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

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