Glass Lewis has warned that a wave of state-level legislation targeting proxy advisory firms could reshape the sector and potentially limit the ability of investors to access independent governance advice.
In a statement, the firm said that 13 US states are considering measures that could make it significantly more difficult for proxy advisors to operate and provide voting recommendations to institutional investors.
Glass Lewis argues that the initiatives are designed to curb that influence by placing new requirements and restrictions on proxy advice. According to the firm, critics of proxy advisors are attempting to bypass federal lawmakers and regulators by pushing legislation through state legislatures that would create ‘a chaotic, impractical patchwork of state regulation.’
In Indiana, a bill passed quickly through the legislature and has been signed into law, due to take effect on July 1. According to Glass Lewis, the law is part of a broader trend in which states impose requirements on proxy advisors before they can recommend votes against management. For example, some proposals would require proxy advisors to produce detailed written financial analyses explaining the short- and long-term financial effects of any recommendation that opposes management.
Similar ‘copycat’ bills have been introduced in states including Nebraska, West Virginia, Mississippi, Kansas, Oklahoma, South Carolina, Wisconsin, Arizona, Iowa and Kentucky, many modeled on previous legislation in Texas. These measures often require additional disclosures to investors and companies or restrict proxy advice on issues such as executive compensation if it is seen as undermining board discretion.
Glass Lewis says such requirements would be operationally unworkable given the scale of the proxy voting process. Proxy advisors review and issue recommendations on thousands of ballot items each proxy season, often within tight timeframes between when companies release their proxy materials and when shareholders must vote. Mandating comprehensive financial analysis for every recommendation against management could significantly slow that process and increase costs for investors.
Other proposed laws focus on disclosure obligations. Some bills would require proxy advisors to include warnings stating that investors are receiving proxy advice without a prescribed financial analysis, even when the recommendation is based on governance or oversight concerns. These disclosures would also be shared with companies and the public. Glass Lewis argues that such requirements could mislead investors and undermine the purpose of independent proxy advice.
Several proposals also address specific governance topics, including executive compensation. In some cases, the legislation would restrict proxy advisors from providing recommendations on pay practices if those recommendations are deemed to ‘undermine the use of discretion by an independent compensation committee of the issuer’s board of directors.’ This approach could effectively prevent investors from receiving advice on how to vote on say-on-pay proposals when that advice challenges management.
A further concern raised by the firm is the potential enforcement structure embedded in many of the bills. Some proposals would allow state attorneys general, companies and even shareholders to bring legal claims against proxy advisors over their recommendations. Glass Lewis said these provisions could expose proxy advisors to significant litigation risk and increase compliance costs for both advisors and their institutional investor clients.
The firm also warned that the legislation raises broader legal and market concerns. Several proposals appear to apply beyond the borders of the states considering them, potentially affecting proxy advice delivered between parties located elsewhere. Glass Lewis said this approach could set a precedent in which states attempt to regulate communication between investors, advisors and companies across the national market.
‘These bills are unworkable, conflict with federal law, and blatantly seek to suppress proxy advice that takes any perspective different from management’s,’ the firm wrote.
As the legislative push continues to evolve across multiple states, corporate governance leaders may increasingly need to consider how shifts in the proxy advisory landscape could affect shareholder engagement and voting dynamics in future proxy seasons.
The question for boards and governance professionals is whether these efforts represent a necessary recalibration of proxy advisor influence or the beginning of a regulatory framework that could reshape how independent advice reaches investors.