The Proxy Advisor Power Play: Legal Challenges Reshape Corporate Governance for Investors

The corporate governance landscape is undergoing a seismic shift as state legislatures and legal challenges target the growing influence of proxy advisors like Institutional Shareholder Services (ISS) and Glass Lewis. These firms, which dominate over 90% of the proxy advisory market, have long shaped voting outcomes on environmental, social, and governance (ESG) issues, board elections, and executive compensation. But a wave of state-level legislation and antitrust investigations is now threatening to upend their authority—and with it, the balance of power between investors, companies, and regulators.

The Texas Experiment: SB 2337 and the New Rules of Engagement

Texas's Senate Bill 2337, signed into law in June 2025, is the most aggressive and comprehensive attempt yet to regulate proxy advisors. The law requires firms like ISS and Glass Lewis to disclose when their recommendations are influenced by nonfinancial factors—such as ESG or DEI considerations—and to provide detailed financial analyses for any proposals that conflict with company management. These disclosures must be shared with shareholders, the relevant company, and the Texas attorney general, with summaries posted on the proxy advisor's website.

The implications are profound. Proxy advisors, which have historically operated in a lightly regulated space, now face a new compliance burden. Steve Cross of FW Cook notes that the law could force firms to revise their methodologies, potentially leading to more nuanced voting recommendations. For investors, this means greater transparency but also a potential chilling effect: if proxy advisors avoid making controversial ESG-related recommendations to sidestep scrutiny, shareholder engagement on these issues could decline.

A Broader Trend: Oklahoma, Missouri, and the Anti-ESG Push

Texas is not alone. Oklahoma's House Bill 1170 and Senate Bill 568, introduced in early 2025, impose similar restrictions on pension funds and governmental entities, mandating that proxy votes prioritize financial interests over non-pecuniary considerations. Missouri's Attorney General has launched an investigation into ISS and Glass Lewis, alleging that their ESG-focused recommendations advance political agendas rather than investor returns. West Virginia, meanwhile, has enacted anti-boycott laws targeting companies that exclude fossil fuel industries from their ESG strategies.

These efforts reflect a broader ideological battle over the role of ESG in corporate governance. Critics argue that proxy advisors have overstepped their fiduciary duties by prioritizing social goals over shareholder value. Proponents counter that ESG considerations are integral to long-term financial performance, particularly as climate risks and labor practices increasingly impact corporate profitability.

The Legal Front: First Amendment Challenges and Market Uncertainty

Proxy advisors are pushing back. ISS and Glass Lewis have sued Texas over SB 2337, claiming the law violates the First Amendment by compelling them to disclose their methodologies and nonfinancial reasoning. The outcome of these lawsuits could set a national precedent, determining whether states can regulate proxy advice without infringing on free speech.

Meanwhile, the SEC's new guidance under Regulation 13D-G has already reduced the number of ESG-related shareholder proposals reaching proxy ballots by 24% in 2025. This regulatory shift, combined with state-level actions, suggests a future where ESG voting is increasingly constrained—unless investors and companies find new ways to engage.

What This Means for Investors

For investors, the evolving legal and regulatory environment demands a more active role in corporate governance. Here's how to navigate the new landscape:

1. Diversify Governance Strategies: Relying solely on proxy advisors may no longer be sufficient. Investors should consider engaging directly with companies on ESG and DEI issues, using custom voting policies tailored to their portfolios.
2. Monitor Legal Developments: The outcome of Texas's SB 2337 and similar laws will shape the future of proxy voting. Investors should track court rulings and legislative changes in key states like Oklahoma and Missouri.
3. Reassess ESG Exposure: As proxy advisors face pressure to deprioritize nonfinancial factors, investors may need to independently evaluate ESG risks and opportunities. This includes scrutinizing companies' own disclosures on climate resilience, board diversity, and supply chain ethics.

The Road Ahead

The proxy advisor saga is far from over. While Texas's law has already sparked legal challenges, its implementation in September 2025 could force a recalibration of corporate governance norms. If other states follow suit, the influence of proxy advisors may wane, shifting power back to institutional investors and corporate boards.

For now, the message is clear: the days of proxy advisors operating as unchallenged gatekeepers are numbered. Investors who adapt to this new reality—by engaging more directly and diversifying their governance tools—will be better positioned to navigate the uncertainties ahead.