How two firms quietly threaten pension funds and taxpayers

With news that the world’s two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, are suing the state of Texas over a new law that limits their ability to push environmental, social, and governance factors (ESG) in shareholder voting, taxpayers deserve to understand who these companies are and what they stand for. At first glance, this lawsuit has been framed as a battle over free speech. But the real issue is less about constitutional rights and more about the enormous, largely unaccountable power these firms wield over public money.

ISS and Glass Lewis are private companies that dominate the proxy advisory market, influencing how institutional investors, including public pension funds, vote on matters like executive pay, board elections, and environmental proposals. These votes shape corporate policy, impact stock performance, and ultimately affect the financial stability of the retirement systems that millions of public employees depend on.

This is concerning because neither ISS nor Glass Lewis has any fiduciary duty to the pensioners or taxpayers whose financial futures are affected by their recommendations. They are not legally required to act in the best financial interest of the investors they influence. Instead, they operate as for-profit businesses, often with significant conflicts of interest. ISS, for example, sells consulting services to the very companies it rates. Glass Lewis has frequently aligned itself with activist investors whose goals may not match those of long-term shareholders.

And yet, these conflicted firms are allowed to shape major corporate decisions with virtually no accountability. They do this through a practice known as “robo-voting,” where most public pension funds automatically follow the recommendations of ISS or Glass Lewis without conducting their own review. Faced with thousands of shareholder proposals each year, some pension systems lean almost entirely on proxy advisor guidance, thereby outsourcing their legal responsibility to third parties with no duty to maximize returns.

When pension funds follow flawed advice, the result is lower returns and higher taxpayer costs. Because retirement benefits are constitutionally guaranteed, any shortfall turns into public debt. Taxpayers end up footing the bill through higher taxes or cuts to public services. It’s a quiet but significant transfer of risk from an obscure corner of the financial system to the public at large.

Despite this, federal regulators have failed to impose meaningful oversight. The Securities and Exchange Commission has spent years in a cycle of proposing, finalizing, and then reversing even modest rules around transparency and accountability for proxy advisors. That inaction has left states to act on their own.

Texas, for example, recently passed legislation requiring proxy firms to disclose whether their advice is based on non-financial considerations. That triggered the lawsuit now making headlines. Meanwhile, Ohio passed a law requiring its public pension funds to make investment decisions with the sole purpose of maximizing returns—an explicit rejection of ESG-first mandates. Some state pension systems, like Ohio’s, have already severed ties with ISS over concerns about conflicts of interest.

None of this is about banning ESG outright or preventing shareholders from having a voice. Shareholder voting is an essential part of corporate governance. But it needs to be grounded in fiduciary duty, not ideological crusades or opaque business models. Reforms should start with basic transparency, disclosing how proxy recommendations are developed and who’s paying for them. Robo-voting should be banned, and pension funds must be required to demonstrate that their votes are based on independent, financially sound analysis. The financial consequences of these proxy advisory recommendations are real and growing. If we want to protect the retirement security of teachers, police officers, and firefighters, and shield taxpayers from picking up the tab, then it’s time to bring some sunlight to the proxy industry. Coincidentally, by filing this lawsuit, these two firms may have just brought that sunlight on themselves.

The post How two firms quietly threaten pension funds and taxpayers appeared first on Reason Foundation.