Proxy Advisors Draw Antitrust Scrutiny

The Federal Trade Commission conducts antitrust investigations. (Leigh Vogel / Getty Images)

Proxy advisors are used to turning a spotlight on companies. Now the government is investigating the advisors.

Mutual fund and pension managers can get proxies for thousands of corporate votes each year. Deciding what’s in shareholders’ interests takes a lot of research with that many votes, and so many money managers enlist the help of proxy advisors.

Two firms provide over 90% of that advice: Institutional Shareholder Services and Glass Lewis & Co. On Thursday, The Wall Street Journal reported that an antitrust investigation of the duopoly is under way by the U.S. Federal Trade Commission.

Glass Lewis confirmed to Barron’s that it received a nonpublic investigation letter from the FTC. “We’ve always operated in a fair, ethical and lawful manner, as evidenced by the trust placed in us by many of the world’s leading investors,” said spokeswoman Sarah Cohn.

ISS spokeswoman Izabella Nagy said the firm was limited in how it could comment. “ISS is proud of its history of providing high-quality, independent, and objective advice to the world’s most sophisticated institutional investors,” she said.

“As a registered investment advisor that has been subject to oversight by the SEC for a quarter of a century, ISS is committed to fulfilling its fiduciary duties to clients and operating in a transparent and ethical manner,” Nagy added.

The FTC didn’t immediately respond to questions.

The antitrust scrutiny is part of a pushback against shareholder activism that began under President Donald Trump’s first presidency, paused under the interim administration of President Joe Biden, and has now revived.

Behind the push are public company executives, unhappy because ISS or Glass Lewis sometimes oppose executive pay hikes or proposed mergers. When an activist money manager persuades the advisors to support the campaign, the activist’s leverage goes up.

Before Tesla voters ratified Elon Musk’s trillion dollar pay package, the Tesla CEO derided proxy advisors as “corporate terrorists.”

The U.S. Securities and Exchange Commission is contemplating new limits on proxy advisors. Republicans in Congress and the conservative attorney general of Texas, Ken Paxton, are separately investigating what they call the firms’ “radical agenda.”

In September, a Texas statute imposed extra disclosure requirements when those firms provide advice on matters of environmental, social, and governance, or diversity, equity, and inclusion—but a federal district judge has blocked the state from enforcing the law.

The anti-advisory law is part of Texas’ campaign to lure businesses with management-friendly laws and regulations. As the controlling Class A shareholders of Coinbase Global agreed to reincorporate from Delaware to Texas, a company proxy this month warned the move might draw criticism from ISS and Glass Lewis.

But the advisors never got a chance to comment on the move, since Coinbase didn’t put the domicile change to a vote of its widely held Class B shares.

Corrections & Amplifications

Coinbase moved its domicile to Texas without holding a vote of shareholders. An earlier version of this article incorrectly reported there had been a vote, and that proxy advisors recommended a no vote.

Write to Bill Alpert at william.alpert@barrons.com