Corporate Governance Risks in M&A: The Pivotal Role of Shareholder Advisory Firms

In the evolving landscape of mergers and acquisitions (M&A), corporate governance has emerged as a critical determinant of deal success. Over the past five years, shareholder advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis have amplified their influence on M&A outcomes, reshaping how companies structure transactions, disclose risks, and align with investor expectations. This analysis explores how these firms-through their voting policies, governance frameworks, and proxy advisory services-have become central to mitigating governance risks and influencing shareholder returns.

Governance as a Deal Catalyst

Shareholder advisory firms now play a gatekeeper role in M&A transactions, particularly in high-stakes deals involving strategic transformations or cross-border acquisitions. According to a HSF Kramer report, firms like ISS and Glass Lewis evaluate M&A proposals by scrutinizing transaction terms, strategic rationale, and regulatory risks to determine whether they create long-term value for shareholders. For instance, Glass Lewis guidance emphasizes the need for fair shareholder compensation, competitive bidding processes, and independent board oversight in mergers. These assessments directly impact institutional investors' voting decisions, often determining whether a deal secures shareholder approval.

The 2024–2025 policy updates from these firms underscore a shift toward holistic governance evaluations. Glass Lewis now requires companies to disclose board-level oversight of AI-related risks, a factor that could influence deals involving technology-driven targets, as noted in a WSGR summary. Similarly, Compensia notes that ISS has heightened scrutiny of performance-based equity awards, ensuring they align with pay-for-performance principles. These changes reflect investor demands for transparency in complex transactions, where governance missteps can derail deals or trigger post-merger litigation.

Executive Compensation and Pay-for-Performance Scrutiny

Executive compensation structures have become a focal point for shareholder advisory firms, with direct implications for M&A success. In 2025, ISS introduced a "Pay-For-Performance Qualitative Review," which evaluates whether performance-based equity awards are structured to incentivize long-term value creation, as explained in a Cooley summary. Companies with opaque or misaligned compensation programs face higher risks of adverse say-on-pay votes, which can erode shareholder confidence and complicate merger approvals.

Glass Lewis has similarly emphasized flexibility in executive pay design, advocating for clear rationales when adjusting incentive structures during mergers, as BIPC explains. For example, mid-cycle changes to long-term incentive (LTI) programs are now subject to rigorous scrutiny, with firms requiring detailed disclosures to justify adjustments, a Pearl Meyer analysis notes. This has forced companies to align compensation practices with governance best practices, reducing the likelihood of shareholder opposition during post-merger integration.

Board Oversight and Strategic Alignment

Board governance has emerged as a key battleground in M&A negotiations, with advisory firms shaping expectations for director accountability. Glass Lewis's 2025 guidelines now require companies to demonstrate robust board oversight of AI and ESG risks, factors that are increasingly material in technology and sustainability-focused deals, a Venable overview explains. This has led to greater shareholder scrutiny of board composition and decision-making processes, particularly in contested mergers where governance weaknesses can be exploited by activist investors.

ISS's updated stance on poison pills and SPAC extensions further illustrates this trend. The firm now evaluates poison pills based on market capitalization and governance track records, encouraging companies to adopt shareholder-friendly takeover defenses, Covington notes. Meanwhile, its simplified support for SPAC extensions has influenced the timing and structure of M&A deals involving special-purpose acquisition companies (SPACs), particularly in volatile markets, as discussed in a Harvard Law post.

Indirect Impacts on Shareholder Returns

While direct case studies of M&A deals influenced by ISS or Glass Lewis remain scarce, the indirect effects of their policies are evident. For example, the heightened focus on governance disclosures has led to more rigorous pre-deal due diligence, reducing the risk of post-merger governance disputes, as shown in a Harvard review. Additionally, companies that proactively align with advisory firm guidelines-such as adopting clawback provisions or extending executive vesting periods-often see improved shareholder returns, as these practices signal stronger corporate stewardship, a Harvard guide notes.

A 2025 analysis by Wilson Sonsini Goodrich & Rosati notes that institutional investors, who rely heavily on ISS and Glass Lewis recommendations, are increasingly prioritizing governance-aligned M&A strategies, and this trend is discussed in an ERISA Practice Center post. This trend has created a feedback loop: firms with strong governance practices attract greater institutional support, enhancing their ability to execute complex transactions without shareholder resistance.

Conclusion

The influence of shareholder advisory firms on M&A outcomes is no longer peripheral but foundational. By setting governance benchmarks and shaping investor expectations, ISS and Glass Lewis have redefined how companies approach deal-making in an era of heightened scrutiny. For investors, this means that governance risks must be evaluated alongside financial metrics, with advisory firm policies serving as a critical lens for assessing deal viability. As M&A activity rebounds in 2025, the alignment of corporate strategies with these governance frameworks will remain a key determinant of shareholder value.