Paul Rose is Dean and Professor of Law at Case Western Reserve University School of Law. This post is based on his testimony in a hearing of the Subcommittee on Capital Markets of the House Committee on Financial Services.
Today, two firms—Institutional Shareholder Services (ISS) and Glass Lewis—dominate over 90% of the proxy advisory market. Their recommendations can swing vote outcomes and shape the governance of publicly traded companies, yet these firms operate without fiduciary obligations, limited transparency, and minimal accountability.
Importantly, this market dominance is not a natural result of investor demand. It is a byproduct of regulatory design—specifically the SEC’s adoption of Rule 206(4)-6 under the Investment Advisers Act of 1940. This rule, adopted in 2003, requires registered investment advisers to adopt proxy voting policies and procedures and to vote client securities in their best interest. Subsequently, the SEC issued no-action letters stating that investment advisers could fulfill these obligations by relying on the guidance of independent third-party proxy advisors. By the time the SEC withdrew these no-action letters in 2018, the proxy advisory industry had grown significantly. Indeed, the proxy advisory industry would not exist at its current scale without these regulatory choices. Rule 206(4)-6 effectively transformed what had been an internal fiduciary duty into an external compliance function, fueling the growth of ISS and Glass Lewis into de facto gatekeepers of corporate governance. Hundreds of institutional investors now outsource their voting decisions to these firms.
