholder meetings. ISS and Glass Lewis publish research reports analyzing management proposals, shareholder resolutions, and corporate governance risk factors. Asset owners then use these reports—alongside their own internal governance review—to determine how they will vote.
Voting occurs through proxy statement filing, either in person or by submitting voting instructions to custodians. Proxy votes are tallied by transfer agents and announced at shareholder meetings. Given the distributed ownership of public companies, institutional votes frequently represent 40–60% of total voting power, making asset owner stewardship decisions material to governance outcomes.
What methodology do proxy advisors use to issue recommendations?
Proxy advisors develop proprietary voting guidelines that codify their governance philosophy. ISS publishes detailed policy documents covering board diversity, executive compensation design, takeover defenses, and other governance areas. Glass Lewis publishes similar guidelines, though with some methodological differences.
When analyzing a specific proposal, governance analysts review the company's proxy statement, board papers, compensation disclosure, and strategic context. For director elections, analysts assess tenure, independence, committee membership, and performance history. For executive pay votes, they examine compensation structure, peer benchmarking, pay-for-performance alignment, and shareholder feedback from prior meetings.
Proxy advisors typically deliver recommendations 2–3 weeks before the shareholder meeting, allowing institutional investors time to conduct independent review. The compressed timeline—often overlapping with multiple meetings in proxy season—is a persistent industry constraint.
Why do asset owners depend on proxy advisors?
Large asset owners voting across hundreds or thousands of companies face resource constraints. A typical pension fund CIO office might employ 3–5 governance specialists to oversee voting in North American companies alone, while managing positions in 2,000+ issuers. Proxy advisor research provides analytical capacity that most asset owners cannot replicate internally.
Additionally, proxy advisors offer standardized governance benchmarking. A large pension fund might want to vote consistently on board diversity or say-on-pay proposals across its portfolio, but consistency absent analytical infrastructure is difficult. Proxy advisor guidelines provide a structured framework.
However, this dependency creates governance risk. In 2017, research by Harvard Business School found that ISS voting recommendations had a statistically significant effect on voting outcomes: when ISS recommended voting against a proposal, the probability of failure increased by approximately 5–10 percentage points, even controlling for other factors. This finding prompted substantial regulatory and asset owner concern about concentrated advisory influence.
What are the main criticisms of proxy advisors?
Asset owners have voiced three primary objections:
Conflicts of interest. ISS and Glass Lewis also operate consulting practices that advise companies on governance matters, compensation design, and shareholder engagement strategy. This creates potential conflicts: advisors might tailor recommendations to retain consulting clients or avoid antagonizing them. In response, both firms have implemented information barriers between research and consulting divisions, but asset owners including CalPERS, the California State Teachers' Retirement System (CalSTRS), and Norway's Government Pension Fund Global have remained skeptical of these firewalls.
One-size-fits-all methodologies. Proxy advisor voting guidelines apply uniform standards across all companies. However, asset owners may have different governance priorities based on their investment horizon, liability structure, or strategic objectives. A long-duration pension fund might prioritize board continuity differently than a hedge fund. Proxy advisor guidelines do not easily accommodate asset-owner-specific stewardship philosophy. What is fiduciary duty? At its core, fiduciary duty requires independent judgment in voting. Mechanical reliance on proxy advisor recommendations undermines this principle.
Limited issuer engagement. Proxy advisors conduct limited dialogue with company boards and management before issuing recommendations. This creates information asymmetry: boards may be unaware of specific governance concerns until voting results are announced. Asset owners, by contrast, often maintain direct engagement channels with portfolio companies, gathering context that proxy advisors lack.
In 2023, the Council of Institutional Investors published a white paper noting that proxy advisors influence stewardship outcomes without bearing the economic consequences of poor governance outcomes—asset owners bear the financial risk. This asymmetry of accountability has motivated asset owners to reduce reliance on proxy advisor recommendations and increase internal governance capability.
What regulatory framework governs proxy advisors?
Proxy advisors operate in a light-touch regulatory environment. In the United States, the SEC issued guidance in 2020 recommending that proxy advisors enhance transparency by disclosing conflicts of interest, publishing quality assurance procedures, and documenting the methodologies underlying specific recommendations. However, these recommendations are voluntary; the SEC has not formally rulemaking authority over proxy advisors as "securities firms."
International regulation is more prescriptive. The European Union's Shareholder Rights Directive II, implemented in 2020, mandates that proxy advisors disclose conflicts of interest, publish details of their voting guidelines, and allow issuers to submit written comments in response to proxy advisor analysis before final recommendations are published. Several EU member states have pursued tighter regulation.
In 2023, the SEC began examining whether proxy advisors should be classified as investment advisers subject to fiduciary duties and compliance oversight. To date, the agency has not reached a formal determination. The tension between treating proxy advisors as research providers (lightly regulated) versus investment advisers (heavily regulated) remains unresolved.
How do institutional investors balance proxy advisor guidance with independent judgment?
Best practice among large asset owners involves a three-step stewardship process. First, asset owners develop written governance principles specifying their voting policy on recurring matters: board independence, executive compensation structure, shareholder resolutions. These principles reflect the asset owner's risk tolerance and investment philosophy.
Second, asset owners review proxy advisor recommendations against these principles. If the proxy advisor recommendation aligns with policy, voting follows the recommendation. If there is misalignment, the asset owner conducts independent analysis before deciding how to vote.
Third, asset owners document their rationale for material or contested votes, particularly votes that deviate from proxy advisor recommendations. This documentation supports the asset owner's fiduciary defense and creates an auditable record of governance decision-making.
Large pension funds including Ontario Teachers' Pension Plan, the Canadian Pension Plan Investment Board (CPPIB), and the Norwegian Government Pension Fund Global have publicly committed to reducing mechanical reliance on proxy advisors and increasing direct engagement with boards. CPPIB, managing approximately $675 billion in AUM, maintains a governance team that reviews proxy advisor recommendations but prioritizes direct dialogue with portfolio companies on governance concerns.
What is the outlook for proxy advisors and asset owner stewardship?
The proxy advisory market faces structural pressure from two directions. First, large asset owners are building internal governance capacity, reducing their dependence on external advisors. CalPERS, managing approximately $468 billion in AUM, has expanded its governance team and increasingly votes independently of proxy advisor recommendations.
Second, regulatory intervention is expanding. The SEC's examination of proxy advisor regulation, combined with international mandates for transparency, is raising compliance costs and limiting advisory flexibility. Proxy advisors will likely respond by enhancing transparency, improving engagement with issuers, and offering more customizable guidance products to high-value clients.
The underlying governance question remains: who should bear responsibility for voting decisions in concentrated shareholding environments? Proxy advisors argue they provide analysis, not direction; asset owners make voting decisions. Asset owners counter that the concentration of advisory influence and the compressed timing of proxy season create de facto decision-making power that lacks accountability. What is fiduciary duty? continues to require asset owners to exercise independent judgment; mechanical reliance on proxy advisor voting recommendations is inconsistent with fiduciary obligation.
For asset owners managing long-term capital, the trend is clear: internalize governance capability, reduce reliance on concentrated advisory sources, and maintain direct engagement channels with portfolio companies. The proxy advisory firms that survive will be those offering transparency, customization, and genuine analytical value rather than standardized voting recommendations.
What are the implications for long-term asset owners?
The concentration of voting influence in two proxy advisory firms creates systemic governance risk that touches long-term capital allocation. If proxy advisor methodologies are misaligned with long-term value creation, those misalignments propagate through voting outcomes and corporate strategy. Asset owners managing trillions in capital bear the financial consequences of governance failures; proxy advisors do not.
Institutional investors should treat proxy advisor research as analytical input, not voting direction. This requires:
Developing independent governance philosophy. Asset owners should articulate specific governance principles aligned with their investment horizon and risk tolerance. What is a sovereign wealth fund? A sovereign wealth fund managing generational capital may prioritize different governance outcomes than a defined-benefit pension fund or a university endowment.
Maintaining direct issuer engagement. Proxy season voting is a backward-looking process; by the time proxy statements are filed, strategic options are limited. Governance-focused asset owners engage with boards continuously, raising concerns before proposals are finalized. This engagement also provides context that proxy advisors lack.
Building governance capacity internally. Large asset owners should employ sufficient governance specialists to review significant votes independently. The cost of internal governance teams is typically offset by improved voting quality and stronger board relationships.
Documenting voting rationale. Fiduciary documentation should explain the asset owner's reasoning for all material votes, including votes that deviate from proxy advisor recommendations. This creates accountability and supports fiduciary defense.
Proxy advisors play a legitimate role in governance infrastructure, particularly for smaller asset owners with limited resources. However, the governance system's reliance on concentrated advisory sources creates misaligned incentives and concentrated influence. Long-term institutional capital allocation depends on governance systems that distribute decision-making authority, encourage direct engagement, and hold decision-makers—including asset owners themselves—accountable for stewardship outcomes.