Proxy firms’ lawsuits highlight need for public pension systems to prioritize investment returns

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 to public pension systems. They are not legally required to act in the best financial interest of the investors they influence. The companies 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, which is completely legal, but whose goals may not match those of long-term shareholders and taxpayers funding public pensions.

These conflicts are a concern for taxpayers because public pension systems allow the companies to shape major decisions with virtually no accountability. ISS and Glass Lewis 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. This is primarily the public pension systems’ responsibility, but 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 investment returns for public workers, retirees and taxpayers.

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 and are held responsible for paying public pension debt. 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. Reuters reported:

In complaints filed in Austin, Texas federal court, Glass Lewis and ISS said Texas’ law was unconstitutional, undermining their First Amendment right to advise clients even if the state didn’t like the advice.

Signed by Republican Governor Greg Abbott in June, the Texas law targets “non-financial” advice on diversity, equity and inclusion (DEI) matters, and environmental, social and governance (ESG) matters, including for votes at shareholder meetings.

It requires proxy advisers to conspicuously tell clients that the advice is “not being provided solely in the financial interest of the company’s shareholders,” and to provide financial analyses supporting the advice. The law takes effect on September 1.

Glass Lewis and ISS said the law would force proxy advisers to broadcast Texas’ preferred viewpoints when their own differed, including on hot-button issues that a Republican state legislator perceived as having a “hard left bent.”

None of this is about banning ESG or preventing shareholders from having a voice. Shareholder voting is an essential part of corporate governance. But when it comes to public pension systems funded and backed by taxpayers, shareholding voting needs to be grounded in fiduciary duty, not ideological crusades or opaque business models.

Some state pension systems, like Ohio’s, have already severed ties with ISS over concerns about conflicts of interest. Ohio passed a law requiring its public pension funds to make investment decisions with the sole purpose of maximizing investment returns—an explicit rejection of prioritizing ESG goals ahead of funding pensions promised to public workers.

Reforms should start with basic transparency, disclosing how proxy recommendations are developed and who’s paying for them. Robo-voting should be banned, and public pension funds should 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 public pension debt they are ultimately held responsible for paying, then it’s time to bring some sunlight to the proxy industry.

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