Once again proxy advisors are in the news. Two big areas that proxy advisors weigh in on are climate risk and board composition – and their scope and impact has grown exponentially. Institutional Shareholder Services (ISS) and Glass Lewis together control some 97% of the market. Their core business is to provide research and make recommendations to their global institutional investor clients about a host of topics voted on at the annual meeting of shareholders; they produce 80+ page annual voting guidelines which include very specific details of what they recommend. Proxy advisory firms also provide voting recommendations on individual director nominations for all public companies. They manage the mechanics of the voting with their own digital platform. ISS has its own rating arm to evaluate ESG efforts by firms. Fees for their services are generally paid by their clients.

Largely due to the growth in institutional investor ownership, proxy advisors wield significantly more influence on the voting outcomes of shareholder proposals and director elections than shareholders themselves. According to recent research, institutional investors often vote in line with ISS and Glass Lewis’ recommendations. All told, their practices are not without controversy and regulatory policy swings. Needless to say, it’s important for boards to know where they stand.

In terms of climate risk, Glass Lewis’ most recent 2025 amended guidelines state it will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. Specifically, it states that “given the importance of the board’s role in overseeing environmental and social risks”, it will generally recommend voting against the governance committee chair for failing to disclose the board’s role in overseeing environmental and social issues. In its guidelines, ISS recommends voting against the incumbent chair of the responsible committee in cases where ISS determines that the company is “not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy”.

In terms of board composition, this week Glass Lewis issued a supplemental statement on board diversity which removed percentage targets but still noted that “boards with gender diversity and underrepresented community representation have become the market standard. Accordingly, our benchmark policies on these issues expect most companies to have met this market practice”.  Further, they will “flag all director election proposals at US companies in which our recommendation is based, at least in part, on considerations of gender or underrepresented community diversity and offer our clients recommendations.” ISS took a different perspective. In its guidelines, for both gender and racial diversity it noted that for shareholder meeting reports published on or after February 25th, 2025, it has “indefinitely halted the consideration” of the gender, racial and/or ethnic diversity of a company’s board when making vote recommendation with respect to the election or re-election of directors at U.S. companies.

As a result of these changes, a board must first establish guidelines for board engagement with shareholders and proxy advisors. Since, proxy advisors directly influence the composition of public boards by recommending a vote for certain individual candidates over others, the Nom/Gov chair has to be crystal clear on its director selection process and related risks. The Audit committee is another set of directors who must be mindful of risk oversight. Recently, at both Apple and Costco, shareholder proposals claimed financial and reputation risk could result from their existing diversity efforts. At both companies the board and shareholder support overwhelmingly sided with keeping their diversity efforts.

Second, boards must recognize that proxy advisors fulfill the role of information intermediaries by helping institutional investors make informed investment decisions. Other times they set the standards, through their guidelines, that influence corporate choices about stakeholder pressures sometimes steering clients away from certain issues and towards others. These recommendations can be viewed as merely a part of a very broad information environment, helping the board to gauge the broader sentiment about current strategy and governance practices. Where there is misalignment, boards need to convey the company’s positions and the reasoning behind them. In order to do so, boards must have regular access to the information needed to evaluate risks emerging from environmental and social trends and have clear messaging on how the long-term strategy considers sustainability or diversity risks and opportunities.

At the same time, they must carefully consider whether to alter their governance practices simply to conform to the standards of proxy advisors. Some CEOs and boards have begun to resist in notable ways. Recently, J.P. Morgan Asset Management eliminated the use of third-party proxy advisor voting recommendations from its internally developed voting systems. Going forward it is working with proxy voting advisors to remove their voting recommendations from research reports they provide to J.P. Morgan Asset Management in the 2025 proxy season.