The U.S. Federal Trade Commission (FTC) has opened an antitrust investigation into two of the biggest providers of proxy advisory services, Institutional Shareholder Services (ISS) and Glass Lewis & Co., the Wall Street Journal reported Thursday. These firms collectively control over 90% of the market for proxy advice, guiding institutional investors such as mutual funds and pension managers on how to vote in thousands of corporate elections each year.

What Proxy Advisors Do

Proxy advisors help investors navigate complex corporate votes, including:

• Executive compensation packages
• Mergers and acquisitions
• Shareholder proposals

Their recommendations can influence outcomes significantly, especially when activist investors seek to sway corporate policy.

Government Scrutiny and Context

The FTC probe reflects growing antitrust concerns over the duopoly. Both ISS and Glass Lewis have received nonpublic investigation letters.

• Glass Lewis: “We've always operated in a fair, ethical, and lawful manner,” said spokesperson Sarah Cohn.
• ISS: Limited comment, emphasizing its commitment to fiduciary duties and transparency.

The investigation aligns with broader regulatory interest:

• The SEC is considering new limits on proxy advisors.
• Republican lawmakers and Texas Attorney General Ken Paxton have separately scrutinized the firms for allegedly pushing a "radical agenda."
• In September, Texas enacted a law requiring additional disclosure on advice concerning environmental, social, and governance (ESG) matters, but a federal judge blocked enforcement.

Why Companies Are Concerned

Executives of public companies sometimes clash with proxy advisors, particularly when advisors oppose:

• Executive pay increases
• Proposed mergers
• Activist campaigns

Tesla CEO Elon Musk famously called proxy advisors “corporate terrorists” before shareholder approval of his trillion-dollar compensation plan.

Proxy advisors' influence extends beyond votes: their recommendations can increase activist leverage, shaping company strategy and governance.

Recent Example: Coinbase

Coinbase recently moved its corporate domicile from Delaware to Texas without a shareholder vote. The move drew attention because:

• ISS and Glass Lewis might have opposed it, had it been voted on.
• Proxy advisors were not given a chance to comment, as the Class B shareholders did not vote.

Looking Ahead

The FTC investigation is part of a broader effort to examine shareholder influence and corporate governance in the U.S., particularly the role of proxy advisory firms in shaping executive and strategic decisions.

As ISS and Glass Lewis navigate increased scrutiny, institutional investors and corporate executives alike will be watching closely for potential changes in proxy advisory regulations and their impact on corporate decision-making.