What Trump’s crackdown on proxy advisors could mean for executive compensation

The Trump administration is seeking to weaken the power of proxy advisors that play a major role in shaping corporate governance issues, including compensation.

In a Dec. 11 executive order, President Donald Trump called for increased oversight of the proxy advisor industry, arguing that these organizations have used their power to advance shareholder proposals related to issues like DEI and ESG, rather than prioritize investor returns.

The order specifically calls out Glass Lewis and Institutional Shareholder Services (ISS), which advise institutional investors on voting for shareholder proposals, and account for more than 90% of the proxy advisor market. These firms have previously waded into hot-button workplace issues when making vote recommendations, such as boardroom diversity or CEO pay, but have recently shifted their focus in light of scrutiny surrounding their work.

What the order seeks to do. Trump asked the Securities and Exchange Commission chairman, Paul Atkins, to consider rescinding or revising regulations and rules related to proxy advisors, especially if they deal with DEI or ESG. Atkins will also consider whether proxy advisors’ voting recommendations violate anti-fraud provisions.

A proposal to have proxy advisors register as Registered Investment Advisers is also on the table, as well as the question of whether investors may be violating their fiduciary duties by asking these advisors to provide recommendations related to non-monetary factors such as DEI or ESG.

The Trump administration also wants the SEC to reconsider rule 14a-8, which concerns solicitations. Proxy advisor services currently aren’t considered solicitations under the law, but there is ongoing legal debate over whether that should change, Ani Huang, president of policy and practice with the CHRO Association, explained to HR Brew.

If Congress were to pass legislation stipulating that proxy advisor reports are considered solicitations, then firms like Glass Lewis and ISS would be subject to SEC rules governing proxy materials, and would have to provide more disclosures surrounding their work. This would change the way proxy advisors interact with companies, as they would have to give them the opportunity “to review and respond to their recommendation,” and make changes for accuracy or conflicts of interest, she added.

How weakened proxy advisors could affect compensation going forward. For the moment, this executive order has a more direct impact on the proxy advisors themselves than the companies affected by their recommendations, Huang said.

The Trump administration’s crackdown on these firms seems poised to disrupt their business model, according to Huang, which could in turn limit their ability to influence companies’ corporate governance practices.

Both Glass Lewis and ISS issued statements in response to the executive order defending their business practices. Glass Lewis said it “has always operated with the highest ethical standards with our clients being central to everything we do,” the Financial Times reported, while ISS wrote on its website that it “remains firmly committed to operating professionally, ethically, independently and in the best interests of our clients, as we have done historically.”

Should the Trump administration be successful in reducing the power of proxy advisors, it could have a major impact on companies that take their recommendations into account when structuring compensation packages, Huang said. Historically employers have steered away from certain practices that draw negative recommendations from proxy advisors when put to a shareholder vote, such as offering executives retention bonuses or agreeing to buy out the home of an executive who needs to relocate for their position.

On the plus side, proxy advisors’ reduced power could “free companies up to have more flexibility and more innovation” in the executive compensation space, Huang said. “They could give retention bonuses, or they could offer sign ons that are necessary to get talent through the door…all kinds of things that they’re kind of prevented from doing now.”

If proxy advisors lose influence, however, it could also create uncertainty for companies that are trying to gauge how their investors will vote on pay proposals, Huang added.

Proxy advisors’ “greatest impact on executive compensation” arguably concerns design and planning, Ariane Marchis-Mouren, senior governance researcher with The Conference Board, told HR Brew via email.

“Boards and compensation committees routinely design pay programs with ISS and Glass Lewis frameworks in mind—particularly on metrics, peer benchmarking, discretion, and realized pay outcomes—to avoid negative recommendations that could trigger reputational risk, investor engagement demands, or failed say-on-pay votes,” she said, referring to policies that allow shareholders to vote on executive pay.

Proxy advisors are facing pressure on multiple fronts, including at the state level. Texas enacted a law in June that limits the firms’ ability to provide advice related to ESG and DEI, which ISS and Glass Lewis are currently fighting in court. And Florida’s attorney general sued both of the firms last month, alleging they violated the state’s consumer protection and antitrust laws.

Looking to the future, Marchis-Mouren predicted that employers may face a “fragmented governance landscape,” requiring them to take into consideration “divergent expectations across states, investor bases, and political jurisdictions” when it comes to executive compensation and other corporate governance issues.