State regulation of proxy advisors

Summary

Podcast Summary: Shareholder Primacy (Free Float Media)

Episode: State Regulation of Proxy Advisors
Date: February 25, 2026
Hosts: Mike Levin (A), Ann Lipton (B)
Theme: Analysis of state-level efforts to regulate proxy advisory firms such as ISS and Glass Lewis, with a focus on legal, business, and activist investing implications.

---

Overview

In this episode, Mike Levin and Ann Lipton delve into a wave of proposed state laws targeting proxy advisory firms, building on the contentious Texas statute. The conversation explores the motivations and legal issues behind these new regulations, reflects on the role of proxy advisors in corporate governance, and considers the ramifications for both proxy firms and activist investors.

---

Key Discussion Points & Insights

1. Background on Proxy Advisors and Regulation

• Proxy advisors like ISS (Institutional Shareholder Services) and Glass Lewis play a central role in guiding institutional investor votes on company matters.
• Growing trends in both federal and state attempts to regulate these advisors—most notably Texas's law, which has inspired similar efforts in at least eight other states.

Notable Quotes:

• "Proxy advisors…are the biggies, ISS and Glass Lewis…Several US States have proposed regulations over these entities…What's happening here?" — Mike (A), [00:34]

2. The Texas Law: Structure and Legal Issues

• The Texas statute targets any proxy advice relating to companies:
  • Incorporated in Texas
  • Headquartered in Texas
  • Planning to reincorporate in Texas
• Law singles out "ESG" (Environmental, Social, Governance) recommendations, declaring them not in shareholders' financial interests, triggering burdensome disclosures.

Notable Quotes:

• "[The law] says that if a proxy advisor makes a recommendation based on ESG, including governance, then…it’s a recommendation that’s not in shareholders financial interest." — Ann (B), [04:15]
• "It...singles out ESG speech specifically to burden." — Ann (B), [06:32]

Timestamps:

• Texas statute overview: [03:21]–[06:09]
• Legal challenge—First Amendment focus: [06:10]–[07:40]

3. Legal Challenge and Current Status

• ISS and Glass Lewis sued in federal court on First Amendment grounds.
• Preliminary injunction blocked the law due to First Amendment concerns; trial date delayed.

Quote:

• "Last year he issued this preliminary injunction blocking enforcement of the law, largely because he agreed there were these First Amendment problems." — Ann (B), [07:15]

4. New State-Level Model Laws

• A conservative organization, Consumers Defense, has drafted a model law (pushed in eight states) aiming to avoid the ESG terminology.
• New laws trigger disclosures whenever proxy advisors recommend against management for any reason—not just ESG.
  • Advisors must either admit no financial analysis was done or disclose methods, experience, and even locations of those preparing recommendations.
• Laws proposed in: Nebraska, Indiana, West Virginia, Kansas, Wisconsin, South Carolina, Mississippi, and Oklahoma.

Notable Quotes:

• "This new model law...doesn’t mention ESG. Instead, it just applies whenever a proxy advisor recommends against management for any reason." — Ann (B), [09:06]
• "They have to explain the methods and processes…including the experience and geographic location of the personnel…" — Ann (B), [10:08]

Timestamps:

• Origin and spread of the model law: [08:17]–[11:09]
• Requirements of new laws: [09:03]–[12:47]

5. Motivations and Strategy Behind the Regulation

• The laws are aimed not at helping investors but at impeding proxy advisors, particularly when they recommend against management.
• These regulations introduce disclosure burdens designed to embarrass proxy advisors or open them to nitpicking legal challenges, rather than serve a good faith investor protection purpose.

Notable Quotes:

• "This is not a good faith attempt to get proxy advisors to make helpful disclosures…the point is to require them to make embarrassing disclosures." — Ann (B), [13:22]
• "It’s a legitimate threat to them…It will make a large part of their business really hard to manage." — Mike (A), [33:14 & 34:15]

6. Legal and Constitutional Challenges

• Problems include:
  • First Amendment (singling out one type of advice)
  • Dormant Commerce Clause (states regulating outside their borders)
  • Preemption by federal securities law
• Many state bills assert jurisdiction far outside their borders—e.g., Kansas claiming authority over proxy advice for companies not domiciled or headquartered in the state.

Notable Quotes:

• "Kansas version…claims it gets to regulate the advice given to a Massachusetts investor about a California headquartered company…Kansas has no right to regulate that far outside its borders.” — Ann (B), [16:10]
• "That’s why you have federal…right, we have federal…can’t regulate outside their borders." — Ann (A), [18:07]

Timestamps:

• Legal arguments: [13:55]–[19:43]

7. Impact on Proxy Advisors and Market Practice

• Glass Lewis is reportedly planning to stop making specific recommendations and only implement investors’ own proxy policies.
• ISS may follow.
• The effectiveness and survivability of the proxy advisory business model is called into question.

Notable Quotes:

• "Glass Lewis is actually planning to stop making…it calls recommendations. Instead it wants to kind of implement investors' own policies." — Ann (B), [19:03]
• "I wonder how much they're just going to give up the ghost." — Ann (B), [19:20]

Timestamps:

• Changing business models: [19:03]–[20:06]

8. Why Companies Care, and the Underlying Motivation

• The core corporate concern may not be ESG broadly, but rather proxy advisor influence on executive compensation (say-on-pay) votes.
• Attacks on proxy advisors represent both anti-ESG sentiment and broader management resistance to shareholder oversight.

Notable Quotes:

• "The big problem that companies have with proxy advisors revolves around…executive comp and say on pay." — Mike (A), [21:55]
• "This is resenting any challenge to management authority…they do not want to tolerate shareholders getting up in their business." — Ann (B), [25:99]

Timestamps:

• Company motivations: [21:51]–[27:15]

9. Activist Perspective and Effects on Proxy Contests

• For activist investors, the value of proxy advisors is in special situations (e.g., contested director elections, M&A) where detailed analysis and recommendations are sought.
• If laws pass, this niche may survive, but it’s a tiny market—likely not enough to sustain the entire proxy advisory industry.

Notable Quotes:

• "You can't pay the bills on 15 or 20 proxy contests that go through special situations…it's a legitimate threat." — Mike (A), [33:14]
• "If they're out of the mix…will you be able to take your case directly to shareholders? Do you need them?" — Ann (B), [29:14]

Timestamps:

• Effects on activism: [29:14]–[33:13]

---

Memorable Moments & Key Quotes

• "[Texas law requires you] to self-accuse yourself of not caring about shareholders’ financial interests." — Ann (B), [04:37]
• "I mean, clearly there are a lot of regulators who are gunning for them. Like essentially all conservative regulators are gunning for them." — Ann (B), [19:20]
• "This is an outgrowth of…the anti-ESG movement. In some ways it looks to me like an attempt to will into existence that ESG not be financial." — Ann (B), [27:36]
• "They’re not intended—this is not a good faith effort to actually improve the system." — Ann (B), [21:51]

---

Important Timestamps

• [03:21]–[07:40]: Texas law structure and First Amendment legal arguments
• [08:17]–[12:47]: Introduction and analysis of the Consumers Defense model law
• [13:22]: Intent to burden proxy advisors with embarrassing disclosures
• [16:07]–[18:15]: Dormant commerce clause and jurisdictional overreach
• [19:03]–[20:06]: Proxy advisors changing business model in response to legal threats
• [21:51][27:36]: Company motivations—exec comp and resistance to oversight

---

Conclusion

• State-level attempts to regulate proxy advisors are proliferating, driven by anti-ESG politics and management pushback against shareholder oversight.
• Laws so far either mirror or attempt to sidestep Texas’s troubled model, but introduce new constitutional and practical problems.
• If enacted and enforced, these statutes could upend traditional proxy advisory services, forcing a pivot in business models and perhaps damaging shareholder engagement.
• Activist investors may still find value in proxy advisors for special situations, but the industry’s future looks uncertain—a development the hosts will continue to monitor as legislative sessions continue.

---

For Questions & Feedback

Contact: shareholderPrimeCrimeFloat LLC

---

Podcast Produced by Free Float Media

Transcript

[A]

Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds collide and intersect or intersect and collide in real life. Ann and I have returned. Ann Lipton, of course, is a law professor at the University of Colorado who teaches and researches securities and business law. And she presides over the legal end of our podcast.

[B]

And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.

[A]

Yes, preside makes you sound like a judge. You're the authority over the legal end of the project. Anyway, we have a juicy subject that we thought we'd discuss today. Proxy advisors, which we've talked about periodically here, which we'll refer to a little later. And of course they are the biggies, Institutional Shareholder Services, ISS and Glass Lewis, sometimes gl. And there's a new development there. It's actually an accumulation of little developments in relating to how the US States think about them. Several US States have proposed regulations over these entities, over ISS and Glass Lewis. So we wanted to look at that effort, a state level regulation, sort of see what's going on and maybe guess how it's going to go. So let's talk about that.

[B]

Yeah, with of course, the reminder that if you would like to email us with questions or comments, you can reach us at shareholderPrimeCrimeFloat LLC.

[A]

Yes, let's hear from your questions and comments and so forth. We got a couple in the last couple weeks which we will hopefully bundle into a fun mailbag episode sometime soon. All right. We have talked before not about just proxy advisors generally and what they do and how they work and what people think of them, but also about efforts to regulate them. This has been an ongoing, like ongoing for 10 or more years situation. Last year in December, we had a whole show. We talked about federal efforts to regulate proxy advisors like at the sec and a Texas law that, that was the first of all these state laws was in Texas.

[B]

Yeah, we talked about. Yeah, yeah, no, I'm just saying we had a show on that where we at the time it was proposed but then it passed. We, we had a show on that in May where we talked.

[A]

Right. Last May. So yeah. And then, and that law. And we're going to address that in a minute, that law is enforced, that's on the books in Texas and we can discuss that a little bit though. It's, I think it's, it's been stayed, it's on hold. And then a little bit of what inspired Our discussion today was Jean Haggerty, a really just top reporter at the deal, had a really superb article and it was superb in many ways. But in one way is she talked a lot to Ann about her. She alerted me to this superb article on this kind of effort among all these different states. And she identified, I think eight different states that have done that. So there's now Texas, eight states, the federal government. What the hell's happening here? Yeah.

[B]

So I mean, the only way to understand what's going on with these state proposals is that the states look like they're trying to avoid some of the mistakes of the Texas law, but they can't really escape all the mistakes. So we talked, as we said, we talked about this on prior shows. Texas passed this law last year that purports to regulate proxy advice about a company that is chartered in Texas or headquarters in Texas or is proposing to reincorporate into Texas. That's what it.

[A]

So there's, there's three different kind of ways that you can be subject to the jurisdiction of this Texas law.

[B]

Exactly.

[A]

Incorporation. Like Tesla.

[B]

Yeah, like Tesla, which is both chartered in Texas and headquartered, but headquartered in

[A]

Texas, which could be like ExxonMobil, which is chartered in New Jersey. Delaware, New Jersey.

[B]

New Jersey.

[A]

Right. And. And headquartered there, they got, you know, thousands of employees or stated some sort of vague intention.

[B]

Yeah, it's a little unclear to me whether you have to like formally put a proposal before shareholders are not. But anyway, so the law covers this three categories. Chartered in Texas or headquartered in Texas, or proposed to reincorporate in Texas. And Texas's law is basically based on esg. It says that if a proxy advisor makes a recommendation that's based on ESG considerations. And remember the G in ESG is governance.

[A]

Right. There could be a lot of really interesting or useful or basic stuff. Yeah, right. Right.

[B]

Yeah. So. Right. So the law says that if a proxy advisor makes a recommendation based on esg, including governance, and if a proxy advisor makes that recommendation, then by definition, according to this law, it's a recommendation that's not in shareholders financial interest. And suddenly the proxy advisor has to make a whole bunch of other kind of disclaimers, including it has to publicly announce that it doesn't focus on shareholders financial interests when making recommendations. So it basically is to self accuse itself of not caring about shareholders financial interests. And if they make an ESG recommendation where the G stands for governance. So this is absurd. And there's more to it than that. The proxy advisor also has to make these Self accusations. If it just recommends against management.

[A]

Yeah.

[B]

No, but seriously, like. And this is just poor drafting but apparent. But the way it's drafted, if you just recommend against management, you have to say, I don't care about shareholder financial interest. So anyway.

[A]

So there's some required. Basically the nature of the Texas regulation is to. For certain or most.

[B]

Yeah.

[A]

And these are precatory proposals. This is. Or this also has to do with director elections.

[B]

Any kind of election.

[A]

Yeah, anything that shareholders vote on.

[B]

Anything that's. Well, it's poorly drafted. So it's a little bit unclear whether it would capture the situation where it's a shareholder proposal and you circulate your own proxy materials. It's a little unclear that's captured. But what's definitely true are 14 proposals and just anything the company puts.

[A]

And there's basically. It's a whole bunch of disclosures and things that you have to say about that you have to state about your advice.

[B]

Yes. You have to say, I don't care about shareholder financial interest. And then you have to give copies to everyone, including in some cases the Attorney general of the state. So immediately ISS and Glass Lewis, currently Ken Paxton. So immediately ISS and Glass Lewis sued to block this law. And they have a lot of arguments about why the law is invalid. But one of the main ones is First Amendment. And because.

[A]

Oh, interesting.

[B]

Singles out ESG speech specifically to burden. Like it's ESG recommendations that are being subject to most of the regulation. And it's also vague what ESG even means. Does it mean governance? If so it's every single recommendation that ISS and Glass Lewis ever gives. So.

[A]

Right.

[B]

So it's a First Amendment. So they have a lot of arguments. But the main ones are this First Amendment problem of you're focusing on esg and that's unfair because you're taking a viewpoint that you're singling out for special like Burden. And also it's vague. So we don't even know what's captured. And that's before Judge Albright in Texas and last year right after.

[A]

Is that a federal, Federal, Federal or state? So it's. So they. So. So ISS and Glass Lewis together sued in federal court to stop Texas from enforcing this brand new law.

[B]

Exactly. And last year he issued this preliminary injunction blocking enforcement of the law, largely because he agreed that there were these First Amendment problems. Now that's a temporary holding. It only lasts until there's a trial. And so the whole thing will eventually go to trial. But that's where we are. It's a little Unclear. We're supposed to go to trial this month, but they.

[A]

Oh, this month? February.

[B]

February. February. But they put it off. And as far as I know, there's no new trial date. But. So that's where we are.

[A]

So we haven't seen yet any examples of Texas enforcing.

[B]

No, because it was blocked right off the bat.

[A]

Okay, so, so, so this is all kind of these, all these limits are hypothetical. We haven't seen what like ISS or Glassloose had, had or state or something. Though I'm pretty sure that ISS and Glass Lewis have maybe started drafting some potential disclosures that they.

[B]

I don't know how they could possibly function with this, but anyway.

[A]

Wait a second. No, this would make it impossible for them to render advice for the companies that are.

[B]

For any kind of advice they give, they'd have to put a sign. They'd have to publicly disclose that they are not focusing on shareholders financial interest. It's very similar. So now what's happened now is that a conservative organization known as Consumers Defense, which essentially was created for the sole purpose of fighting esg, has drafted a new model proxy advisor law. And it's pushing the states, mostly red states, to pass its model law. And so a bunch of states have put this model law, have proposed it in their legislature. Sometimes they use the exact text, sometimes they modify it a little. Gene Haggerty reports. It's been proposed in eight states. Nebraska, Indiana, West Virginia, Kansas, Wisconsin, South Carolina, Mississippi and Oklahoma.

[A]

So they're red or at best purple states.

[B]

Yes, Wisconsin with red legislatures. And it was. So this new model law was obviously drafted to avoid this big problem with the Texas law. Interesting, the ESG concept. So instead of focusing on the esg, what this new legislation does is it doesn't mention esg. Instead, it just applies whenever a proxy adviser or recommends against management for any reason. If you give any advice against management, this law kicks in. And if they recommend something against management, then the proxy advisor has to make really loaded disclosures. It either has to make these disclosures that it has made its recommendation without doing a written financial analysis, or if it does do a written financial analysis, it has to explain the methods and processes used to prepare the analysis, including the experience and geographic location of the personnel who formed the recommendation, and then make the analysis available to their clients and I think even the subject company.

[A]

Okay, so that's what this does. Let's rewind a second. So this. What's it called? Consumer's Defense.

[B]

Consumer's Defense, yeah.

[A]

It's, it's, it's a Conservative, but it's a special purpose.

[B]

Yeah.

[A]

And you said to deal with esg. Yeah, probably. Esg. Esg. Investing stuff. Not just like woke. Yeah.

[B]

Yeah. Well, yeah, it's an arm of another conservative organization and this new sort of sub organization was created for the sole purpose, as I understand it. I mean, it's on its website, like fighting WOKE capitalism. Esg.

[A]

Okay, so this could be an offshoot of National Legal Policy center, whatever.

[B]

Well, yeah, I don't know. It's part of an earlier organization that's been around for a while that's conservative organization.

[A]

And it promulgated this model.

[B]

Yes.

[A]

It basically probably had in dozens of many states, more than just these eight. Probably had local people or try to hit up state reps to say, let's, let's consider this. Now, that's kind of how it works, I assume.

[B]

But right now it's been a version of what they proposed. Has been proposed in eight states. Sometimes they're just taking the exact text and sometimes they're modified.

[A]

And there's. I have a little bit of experience with this going back decades where, I don't know if, you know, I used to work in the. When I was in graduate school, I spent some time in the Illinois state legislature.

[B]

Oh, I did not know that.

[A]

Yes. As an intern. And you know, there are legislators, state legislators, which are happy to serve as mouthpieces for model legislation. And that's what the consumer defenses of the world prefer. But sometimes the best you can get if you're consumer defense is someone who's interested in it but wants to sort of take some liberties or, you know, value has a modicum of independence. Yeah. So then they'll. Then they'll kind of work on it and. And sort of exactly as I said,

[B]

some of these are modified in ways that are more or less, you know, I don't think there's really any getting around some of the problems with the law, but some states have tried to mitigate.

[A]

All right. And so the NA and the nature of the model law and its variance is similar in spirit to what Texas is intending. But it's trying to like.

[B]

Yeah. Instead of talking about esg. I mean, some of the preamble talks about. We are afraid of, like, WOKE ESG recommendations. But the actual law doesn't say anything about esg. It says just against voting against management requires. Either you have to admit that you didn't do a written financial analysis or if you did do one, explain your methods, explain your process, say the geographic location of the person who did it. And then actually disclose the analysis upon request.

[A]

Right. And again, this applies only to the proxy advisors, of course, not to the. Not to like a stewardship team, just

[B]

to the advisors of.

[A]

Of a. Of a big fund.

[B]

Yes.

[A]

Okay, well, that's interesting. So there's. And I'm guessing at all eight. I'm pretty sure I know this, that. That it's all been introduced. Nothing's been approved yet.

[B]

Nothing's been passed yet.

[A]

Nothing. Nothing. And so the chances of it getting passed in some of these states is probably good. But it hasn't. Hasn't occurred?

[B]

No, not as far as I know.

[A]

All right, now, what's the distinction between this and like the federal, I guess. Federal.

[B]

Well, yeah, but I mean, like, you should really just talk about, like, what some of the problems are here.

[A]

Oh, sure, yeah, let's talk about that.

[B]

Yeah, yeah. I mean, like, first of all, I just really have to just say it openly. This is not a good faith attempt to get proxy advisors to make helpful disclosures. The point is to require them to make embarrassing disclosures. Either admit we don't have a written financial analysis or. Or to get them to disclose this analysis that either is gonna reveal trade secrets or is gonna give so much detail that that's just gonna be an avenue for more bad faith attacks. Oh, they left out this thing. That's negligent. Oh, they left out this other. I mean, like, that's the point.

[A]

And you know, in truth, the proxy advisors deal with so many. And maybe not this year, but in the past they've dealt with so many different kind of proposals and variants of proposals. There's no way, you know, they look at a policy, they kind of figure out how a proposal kind of lines up against it, and then they move on and they make a recommendation and they move on to the next one. They're not going to do a detailed financial analysis for a given company.

[B]

Exactly. It's not going to clear what's going to be sufficient. Written proposal, A written analysis. And they're not. And often their analysis is based on, like, surveying what institutional investors think are best practices. That's not exactly what. So, I mean, none of this. The point is to either embarrass the proxy advisor or at least make the proxy advisor disclose something that can then be further nitpicked. So that's.

[A]

Right. Or at the very least, just to make them work really hard to render a recommendation. Yeah, right, exactly.

[B]

So, but that said, even though the point was to avoid some of the worst excesses of the Texas law by not saying esg. There are a lot of the same legal problems. So first of all, if you, even though it doesn't attack ESG specifically, it still only applies to advice against management, not advice in favor of management. And that by itself might be a First Amendment problem. And it's one of the arguments that's being made in the Texas litigation right now. If you're only burdening recommending against management, that's still a First Amendment problem. Then we get to the scope problem. So the stated rationale for this legislation is the state's need to protect investors from fraudulent or bad advice. So first of all, it's not clear that institutions, which are the only people who hire proxy advisors.

[A]

Yeah. Individuals don't need that kind of this protection.

[B]

Institutional investors do not need this kind of protection. But leaving that aside, if you're a state and you're concerned that investors are getting bad advice, then you would expect a law that extends to anyone advising investors in your state. You would have Kansas regulating investors in Kansas, West Virginia regulating investors in West Virginia. But that's not what these bills do. The model legislation and the way it's been introduced in a lot of states applies to any proxy advice given to any investor about any public company, regardless

[A]

of domicile or anything like that, regardless of that.

[B]

So Kansas version of the law, cuz it's using just the model law, is claiming it gets to regulate the advice given to a Massachusetts investor about a California headquartered company that's incorporated in Delaware. And like what is Kansas's interest in doing that? Kansas has no right to regulate that far outside its borders. Same with Mississippi, same with Missouri.

[A]

And there was a fundamental principle, federal principle, commerce.

[B]

So yeah, so the Congress gets to regulate commerce. And from there there's a sort of principle that states are not allowed to regulate interstate commerce. It's called the dormant commerce clause. And it means they can't regulate outside their borders. So remember the Texas law, it applies to any company incorporated in Texas, headquartered in Texas or that plans to reorganize into Texas. That was bad enough. We had a whole show where we talked about how that's questionable legally. But these laws, many of them go much further. There would be literally Kansas saying I have nationwide jurisdiction to regulate any proxy advice given about any public company anywhere. And that's just absurd.

[A]

Well, I mean that it sounds like the very first time that they try to enforce their law or even before that, you know, that Massachusetts investor. Well, the question or ISS really would say, you know, you would sue them probably in probably Some federal district in Kansas and say that you can't do this.

[B]

Well, that.

[A]

Look at the cameras.

[B]

The separate issue is whether or not it actually gets challenged. But yes, but this is the. So that's literally a constitutional problem. And remember one of the things it does, it sets up for the proxy advisors to be subject to conflicting laws. Because if Kansas says I can regulate the proxy advice that's given to anyone anywhere in the country about any public company and West Virginia says I can regulate the proxy advice given to me, then theoretically you could have completely conflicting state law. Conflicting laws. Which is exactly why we have this principle.

[A]

That's why you have federal. Right, we have federal.

[B]

Can't regulate outside their borders. So that are all.

[A]

Are all eight states no laws?

[B]

No. Some of them are doing the Texas thing where it's only if you're incorporated in Texas, incorporated in the state or headquarters state. But you can see why not all of these states want to do that. I mean Kansas, how many publicly traded companies are incorporated or headquartered in Kansas?

[A]

I can't think of a law.

[B]

So like the only way that their law can have any impact is if they do this nationwide thing. But of course that's what they can't do. And then finally there's the preemption problem. So federal law regulates a lot of this stuff. Like federal law regulates advice given to ERISA plans, federal law regulates registered investment advisors. ISS is a registered investment advisor, Glass. Apparently it's going to become one. So there's an argument that these laws conflict with federal law and if that happens, federal law wins. That said, we've said before we talked about this that Glass Lewis is actually planning to stop making what it calls recommendations.

[A]

Right.

[B]

Instead it wants to kind of implement investors own policies.

[A]

Well, they're going to do the front end analytical work.

[B]

Right, Exactly.

[A]

And then do potentially the back end, all the administrative work to cast votes. But not the middle part, the recommendation part. Trying to step away from.

[B]

Yes. And it's not clear to me whether that's covered under these laws. I genuinely don't know. I also don't know how long Glass Lewis and ISS want to keep fighting this. I mean clearly there are a lot of regulators who are gunning for them. Like essentially all conservative regulators are gunning for them. And at some point I wonder how much they're just going to give up the ghost. So I don't know if it's going to get litigated, but I do think they would have, you know, pretty strong arguments if it was.

[A]

Wow. So there's some, some interesting, obviously regulatory nuance here, a lot of obstacles. And again, this is all speculative because it's eight proposed laws of different flavors. But it could have some really interesting impacts on some of the proxy advisors, which we can probably talk about after a quick break. How's that?

[B]

Okay.

[A]

All right, let's do that after a break here at Shareholder Primacy.

[C]

Shareholder Primacy is brought to you by freeflowanalytics.com, the only free database of corporate directors, their influence and their performance. If you own a stock or retirement plan, go to free flow analytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free flow analytics.com now back to the show.

[B]

Welcome back to Shareholder Primacy. I'm Ann Lipton here with Mike Levin, talking about how states have started down the road of setting limits on proxy advisors.

[A]

Yeah. So we need to discuss the potential implications of this first. I think it's worth asking right now. We've seen only these eight states do this. Potentially there's a few more that could.

[B]

Yeah. I mean, if the lobbying effort, I mean, it just, it's so obviously at the bare minimums, they cannot regulate this far that, I mean, it just seems very silly.

[A]

And clearly it depends on, you know, I'm going to say nexus or whatever, whatever the jurisdictional, you have to work those out because it's pretty clear that some sort of constitutional problem.

[B]

They would be on much firmer ground if they said only investors in our state. We are regulating the advice given to investors in our state. At least then they wouldn't have the commerce cause problem.

[A]

And it's also worth mentioning that it's pretty clear that they're not responding to these laws, don't respond to problems that investors have with.

[B]

These are intended to prevent proxy advisors from giving proxy advice, right?

[A]

Yeah.

[B]

They're not intended. This is not a good faith effort to actually improve the system.

[A]

Right, right. But between proxy advisors and their clients, there's really very little friction here. There are very few. I mean, proxy advice, I mean, clients have their problems with the proxy advisors. Mostly they're not asking for. Right, right. They're clearly not asking for this. This is, you know, something that is coming from a different direction, really from a company direction. I think it's also worth kind of digging into what that company direction is. And I have long maintained that the big problem that companies have with proxy advisors revolves around a very specific issue. And I'm kind of curious about, if you agree with this, that it revolves around proxy advisors, recommendation on executive comp and say on pay that most companies, most executives, most leadership teams, most boards don't really care deeply about the. The whole ESG project. It's a nuisance. And there's some companies that take it to heart a lot more than others. I'm thinking maybe ExxonMobil we talked about a minute ago. Okay. But most of them, you know, they kind of grudgingly look at some of this as a compliance thing or like I said, something of a nuisance. But they don't really care deeply about how the proxy advisors are really shareholders because, you know, we've talked before about how proxy advisors are really just a reflection of what investors think. You know, because they survey their investors and so forth. It's basically, it's going after proxy advisors is an indirect way to try to make life harder for investors and shareholders. But the whole ESG project, which is in Texas, the point of the proxy advisor regulation and indirectly in these eight other states, kind of maybe the point though, they didn't want to make it ESG oriented.

[B]

Yeah, but they say that in the preamble, Right?

[A]

Exactly. I've long maintained that the big sticking point, the thing that really irritates companies and makes them want to support this stuff and give money to legislators that are carrying this legislation in these states is exec cap. Because the proxy advisors still have some sway. They do all the analysis, they make recommendations on, say on pay and so forth. And that can be kind of irritating. That hits a little closer to home for this company leadership. And this is really exec comp, not board comp. And so I've never really kind of connected the dots too closely, but that's always been my sense that this is what motivates a lot of the opposition to proxy advisors among corporations. So you get a company that has this consumer. What's it called? Consumer.

[B]

This one is.

[A]

Oh, it's one of these lobbying firms and they go, you know, they need to raise money from companies and so they go to company PACs and so forth. And they say we're going after proxy advisors and these with this model legislation. And here's the states we're targeting. You know, this is how the kind of works, I think. And then the company, you know, the CEO says, yeah, they really kind of screwed me over on exec comp last year. I thought I was doing a really great job when he maybe wasn't. And they kind of recommended no. And now they're making noise about going after the head of the comp committee or something, and they're just kind of disrupting something. That's. That, that's really a good thing for me. So I'm going to support this effort to kind of limit how they deal with comp anyway. That's a hypothesis. I don't have a whole lot of evidence.

[B]

I have no doubt that's a huge part of the ire, but I actually tend to think it's sort of broader. So first of all.

[A]

Okay, go ahead.

[B]

I mean, I think that this is resenting any challenge to management authority. Like increasingly. I think they just do not want to tolerate shareholders getting up in their business. And executive comp is part of it, but I don't think it's the only thing. And I think ESG has a little bit more sway than you think. And I suppose so. First of all, I think, you know, historically a lot of the anti ESG movement was being paid for by like essentially oil interests.

[A]

Yeah, sure, there's a real financial really focusing on the E part rather than the S part, but it's easier to

[B]

attack the whole thing. But also, I mean, see, here's the thing about esg. It can mean, obviously we've said this before. I've said it a zillion times. It can mean two things. Sometimes ESG means something like demanding that corporations behave responsibly just because you want them to behave responsibly. But sometimes ESG has a sort of financial valence. It means we want companies to recognize that certain environmental issues and social issues are real financial risks like climate change.

[A]

This is requires some planning, requires some thought.

[B]

It's not fuzzy do Gooder ism. Some ESG strategies are rooted in the idea that companies will suffer financially if they don't adjust to a chaming climate, even diversity. Sometimes it's we just want, you know,

[A]

this is like a good thing, a more egalitarian world.

[B]

But sometimes it can be financial. It's the idea that maybe more diverse workforces perform better or maybe they appeal to consumers more. Maybe it's better to have a product mix, entertainment, the super bowl halftime show, TV show.

[A]

There's legitimate strategic, business strategic reasons to have to focus on to have this diversity.

[B]

And I think that the anti ESG movement, and that's what this is an outgrowth of in some ways it looks to me like an attempt to will into existence that ESG not be financial. It's a mechanism for simply denying that climate change is real or has a real financial impact. It's a way of denying that diversity efforts might actually have mass appeal and reflect mass tastes. And the way they're trying to try to enforce that is by making it impossible for financial actors to express a preference.

[A]

And so. And then the, then ISS and Glass Lewis just become the punching bags.

[B]

Exactly.

[A]

For that effort.

[B]

Yes.

[A]

So go ahead.

[B]

What do you think? I mean, like, honestly, I think that these laws are so troubled from a legal perspective.

[A]

Oh yeah. And we've kind of established that.

[B]

How is this, like, how would this affect activism, like just straight up your activism if you can't recommend a man's management?

[A]

Well, so here's part of the problem for, and this is a problem for ISS and glassloaders with proxy advisors is that big investors have started a little bit to migrate away from relying on them. And this might hasten a little bit this effort that, because it may, you know, may increase the cost of the. Again, the big complaint that shareholders have about ISS in Glass Lewis is. Well, is what it costs to buy their services. The big complaint that activists have is that we can't get their attention and they don't favor us enough.

[B]

Okay.

[A]

They're too fair.

[B]

So if they're out, okay. But if they're out of the mix, I mean, can you take, will you be able to take your, your case directly to shareholders? Do you need them?

[A]

It's, it's, it's, it kind of depends. And part of the problem is that I absolutely need them because I'm, I don't, you know, I'm not writing ESG proposals, I'm writing board actions where I need to talk to their special situations people. I need to talk to the, the Chris's and so forth. You know, there's a whole culture around how to approach ISS and Glass Lewis and make your case for your directors. That's not changing. I mean these laws may change that a little bit.

[B]

No, these laws do change it though. These laws, if they go into effect, will make it virtually impossible to recommend against management. They will kill the industry.

[A]

Well, but in the special situations area,

[B]

that's recommending against management.

[A]

Absolutely, that's what these covers. But, but all the additional reasoning that these laws are requiring are mostly already there in the special situations.

[B]

So you're saying that these additional disclosures are not like these.

[A]

Yeah, yeah, the special situations people. For them to comply. Suppose, suppose that the Texas law is declared valid. I'm making this up. Or that one of the other states challenge is challenged and then the federal court affirms that the Mississippi, Mississippi Kansas law is, is, is, is enforceable especially situational say okay, well I had a page of this financial asset we don't usually include.

[B]

I'm not. Well, I, since I think part of the, I mean. So you think that the, the analysis is going to meet the standard.

[A]

I think I was meant within, within the analysis that the proxy advisors customarily do for like board stuff, for mergers, for that kind of stuff.

[B]

My suspicion is that the point of these laws is to make it impossible for them to meet that standard.

[A]

Right. And there, and there may continue to raise the bar or something. There may be, you know, ways, you know, regulations that are implemented or something that make it increasingly hard. But you know, for some of the core, and I've said this before that you know that part of the, part of the overall effort to lean on and make life hard for proxy advisors focuses on esg. But there's. And therefore that's why Glass Lewis and ISS aren't going to be giving recommendations much anymore and so on and so forth. But the, the whole idea of you know, making recommendations on comp and again on comp. They do all sorts of elaborate financial analysis on exec comp. There's very detailed financial analysis. Anyway, same thing for again special situations. Board elections is a little different. Board elections tends to follow a policy and usually that has to do with responsiveness of a board to previous shareholder pressure. So they'll, you know, they'll recommend you vote against the nom and Corp. Gov committee person if for three years shareholders, you know, look for some sort of governance reform. And they didn't, they didn't listen. Okay. So there may need to beef up there recommendations to vote against a board member in order to comply with this law. Okay. But in these other two areas in the exec comp world and then also all the specialists and in special situations there's not that many. You know, there's maybe 15 or 20 reports that are written at least in the US about proxy contests. Okay. Those are very well documented as a general rule. So I don't guessing that those analyses will be largely in compliance with this new effort. Okay. You know, the problem for the proxy advisors is that there's only 15 or 20 of them. They're very high valued, they're very high profile. You know, you see the news releases when in a proxy contest when someone says oh ISS supported our three people.

[B]

Yeah.

[A]

Okay. They're really, you know that that's when you know ISS and Glass Lewis are mostly, you know get their publicity is when they're you know, opining on a, you know, hot activist situation. Okay. The problem is there's too few of them. You can't build a business on that. You can't pay the bills on 15 or 20 proxy contests that go through special situations. So anyway, so it's uneven. It's a legitimate threat to them. And you're right. I agree with you completely that it will make a large part of their business really hard to manage. But a couple of the critical parts that I have a little more contact with are probably something that they'll be able to manage. It's just they can't build a business off of those. As I said to go. So anyway, wow. So we'll have to sort of track this in the, in the spring. And I mean, you know, there's a whole legislative process going on. We'll know about this.

[B]

My big question is if this stuff passes, like, how much appetite ISS and Glass Lewis have to keep litigating it as opposed to. Yeah, at some point.

[A]

I don't know. I think, I think they've been very willing to challenge and put a lot of resources.

[B]

But Glass Lewis has already changed. It's completely changing its business model. So it's. And ISS is going to do a research.

[A]

Probably do the same thing, too. Yeah. So. So I don't know.

[B]

I don't know.

[A]

We'll see anyway. All right, cool. Well, we'll, we'll update followers here about what we see here. Maybe more states. I'll introduce some laws or some of these won't go through or who know, who the hell knows? So we'll have to track it anyway. Right. This is good. Let's, let's come back next week or in a couple weeks. I know you got some time off for some more, some more, some more work, but we'll do that. We'll talk again soon. All right. This is Shareholder Primacy, hosted by an lipped enemy, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Anne is professor of law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me, [e-mail] and annaw Colorado Edu. Our podcast is produced and distributed by Free Float Media. Thanks for listening. We'll be back again next week. It.