Proxy Advisors and ESG: How ISS and Glass Lewis Quietly Shape Corporate Behavior

Most shareholders never read a company's full proxy statement before an annual meeting. Instead, a huge share of votes on director elections, executive pay, and shareholder ESG proposals gets shaped by the recommendations of two firms most people have never heard of: Institutional Shareholder Services (ISS) and Glass Lewis.

Why two research firms move so much capital

ISS and Glass Lewis are proxy advisory firms. Institutional investors, pension funds, mutual funds, and asset managers who hold voting shares across hundreds or thousands of companies, don't have the staff to independently research every ballot item at every portfolio company's annual meeting. So they subscribe to voting recommendations from ISS or Glass Lewis, which analyze proxy statements and issue a recommended vote on each item.

Between them, these two firms cover the overwhelming majority of the proxy advisory market. Their recommendations don't bind anyone, but in practice, a meaningful share of institutional votes tracks the advisors' guidance closely, particularly for asset managers running large, diversified portfolios where deep individual research isn't practical.

Where ESG enters the picture

Both firms maintain their own voting policies that account for ESG-related factors: board diversity benchmarks, climate-related shareholder proposals, executive compensation tied to sustainability metrics, and governance practices around board independence. When a company's practices fall outside what a proxy advisor's policy considers acceptable, that can translate into a "vote against" recommendation on director elections or say-on-pay votes, even when the company itself sees no problem with its practices.

This gives proxy advisors outsized influence over how ESG expectations actually get enforced in practice. Regulators and legislators can set disclosure requirements, but proxy advisors are one of the mechanisms that turns disclosed information into actual consequences at the ballot box.

The tension this creates

Proxy advisors have faced sustained criticism from multiple directions. Some argue their ESG-related voting policies push companies toward specific social or environmental positions without those positions reflecting genuine shareholder consensus. Others argue proxy advisor recommendations move too slowly or too conservatively relative to what large institutional investors with dedicated stewardship teams actually want.

There's also a structural concern: because so much of the market relies on a small number of advisory firms, their internal policy decisions function almost like private regulation, shaping corporate behavior at scale without the transparency or accountability that comes with an actual regulatory process.

What companies can actually do about it

Companies preparing for proxy season increasingly engage directly with ISS and Glass Lewis methodology documents well before annual meetings, rather than treating proxy advisor recommendations as something that happens to them. This includes understanding which specific policy triggers apply to board composition, compensation structure, or ESG-related proposals, and addressing gaps proactively in proxy disclosures rather than reactively after an unfavorable recommendation is issued.

Institutional investors, for their part, increasingly maintain their own voting guidelines that diverge from proxy advisor defaults on specific issues, using the advisors' research as an input rather than a final answer. Large asset managers with dedicated stewardship teams frequently override proxy advisor recommendations on high-profile votes when their own analysis differs.

The practical takeaway

Whether or not proxy advisors deserve the influence they have, that influence is a fact companies have to plan around. Understanding how ISS and Glass Lewis actually evaluate ESG-related governance and compensation practices is now a practical requirement for managing shareholder relations, not a niche concern limited to governance specialists.