In the world of corporate governance, two firms wield an outsized influence: Institutional Shareholder Services (ISS) and Glass Lewis. Together, these companies control between 90 percent and 97 percent of the proxy advisory market, guiding institutional investors on how to vote on shareholder proposals and board elections. Their recommendations carry significant weight, with some studies suggesting they can swing up to a quarter of shareholders for a given vote. However, recent developments have made it clear that investors are beginning to see the flaws in this duopoly, seeking alternatives that promise more accuracy and less bias.
BlackRock’s recent addition of Egan Jones as a third proxy advisor is a telling and welcome sign of market participants rejecting the pair of handcuffs that is the proxy advisory duopoly.
Animating this shift, at least in part, are stumbles by ISS and Glass-Lewis themselves. A study by the American Council for Capital Formation found at least 64 instances during the 2023 proxy season where companies challenged what they deemed inaccurate recommendations from these firms. The Business Roundtable likewise noted that in a survey of its membership, 95 percent of respondents found errors in advisory reports. In a duopoly, disciplining market forces recede, and incumbents have less incentive to innovate and compete. One symptom of this in the proxy advisory space are errors and a lack of transparency.
It’s not just their mistakes that are troubling; it’s the broader impact these firms are having on corporate governance. And the stakes are high, as a Boston Consulting Group finding makes clear. Companies lose up to 25 percent of their Total Shareholder Return (TSR) within a year of an activist attack. These attacks, often endorsed by ISS and Glass Lewis, can disrupt companies and unnecessarily destroy shareholder value.
Consider the case of the Walt Disney Company and activist investor Nelson Peltz. Earlier this year, Peltz’s firm, Trian, ran a proxy fight against Disney, seeking to gain seats on its board. Despite winning an endorsement from ISS, Trian’s efforts ultimately failed. Shareholders rejected the recommendations, allowing Disney’s management to focus on their turnaround plan rather than being distracted by a proxy fight. This outcome likely spared Disney from the disruption and potential decline in shareholder value that could have followed.
Similarly, Ancora Holdings’ proxy fight against Norfolk Southern is another example of the limited success of activist campaigns backed by ISS and Glass Lewis. Ancora nominated seven candidates to Norfolk Southern’s board, with ISS supporting five of them and Glass Lewis backing six. Yet, Ancora won only three seats, leaving the activist investor without much leverage to effect change. These cases demonstrate that while ISS and Glass Lewis have significant influence, their recommendations do not always align with the best interests of shareholders.
Today this duopoly is turning its attention to a new target: Masimo, a leading medical device company. Activist investor Politan Capital Management, which already has two seats on Masimo’s board, is seeking to gain control by nominating two additional candidates at the upcoming annual meeting. Both ISS and Glass Lewis have endorsed Politan’s nominees, despite the fact that they lack industry experience. In contrast, Masimo’s board nominees include the company’s founder, CEO, and current chairman, as well as a former CEO with over 30 years of experience in the medical device industry. If Politan succeeds, it would place a three-year-old hedge fund in control of a company that thrives on innovation—a risky move that could jeopardize Masimo’s future.
Masimo’s CEO has made it clear that he will follow the wishes of Masimo’s shareholders and step down if not re-elected, posing the risk of major firm disruption that could ultimately harm shareholders.
The concerns raised by these cases are echoed by prominent voices in the financial world. In a recent column, Steve Forbes called ISS and Glass Lewis “hazardous to shareholder health,” highlighting the need for greater scrutiny of these firms’ influence.
As the proxy advisory duopoly continues to face challenges, it’s becoming clear that their unchecked power is not in the best interest of shareholders or companies. Institutional investors are beginning to seek alternatives, recognizing that relying too heavily on ISS and Glass Lewis could lead to decisions that undermine corporate growth and shareholder value.
It’s time for a more balanced and transparent approach to proxy advising—one that prioritizes accuracy, accountability, and the long-term health of American businesses.