CORPORATE 

SHAREHOLDER 

MEETINGS

Proxy Advisory Firms’ 

Role in Voting 

and Corporate 

Governance Practices

Report to the Chairman, Subcommittee 

on Economic Policy, Committee on 

Banking, Housing, and Urban Affairs, 

U.S. Senate

November 2016

GAO-17-47

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-47, a report to the 

Chairman, Subcommittee on Economic Policy, 

Committee on Banking, Housing, and Urban 

Affairs, U.S. Senate

November 2016

CORPORATE SHAREHOLDER MEETINGS

Proxy Advisory Firms’ Role in Voting and Corporate 

Governance Practices

Why GAO Did This Study

As institutional investment has grown 

over the last 30 years, institutional 

investors increasingly have relied on 

proxy advisory firms. The proxy 

advisory industry in the United States

consists of five firms—two of which are

the largest and most dominant proxy 

advisory firms. Some members of 

Congress, industry associations, and 

academics have raised issues about 

proxy advisory firms’ influence on

voting and corporate governance, the 

level of transparency in their methods,

and the level of regulatory oversight.

GAO was asked to review the current 

state of the proxy advisory industry. 

This report discusses (1) the influence 

proxy advisory firms may have on 

voting and corporate governance, (2) 

how firms develop and apply policies to 

make vote recommendations, and (3)

SEC’s oversight activities. GAO 

reviewed literature; analyzed the proxy 

advisory firms’ policies and SEC 

policies and examinations; and 

interviewed the 5 proxy advisory firms, 

13 institutional investors, 11 corporate 

issuers, SEC officials, and industry 

stakeholders. GAO randomly selected 

corporate issuers from Standard and 

Poor’s indexes and judgmentally 

selected institutional investors (based 

on size and type of investor) from 

industry associations’ information.

GAO makes no recommendations in 

this report. GAO provided a draft to 

SEC for its review and received 

technical comments, which were 

incorporated as appropriate.

What GAO Found

Institutional investors, such as pension plans and mutual funds, hire proxy 

advisory firms to obtain research and vote recommendations on issues, such as 

executive compensation and proposed mergers that are addressed at 

shareholder meetings of public corporations (corporate issuers). Market 

participants and other stakeholders with whom GAO spoke agreed that with the 

increased demand for their services, proxy advisory firms’ influence on 

shareholder voting and corporate governance practices has increased. But 

recent studies, market participants, and stakeholders had mixed views about the 

extent of the influence. For example, some said influence can vary based on 

institutional investor size (there is less influence on large institutional investors 

that often perform research in-house and have their own voting policies).

Proxy advisory firms, specifically Institutional Shareholder Services and Glass 

Lewis & Company—the two largest firms—develop and update their general

voting policies through an iterative process, involving analysis of regulatory 

requirements, industry practices, and discussions with market participants. 

Corporate issuers and institutional investors told GAO that unlike in the past, the 

firms have made more of an effort to engage market participants in the 

development and updating of voting policies, such as criteria for assessing the 

independence of board directors and executive compensation packages. 

According to the firms, they apply these general voting policies to publicly 

available company information to develop vote recommendations, which also are 

based on institutional investor voting instructions and criteria that firm analysts 

determine are applicable to the issue being voted on. Firms have taken steps to 

communicate with corporate issuers and allow review of data used to make vote 

recommendations before they are finalized. However, some corporate issuers 

told GAO that firms continue to apply policies in a one-size-fits-all manner, which 

can lead to recommendations not in the best interest of shareholders. Corporate 

issuers also stated that they often do not understand the rationale for some vote 

recommendations and would like to discuss them before they are finalized. Proxy 

advisory firms told GAO that to maintain objectivity and satisfy research reporting 

timelines for clients, they limit the breadth of such discussions.

Securities and Exchange Commission (SEC) oversight of proxy advisory firms 

and the services they provide has included gathering information, issuing

guidance, and examining proxy advisory firms and use of the firms by investment

companies, such as mutual funds. In 2010, SEC summarized concerns that 

market participants raised about conflicts of interest, accuracy, and transparency

of proxy advisory firms and requested comments on potential regulatory 

solutions. In December 2013, SEC held a roundtable to discuss issues facing the 

proxy advisory industry, and issued guidance in June 2014 on disclosure of 

conflicts of interest, among other things. According to SEC, it also has continued 

to address concerns surrounding proxy advisory firms through its examinations of 

investment advisers and investment companies that retain their services. SEC 

made these examinations a priority in 2015 and an area of focus in its ongoing 

initiative for registered investment companies that had not been examined by 

SEC.

View GAO-17-47. For more information, 

contact Michael Clements at (202) 512-8678 

or clementsm@gao.gov.
Page i GAO-17-47 Corporate Shareholder Meetings

Letter 1

Background 4

Several Factors Have Led to Increased Demand for and Influence 

of Proxy Advisory Firms, but Mixed Views Exist on the Extent of 

Influence 13

Proxy Advisory Firms Have Increased Engagement with Market 

Participants and Stakeholders in the Vote Recommendation 

Process 19

SEC Oversight Activities of Proxy Advisory Services Have 

Included Information Gathering, Guidance, and Examinations 31

Agency Comments 37

Appendix I Objectives, Scope, and Methodology 39

Appendix II GAO Contact and Staff Acknowledgments 44

Tables

Table 1: Key Participants in Proxy Voting for Shareholder 

Meetings 5

Table 2: Registration Status of Proxy Advisory Firms, as of June 

2016 10

Figures

Figure 1: Examples of Communication Mechanisms Institutional 

Shareholder Services (ISS) and Glass Lewis Used for 

Proxy Voting Policy Development, as of September 2016 22

Figure 2: Institutional Shareholder Services’ (ISS) and Glass 

Lewis’s Review Processes for Proxy Reports, as of 

September 2016 28

Figure 3: Securities and Exchange Commission (SEC) Oversight 

Actions Related to the Proxy Voting System and Use of 

Proxy Advisory Firms, 2007–2016 32

Contents
Page ii GAO-17-47 Corporate Shareholder Meetings

Abbreviations

Advisers Act Investment Advisers Act of 1940

AUM assets under management

CEO chief executive officer

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer 

Protection Act 

Egan-Jones Egan-Jones Proxy Services

Exchange Act Securities Exchange Act of 1934

Glass Lewis Glass Lewis & Co.

ISS Institutional Shareholder Services

Marco Consulting Marco Consulting Group

NASDAQ NASDAQ Stock Market

NYSE New York Stock Exchange

SEC Securities and Exchange Commission

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-17-47 Corporate Shareholder Meetings

441 G St. N.W.

Washington, DC 20548

November 15, 2016

The Honorable Dean Heller

Chairman

Subcommittee on Economic Policy

Committee on Banking, Housing, and Urban Affairs

United States Senate

Dear Mr. Chairman:

Each year at tens of thousands of meetings, shareholders of publicly 

traded companies (corporate issuers) vote on issues that could affect the 

companies’ value, such as the election of directors, executive 

compensation packages, and proposed mergers and acquisitions. The 

shareholders receive advance notice of the votes through a written proxy 

statement—information about the issues subject to vote—and may vote in 

person or choose a third party (proxy) to cast their vote.1 Most proxy 

votes are cast by or on behalf of institutional investors, such as mutual 

funds and pension funds, because of the level of stocks they manage 

relative to other types of investors. Institutional investors frequently hire 

proxy advisory firms to provide research on the issues being voted on and 

also make recommendations on whether to vote for or against these 

issues.

As demand for the services of proxy advisory firms has grown, concerns 

about the industry in the United States also have increased. For example, 

some former Securities and Exchange Commission (SEC) 

commissioners, industry associations, and academics have raised 

concerns about the firms and their influence on shareholder votes and 

corporate governance, and whether increased oversight and 

transparency was needed. More recently, some members of Congress 

expressed similar concerns and introduced legislation aimed at improving 

 1

A proxy statement contains information the Securities and Exchange Commission (SEC) 

requires companies to provide to shareholders so shareholders can make informed 

decisions about matters that will be voted on at an annual or special shareholder meeting. 

Proxy statements, which must be filed by a publicly traded company before a shareholder 

meeting, are filed with SEC on Schedule 14A. 

Letter
Page 2 GAO-17-47 Corporate Shareholder Meetings

the accountability and transparency of proxy advisory firms.2 Critics 

contend the firms have a disproportionate influence on shareholder votes 

and have no obligation to make voting recommendations in the best 

interests of shareholders, and the proxy advisory industry suffers from 

conflicts of interest and a lack of competition. Others counter that proxy 

advisory firms provide a valuable service for institutional investors, 

including identifying and aggregating information, and note that 

institutional investors are sophisticated market participants that are free to 

choose whether and how to employ proxy advisory firms. Moreover, they 

note that without the services of a proxy advisory firm, institutional 

investors would need significant resources to adequately manage a 

complex and variable set of voting decisions on myriad corporate issues. 

In June 2007, we reported on issues related to the proxy advisory firm 

industry, including how potential conflicts of interest could affect proxy 

advisory firms’ recommendations, a lack of competition within the 

industry, and the extent to which institutional investors rely on advisory 

firms.3 For example, we found larger institutional investors were less likely 

to rely on proxy advisory firms because they could research voting issues 

in-house, in contrast to smaller institutional investors that did not have 

such research capabilities.

You asked us to review several additional aspects of the proxy advisory 

firms industry. This report discusses (1) the demand for proxy advisory 

services and the extent to which firms may influence proxy voting and 

corporate governance practices, (2) how proxy advisory firms develop 

and apply voting policies to make vote recommendations and efforts to 

increase transparency, and (3) SEC’s oversight since 2007 related to 

proxy advisory firms and the services they provide.4

 2

See, e.g., Corporate Governance Reform and Transparency Act of 2016, H.R. 5311, 

114th Cong. (2016). Among other things, the bill would require all proxy advisory firms to 

register with SEC, disclose potential conflicts of interest, and make publicly available their 

methodologies for formulating proxy recommendations and analyses.

3

See GAO, Corporate Shareholder Meetings: Issues Relating to Firms That Advise 

Institutional Investors on Proxy Voting, GAO-07-765 (Washington, D.C.: June 29, 2007). 

4

In this report, we focus on SEC oversight related to requirements under the federal 

securities laws. We do not examine the extent to which proxy advisory firms may or may 

not, in some cases, be subject to additional requirements applicable to those who provide 

investment advice or recommendations for a fee or other compensation with respect to 

assets of a pension plan. 29 C.F.R. § 2510.3-21. 
Page 3 GAO-17-47 Corporate Shareholder Meetings

To address these objectives, we conducted a literature review and 

examined studies, reports, congressional testimony, documentation from 

SEC, which regulates the proxy solicitation process for publicly traded 

equity securities, and documentation from proxy advisory firms. We also 

identified and conducted interviews with officials and representatives with 

knowledge of the industry (SEC, 5 proxy advisory firms, 13 institutional 

investors, 11 corporate issuers, 4 proxy solicitors, 2 international 

regulatory organizations, and 8 industry and advocacy groups).5 We 

conducted the interviews to obtain an understanding of issues affecting 

the proxy advisory industry and a variety of perspectives, as well as to 

corroborate the information obtained in our literature review. Additionally, 

for the first objective, we reviewed and summarized literature, and 

analyzed available information on users of proxy advisory firms and the 

demand for proxy advisory services, factors that may have contributed to 

demand, and the possible influence of firms on proxy voting and 

corporate governance practices.

For the second objective, we compared proxy advisory firms’ policies and 

procedures for selected voting issues with corporate governance 

standards developed by other entities, such as stock exchanges that 

have corporate governance requirements that corporate issuers must 

meet to be listed on the exchange and one large institutional investor that 

has developed its own voting policies on corporate governance issues. 

We analyzed criteria and tools proxy advisory firms use in developing 

vote recommendations, and identified several examples of different proxy 

voting issues to illustrate the process.6 We also reviewed proxy advisory 

firms’ policies and views on the transparency of their processes, including 

methodologies used to develop vote recommendations.

For the third objective, we reviewed and summarized SEC oversight 

activities since our 2007 report, including SEC’s efforts to solicit

 5

In selecting corporate issuers (public companies that develop, register, and sell securities 

to the investing public to finance their operations), we used information from the Standard 

and Poor’s Smallcap 600, Midcap 400, and Large 500 indexes to randomly select a mix of 

small, midsize, and large corporate issuers. We obtained information from industry 

associations to judgmentally select a mix of investors by asset size and type (such as 

mutual fund companies and pension funds). For this report, we define “large” as $600 

billion or more in assets under management (total market value of all financial assets 

managed on behalf of the institution or its clients) and “small” as $200 billion or less in 

assets under management. 

6

Our selection of entities and voting issues was based on our literature review and 

interviews with market participants and other stakeholders. 
Page 4 GAO-17-47 Corporate Shareholder Meetings

comments about proxy advisory services and updated guidance and 

examination procedures. We also reviewed several examinations that 

covered issues related to proxy advisory services. Throughout this report, 

we use certain qualifiers when describing responses from interview 

participants, such as “few,” “some,” and “most.” We define few as a small 

number such as two or three; some as at least four or more but less than 

most; and most as at least seven or more relative to the total number 

possible. See appendix I for more information on our scope and 

methodology.

We conducted this performance audit from August 2015 to November 

2016 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Publicly traded companies are generally required by state law to hold 

annual meetings to conduct business that requires shareholder approval. 

U.S. public companies hold their annual meetings to consider key 

management and shareholder proposals that may have an effect on a 

company’s operations and value, such as executive compensation and 

director elections, or other more routine issues that may not affect value, 

such as changing a corporate name or approving an auditor. They also 

occasionally hold special meetings during the year to consider key issues 

such as proposed mergers and acquisitions.

Shareholders are provided advance notice of annual and special 

shareholder meetings through a written proxy statement, which typically 

includes a proxy ballot (also called a proxy card) that allows shareholders 

to appoint a proxy to vote on the shareholder’s behalf if the shareholder 

decides not to attend the meeting. Proxy voting can be conducted online, 

by mail, or by telephone.7 Shareholders may instruct the proxy how to 

vote the shares or grant the proxy discretion to make the voting decision. 

Because of their large stockholdings, institutional investors (such as 

 7

In 2007, SEC amended the proxy rules to allow companies to provide proxy materials to 

shareholders through the Internet. This model of proxy materials is often referred to as 

“Notice and Access.” 72 Fed. Reg. 42,222 (Aug. 1, 2007) (codified as amended in 

scattered sections of 17 C.F.R. Part 240). 

Background
Page 5 GAO-17-47 Corporate Shareholder Meetings

investment advisers, insurance companies, mutual funds, and pension 

plans) cast the majority of proxy votes.

In general, proxy voting in shareholder meetings involves several key 

participants such as shareholders (including institutional investors), 

corporate issuers, proxy agents, and proxy advisory firms (see table 1).8

Institutional investors frequently hire proxy advisory firms to provide 

analysis and proxy voting recommendations and facilitate voting, record 

keeping, reporting, and disclosure requirements. For instance, the 

mechanics of tracking proxy cut-off times, managing and analyzing proxy 

materials, and casting votes can require significant resources. Many 

institutional investors use a proxy advisory firm to help perform some or 

all of these services. While proxy advisory firms perform services yearround, most of the services center on the proxy season.9 Some publiclytraded companies also may use a proxy solicitor to identify, locate, and 

communicate with shareholders to secure votes on certain issues.

Table 1: Key Participants in Proxy Voting for Shareholder Meetings

Name Description Role

Shareholder Owner of one or more shares of stock in a 

company, also commonly called a 

stockholder

Vote on issues that come up at shareholder 

meetings that could affect a company’s value

Corporate issuer Public company subject to reporting 

requirements under the Securities Exchange 

Act of 1934

Distribute proxy materials to shareholders; 

may put forth proposals on certain corporate 

matters

 8

Generally speaking, proxy agents are third-party service providers that provide proxy 

distribution, voting services, and other responsibilities in connection with the proxy voting 

system. Broadridge Financial Solutions, the proxy agent used by most corporate issuers in 

the United States and globally, delivers proxy materials for approximately 13,000 

shareholder meetings annually, and, in fiscal year 2015, processed more than 2 billion 

investor communications through paper or electronic channels. 

9

The proxy season generally is from mid-March to early June, when most of the largest 

publicly traded companies in the United States hold annual meetings to vote on company 

business, including resolutions introduced by shareholders.
Page 6 GAO-17-47 Corporate Shareholder Meetings

Name Description Role

Institutional investor Entities (such as mutual funds, corporate 

pension funds, government pension funds, 

union pension funds, and investment 

management companies) that hold shares in 

a large number of public companies; 

investment advisers to these entities 

generally are registered with the Securities 

and Exchange Commission and have 

fiduciary duties under the Investment 

Advisers Act of 1940

Carry out fiduciary duty of voting proxy in best 

interest of the institutional investor’s beneficial 

owners

Proxy advisory firm Third-party that provides services to 

institutional investors that include research 

and vote recommendations on proposals

Provide research and analysis, vote 

recommendations, and in some cases, cast 

proxy vote for institutional investors

Proxy solicitor Specialist (firm) hired to gather proxy

votes

Help public companies identify, locate, and 

communicate with shareholders to secure 

votes

Proxy agent Third-party that provides proxy distribution 

and voting services for corporate issuers.

Provide mailing, execution, and tabulation of 

proxy votes, (including meeting notifications, 

tracking, reconciliation, and reporting and 

record keeping)

Source: Securities and Exchange Commission (SEC). | GAO-17-47

Currently, the proxy advisory industry in the United States consists of five 

firms: Institutional Shareholder Services (ISS), Glass Lewis & Co. (Glass 

Lewis), Egan-Jones Proxy Services (Egan-Jones), Marco Consulting 

Group (Marco Consulting), and ProxyVote Plus.10

• ISS, founded in 1985, provides research and analysis of proxy issues, 

custom policy implementation, vote recommendations, vote execution, 

governance data, and related products and services. ISS also 

provides advisory/consulting services, analytical tools, and other 

products and services to corporate issuers through ISS Corporate 

Solutions, Inc. (a wholly owned subsidiary). ISS is owned by Vestar 

Capital Partners, a private equity firm, and company management. As 

of September 2016, ISS had more than 900 employees in 18 offices 

in 12 countries, and covered approximately 39,000 meetings in 115 

countries. ISS had about 1,600 institutional investor clients and 

 10There are also several European firms—for example, Manifest, Pensions and 

Investment Research Consultants, Hermes Equity Ownership Services, and BMO Asset 

Management—that offer international research, including research reports on U.S. 

companies, or provide vote management and engagement services to institutional clients 

that invest globally. We did not include these firms in our review.

Proxy Advisory Firms
Page 7 GAO-17-47 Corporate Shareholder Meetings

executed more than 8.5 million ballots annually on behalf of those 

clients.

• Glass Lewis, established in 2003, provides proxy research and 

analysis, custom policy implementation, vote recommendation, vote 

execution, and reporting and regulatory disclosure services to 

institutional investors. Glass Lewis is an independent portfolio 

company of the Ontario Teachers’ Pension Plan Board and Alberta 

Investment Management Corporation. As of September 2016, Glass 

Lewis had more than 350 employees and offices in San Francisco, 

New York, Ireland, Australia, and Germany that provide services to 

more than 1,200 institutional investors that collectively manage more 

than $20 trillion.

• Egan-Jones Proxy Services was established in 2002 as a division of 

Egan-Jones Ratings Company. Egan-Jones provides proxy services, 

such as notification of meetings, research and recommendations on 

selected voting issues, voting guidelines, execution of votes, and vote 

disclosure. As of September 2016, Egan-Jones Ratings Company had 

approximately 450 clients of all types firm-wide including funds, 

institutions, corporate issuers, and public entities. Of these, EganJones’ proxy research or voting clients mostly consisted of mid- to 

large-sized mutual funds. Egan-Jones covers approximately 40,000 

companies. Many of its largest institutional clients use Egan-Jones 

research to augment their own research. Egan-Jones is based in 

Haverford, Pennsylvania.

• Marco Consulting Group, an Illinois-based firm, was established in 

1988 to provide investment analysis and advice, and proxy voting 

services to a large number of Taft-Hartley and public benefit plans.11

As of September 2016, Marco Consulting served 300 clients with 

assets of $145 billion. Marco Consulting uses ISS as the provider for 

its proxy voting platform and reporting. Marco Consulting also 

subscribes to research services from ISS. It has offices in Chicago, 

Boston, and Denver.

• ProxyVote Plus, also based in Illinois, is an employee-owned firm 

established in 2002 to provide proxy voting services to Taft-Hartley 

fund clients. ProxyVote Plus conducts internal research and analysis 

 11Taft-Hartley refers to funds placed in trust and administered jointly by employers and 

unions for the exclusive purpose of funding multiemployer employee pension and welfare 

plans. Taft-Hartley Act refers to the Labor Management Relations Act, 1947, which 

includes provisions facilitating the establishment of such plans. § 302(c), ch. 120, 61 Stat. 

136, 157-58 (1947) (codified at 29 U.S.C. § 186(c)(5)). 
Page 8 GAO-17-47 Corporate Shareholder Meetings

of voting issues and executes votes based on its guidelines. 

ProxyVote Plus reviews and analyzes proxy statements and other 

corporate filings, and reports annually to its clients on proxy votes cast 

on their behalf. As of September 2016, ProxyVote Plus had more than 

200 clients throughout the United States and Canada.

Of the five firms, ISS and Glass Lewis are the largest and most often 

used by institutional investors. To compete, proxy advisory firms must 

offer comprehensive coverage of corporate proxies and use sophisticated 

systems to provide research and proxy vote execution services. As we 

reported in 2007, ISS’s long-standing history—since 1985—of working 

with institutional investors, as well as its reputation for providing 

comprehensive proxy voting research and recommendations, makes it 

the most dominant proxy advisory firm.12 We found that ISS’s dominance 

makes it difficult for competitors to attract clients and compete in the 

market. We also reported that institutional investors may be reluctant to 

subscribe to a potentially inexperienced or less-established proxy 

advisory firm that may not provide thorough coverage of all of their 

institutional holdings. According to market participants and other 

stakeholders with whom we spoke, these conditions continue to exist, 

and, among other things, the initial investment required to develop and 

implement the necessary technology is a significant expense for firms.

Under the Securities Exchange Act of 1934 (Exchange Act), SEC 

regulates the proxy solicitation process for publicly traded equity 

securities.13 SEC also regulates the activities of proxy advisory firms that 

are registered with SEC as investment advisers under the Investment 

Advisers Act of 1940 (Advisers Act).14 Under SEC rules, when soliciting 

proxies, certain information must be disclosed in writing to shareholders 

in a document referred to as a proxy statement. These proxy statements 

must include important facts about the issues on which shareholders are 

 12See GAO-07-765. 

13Section 14 of the Securities Exchange Act of 1934, as amended, established the federal 

regulation of the proxy voting process. 15 U.S.C. § 78n.

14Investment Advisers Act of 1940, 54 Stat. 847 (1940) (codified as amended at 15 U.S.C. 

§ 80b-1 to 80b-21). The Advisers Act defines an investment adviser as any person or firm 

that, for compensation, is engaged in the business of providing advice to others or issuing 

reports or analyses on securities, subject to exception. 15 U.S.C. § 80b-2(a)(11). Those 

meeting the definition of an investment adviser are generally required to register with SEC 

unless they are subject to an exemption from the definition of investment adviser or are 

prohibited from registering under the statute. 15 U.S.C. §§ 80b-3, 80b-3a. 

U.S. Regulatory 

Framework
Page 9 GAO-17-47 Corporate Shareholder Meetings

asked to vote. A party soliciting proxies must file such proxy statement 

with SEC unless it is exempt under the proxy rules.15 Under the Advisers 

Act and related SEC rules, registered investment advisers are subject to 

a number of regulatory requirements that provide important protections to 

the firm’s clients. For example, an investment adviser must disclose 

information about its business practices and potential conflicts of interest 

to clients and prospective clients.16 Additionally, registered investment 

advisers are required to adopt and implement written policies and 

procedures reasonably designed to prevent violation of the Advisers 

Act.

17 Finally, regardless of whether a proxy advisory firm is registered as 

an investment adviser, all firms that meet the statutory definition of 

investment adviser, and are unable to rely on an exclusion from the 

definition, are subject to the antifraud provisions of the Advisers Act. This 

act prohibits investment advisers from engaging in any act, practice, or 

course of business that is fraudulent, deceptive, or manipulative.

18

Table 2 describes whether and how proxy advisory firms are registered 

with SEC. ISS, Marco Consulting, and ProxyVote Plus are registered as 

investment advisers and, according to their SEC registration filings,

identified their work as pension consultants as the basis for registering as 

advisers.19 Egan-Jones Ratings Company (Egan-Jones’s parent 

company) is registered as a Nationally Recognized Statistical Rating 

Organization and must meet certain regulatory requirements related to its 

credit ratings activity, but these requirements do not apply to its proxy 

advisory services. Glass Lewis is not registered with SEC.

 15See 17 C.F.R. §§ 240.14a-2, 240.14a-3.

16Registered investment advisers are required to disclose certain information, through 

Part 2 of Form ADV or a brochure containing the same information, to advisory clients or 

prospective clients. 17 C.F.R. § 275.204-3. The information required to be disclosed 

includes certain conflicts of interest as well as information on the adviser’s fee schedule 

and business background of management and key advisory personnel. 

1717 C.F.R. § 275.206(4)-7.

1815 U.S.C. § 80b-6.

19The Advisers Act prohibits any state-regulated investment adviser who has less than 

$100 million in assets under management from registering with SEC, unless the adviser is 

an investment adviser to a registered investment company, like a mutual fund. 15 U.S.C. § 

80b-3a(a)(1). SEC Rule 203A-2(a) exempts certain pension consultants from this general 

prohibition and requires them to register with SEC if the pension consultants provide 

investment advice to employee benefit plans, governmental plans, or church plans having 

an aggregate value of at least $200 million in assets. 17 C.F.R. § 275.203A-2(a). 
Page 10 GAO-17-47 Corporate Shareholder Meetings

Table 2: Registration Status of Proxy Advisory Firms, as of June 2016

Firm Registered with Securities 

and Exchange 

Commission

Registration type

Institutional Shareholder 

Services

Yes Investment adviser

Glass Lewis No Not applicable

Egan-Jones Yes Nationally recognized 

statistical rating organization

Marco Consulting Yes Investment adviser

ProxyVote Plus Yes Investment adviser

Source: Securities and Exchange Commission. | GAO-17-47

SEC also has issued several rules and policy documents that provide 

guidance on proxy voting by investment advisers and investment 

companies. For example, SEC issued a final rule in February 2003 that 

addresses an investment adviser’s fiduciary responsibilities to clients 

when the adviser has the authority to vote their proxies, including 

adopting policies and procedures to ensure proxies are voted in the best 

interest of clients.20 The rule also requires that an adviser must (i) 

disclose to clients how they can obtain information from the adviser on 

how their securities were voted and (ii) describe the adviser’s proxy voting 

policies and procedures to clients, and upon request, provide clients with 

a copy of those policies and procedures. SEC issued another final rule in

February 2003 that requires investment companies such as mutual funds 

to disclose how they vote proxies relating to portfolio securities they hold, 

and file with SEC and make available to shareholders information about 

specific proxy votes cast.21 In May 2004 and September 2004, SEC staff 

issued guidance that, among other things, clarified how an investment 

adviser could resolve conflicts of interest in voting clients’ proxies and 

ensure that proxy advisory firms could adequately analyze proxy issues 

 20Proxy Voting by Investment Advisers, 68 Fed. Reg. 6585 (Feb. 7, 2003) (codified as 

amended at 17 C.F.R. §§ 275.204-2, 275.206(4)-6)).

21Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered 

Management Investment Companies, 68 Fed. Reg. 6564 (Feb. 7, 2003) (codified as 

amended at 17 C.F.R Parts 239, 249, 270, and 274). 
Page 11 GAO-17-47 Corporate Shareholder Meetings

and make recommendations in the best interests of the adviser’s clients.22

We focus on SEC oversight since 2007 later in this report.

SEC monitors compliance with the federal securities laws and regulations 

through risk-based examinations of registered investment advisers. 

Based on examination findings, SEC may send letters to investment 

advisers, including proxy advisory firms registered as investment 

advisers, requesting that they correct identified deficiencies. SEC may 

take enforcement actions for more serious violations. Proxy voting issues 

and proxy advisory firms may not be examined on a regularly scheduled 

basis because SEC uses a risk-based approach to identify examination 

priorities each year. Among other things, SEC may consider the risk of an 

entity based on prior examination findings; significant changes in a 

registrant’s business activities or disclosures regarding regulatory or other 

action brought against them; and tips, complaints, or other referrals.23

SEC uses this approach to help allocate its limited resources to focus on 

those registrants that examination staff believe place the investing public 

or market integrity most at risk.

International regulatory organizations, including the European Securities 

and Markets Authority and Canadian Securities Administrators, have 

taken actions to promote increased engagement among market 

participants and transparency into proxy advisory firms’ processes. In 

recent years, these organizations conducted reviews of the proxy 

advisory firm industry and concluded that regulatory intervention was not 

needed. Specifically, the European Securities and Markets Authority 

concluded that regulation was not justified because there was no 

evidence of a market failure in relation to how proxy advisory firms 

interact with institutional investors and corporate issuers. However, both 

entities proposed guidance and recommendations for the firms to 

enhance transparency, among other issues.

 22Securities and Exchange Commission, SEC Staff Letter to Kent S. Hughes, Egan-Jones 

Proxy Services (Washington, D.C.: May 27, 2004); and SEC Staff Letter to Mari Anne 

Pisarri, on behalf of Institutional Shareholder Services (Washington, D.C.: Sept. 15, 2004). 

23SEC has a “Tips, Complaints and Referrals” website for members of the public to 

provide information to SEC regarding possible violations of federal securities laws. 

Accessed on September 6, 2016, https://denebleo.sec.gov/TCRExternal/index.xhtml.

International Regulatory 

Actions Related to Proxy 

Advisory Firms
Page 12 GAO-17-47 Corporate Shareholder Meetings

In a 2013 report, European Securities and Markets Authority officials 

recommended the creation of an industry code of conduct. Subsequently, 

a group of proxy advisory firms, including ISS and Glass Lewis, published 

a set of best practice principles that included disclosing their (1) research 

methodology and, if applicable, general voting policies; and (2) policies 

for communication with corporate issuers, shareholder proponents, other 

stakeholders, media, and the public.24 In December 2015, European 

Securities and Markets Authority released a follow-up to its 2013 report 

responding to the establishment of best practice principles.25 This report 

concluded that the best practice principles had a positive impact on the 

market, mainly in terms of enhanced clarity for different stakeholders on 

how proxy advisory firms operate. The report also stated that while the 

majority of the industry is signatory to the principles, including ISS and 

Glass Lewis, broader sign-up to the principles would contribute to 

establishing the principles as the prevailing standard in the industry. ISS 

and Glass Lewis have posted statements of compliance on their websites 

that describe how they apply the principles in their work.

In April 2015, the Canadian Securities Administrators adopted the 

National Policy 25-201 Guidance for Proxy Advisory Firms.26 The policy is 

intended to promote transparency in the process leading to vote 

recommendations and the development of proxy voting guidelines, and 

foster understanding among market participants about the activities of 

proxy advisory firms. The guidance is not intended to be prescriptive but 

rather encourage proxy advisory firms to consider the guidance in 

developing and implementing practices that are tailored to their structure 

and activities.

 24Best Practice Principles for Shareholder Voting Research, Accessed on October 7, 

2016. https://bppgrp.info/.

25European Securities and Markets Authority, Follow-up on the Development of the Best 

Practice Principles for Providers of Shareholder Voting Research and Analysis (Paris, 

France: December 2015). 

26Canadian Securities Administrators, Guidance for Proxy Advisory Firms, National Policy 

25-201 (Montreal, Canada: Apr. 30, 2015). 
Page 13 GAO-17-47 Corporate Shareholder Meetings

The market for proxy advisory firms has grown, with higher demand 

stemming from factors including the rise of institutional investing and the 

effect of some new policies and requirements. Recent studies and the 

market participants and other stakeholders with whom we spoke agreed 

that proxy advisory firms influenced shareholder voting and corporate 

governance practices. But market participants and stakeholders had 

mixed views about the extent of this influence and some said that 

influence can vary based on the size of the institutional investor or the 

voting policies used. Studies we reviewed also did not agree on the 

extent of the influence or whether it was helpful or harmful.

The market for proxy advisory firms has grown over the last 30 years as 

institutional investors have relied more on firms to provide research, 

analysis, and vote recommendations. According to academic and industry 

studies, the increased demand for proxy advisory services stems from 

several factors, including the growth in the proportion of shares owned by 

institutional investors, the number and complexity of voting issues, and 

shareholder activism and the effect of some new policies and 

requirements. Some of these issues are consistent with themes we 

identified in 2007.

Institutional Ownership. The increased ownership share that 

institutional investors hold and the high volume of proxy votes they are 

responsible for casting has increased demand for proxy advisory firms. 

According to a recent Broadridge and PwC report, in 2016 institutional 

investors owned 70 percent of shares outstanding in U.S. public 

companies compared with retail investors (or individual investors) who 

owned 30 percent of shares outstanding.27 Institutional investors also 

have voted at much higher rates; for example, as of June 2016, 91 

percent of institutional investors voted their shares compared with 28 

percent of retail investors. Because many institutional investors use the 

services of proxy advisory firms, increased institutional ownership has 

resulted in a greater demand for these firms.

 27Broadridge Financial Solutions and PwC’s Governance Insights Center, “2016 Proxy 

Season Wrap-up,” ProxyPulse. third ed. (2016). Accessed on September 28, 2016, 

http://media.broadridge.com/documents/Broadridge-ProxyPulse-3rd-Edition-2016.pdf. As 

mentioned earlier, Broadridge Financial Solutions is the proxy agent used by most 

corporate issuers in the U.S. and globally.

Several Factors Have 

Led to Increased 

Demand for and 

Influence of Proxy 

Advisory Firms, but 

Mixed Views Exist on 

the Extent of 

Influence

Increased Demand for 

Proxy Advisory Firms’

Services Stems from Rise 

of Institutional Investing 

and Requirements for 

Shareholder Voting
Page 14 GAO-17-47 Corporate Shareholder Meetings

Number and Complexity of Voting Issues. Some institutional investors 

may lack the resources to consider the many complex proxy issues that 

come before them for a vote and instead may opt to use the services of a 

proxy advisory firm, which adds to the demand for the firms. For example, 

the Dodd-Frank Wall Street Reform and Consumer Protection Act 

requires a shareholder advisory vote on executive compensation (“sayon-pay”).28 The act allows shareholders to vote their opinion on executive 

compensation plans every 1–3 years, thereby increasing the volume of 

shareholder votes on this issue. Institutional investors also have become 

more involved in a range of corporate governance and other issues such 

as board composition and diversity, executive severance agreements 

(including “golden parachutes”), strategy and growth, and sustainability 

and climate change that can require extensive analysis.29 Thus, the 

growing number and complexity of proxy voting issues has also 

contributed to the increased demand for proxy advisory firms.

Shareholder Activism and Regulation. Proxy advisory firms also have 

become more prominent because of continued shareholder activism and 

the impacts of some regulations. For example, many institutional 

investors seek the services of proxy advisory firms to assist in their 

assessments of corporate governance practices and carry out the 

mechanics of proxy voting. As discussed earlier, in 2003, SEC adopted a 

final rule that required registered investment advisers, among other 

things, to adopt policies and procedures reasonably designed to ensure 

that they vote proxies in the best interests of clients.30 According to some 

industry stakeholders, based on certain interpretations of the rule and 

subsequent SEC staff guidance, some investment advisers determined 

that they could discharge their duty to vote their proxies and demonstrate 

that their vote was not a product of a conflict of interest if they voted 

 28Pub. L. No. 111-203, § 951, 124 Stat. 1376, 1899 (2010) (codified as amended at 15 

U.S.C. § 78n-1). Section 951 of the act requires public companies subject to the proxy 

rules to provide their shareholders with an advisory vote on the compensation of certain 

executives, as well as an advisory vote on the desired frequency of say-on-pay votes 

(every 1, 2, or 3 years). Frequency votes must be held at least every 6 years.

29“Golden parachute” generally refers to compensation arrangements with executive 

officers concerning any type of compensation (whether present, deferred, or contingent) 

that are based on or relate to an acquisition, merger, or similar transaction. 

3068 Fed. Reg. 6585 (Feb. 7, 2003) (codified as amended at 17 C.F.R. §§ 275.204-2, 

275.206(4)-6)). 
Page 15 GAO-17-47 Corporate Shareholder Meetings

based on the recommendations of a proxy advisory firm.31 As a result, 

institutional investors tended to outsource their research and voting 

decisions, which helped to increase the demand for proxy advisory 

services. However, in 2014, SEC staff issued a Staff Legal Bulletin that, 

among other things, included guidance on investment advisers’

responsibilities in voting client proxies and retaining proxy advisory firms, 

including notice that investment advisers are not required to vote every 

proxy, depending on the proxy voting arrangements between advisers 

and their clients.32 We discuss other aspects of this guidance later in the 

report.

Recent studies, market participants, and other stakeholders agree that 

proxy advisory firms have influence on shareholder voting and corporate 

governance practices, but had mixed views about the extent of their 

influence. Our review of four recent studies that analyzed the extent to 

which proxy advisory firms’ recommendations influenced voting decisions 

and shifted some fraction of the votes shows that proxy advisory firms 

have influence on shareholder voting. For instance, using a sample of 

director elections, a 2009 study found that ISS recommendations have an 

impact on shareholder votes, and directors receiving a negative ISS 

recommendation receive 19 percent fewer votes.33 However, a 2010 

study concluded that while both ISS and Glass Lewis appear to have a 

meaningful impact on shareholder voting, media reports often overstate 

the extent of ISS’s influence on voting.34 The study found that the impact 

of an ISS recommendation is reduced once director- and companyspecific factors that are important to investors—failure to attend board 

meetings, financial performance, corporate misconduct, and a lack of 

responsiveness to shareholders—are taken into consideration. Unlike 

higher estimates, the analysis showed that an ISS recommendation 

shifted 6–10 percent of shareholder votes.

 31See, e.g., Daniel M. Gallagher, “Outsized Power and Influence: The Role of Proxy 

Advisers,” Washington Legal Foundation, Critical Legal Issues Working Paper Series 187

(Washington, D.C.: August 2014).

32Securities and Exchange Commission, Division of Corporate Finance, Division of 

Investment Management, Staff Legal Bulletin No. 20 (June 30, 2014). 

33Jie Cai, Jacqueline L. Garner, and Ralph A. Walkling, “Electing Directors,” The Journal 

of Finance, vol. 64, no. 5 (October 2009).

34Stephen J. Choi, Jill E. Fisch & Marcel Kahan, “The Power of Proxy Advisors: Myth or 

Reality?” 59 EMORY L.J. 869, 906 (2010). 

Studies and Market 

Participants Agreed That 

Proxy Advisory Firms 

Influence Voting and 

Corporate Governance, 

but Had Mixed Views 

about Extent of Influence
Page 16 GAO-17-47 Corporate Shareholder Meetings

Additionally, a 2013 study concluded that proxy advisory firm 

recommendations are the key determinant of voting outcomes in the 

context of mandatory “say-on-pay” votes.35 The study found that negative 

ISS and Glass Lewis recommendations are associated with 25 percent 

and 13 percent more votes against the compensation plan, respectively. 

The study also found that the relationship between proxy advisory firm 

recommendations and shareholder votes varies based on the rationale 

behind the recommendation and the institutional investor’s ownership 

structure. For example, the relationship between negative 

recommendations and shareholder votes is weaker for shareholders with 

larger holdings and, thus, presumably greater incentives to perform their 

own internal research. The study concluded that this suggests that at 

least some shareholders are not directly influenced by the 

recommendations and take into account the underlying basis for the 

recommendation and other relevant factors. A 2015 study also found that 

proxy advisory firms have an effect on voting outcomes related to say-onpay proposals. Specifically, the study concluded that negative ISS 

recommendations reduce the percentage of votes in favor of say-on-pay 

proposals by about 25 percentage points.36

Similarly, our interviews with market participants and other stakeholders 

showed mixed views on the extent of influence proxy advisory firms have 

on voting. Most of the 13 institutional investors,11 corporate issuers, 4 

proxy solicitors, and 8 industry association representatives with whom we 

spoke stated that proxy advisory firms (more specifically, ISS and Glass 

Lewis—the two firms with the largest number of institutional investor 

clients) have influence on shareholder voting. However, some investors, 

solicitors, and investor association representatives said that proxy 

advisory firms had little influence and that such influence varied based on 

the size of the institutional investor or whether the institutional investor 

uses its own or the proxy advisory firm’s research and voting policies. 

Specifically, they told us that the level of influence that ISS and Glass 

Lewis have on voting and corporate governance is minimal because large 

institutional investors cast the majority of proxy votes and do not 

exclusively rely on the research and vote recommendations offered by 

proxy advisory firms to help decide how to vote proxies.

 35Yonca Ertimur, Fabrizio Ferri, and David Oesch. “Shareholder Votes and Proxy 

Advisors: Evidence from Say on Pay,” Journal of Accounting Research, vol. 51, no. 5 

(December 2013). 

36Nadya Malenko and Yao Shen, “The Role of Proxy Advisory Firms: Evidence from a 

Regression-Discontinuity Design,” (2015).
Page 17 GAO-17-47 Corporate Shareholder Meetings

We previously found in 2007 that large institutional investors, which cast 

the great majority of proxy votes made by all institutional investors, placed 

less emphasis on proxy advisory firms’ research and recommendations 

than smaller institutional investors, and tended to have their own in-house 

research staffs to conduct research that drove their proxy voting 

decisions.37 Some institutional investors and investor association 

representatives with whom we spoke also said that the firms’ influence 

has significantly declined in recent years, as some institutional 

investors—in particular, asset managers (such as investment advisers to 

mutual funds) and pension funds—have taken a greater interest in proxy 

voting and developed in-house expertise to address proxy vote-related 

issues.

The institutional investors and investor association representatives also 

pointed to the growing trend among institutional investors of using their 

own voting policies as a basis for voting decisions instead of relying on 

the proxy advisory firms’ policies and vote recommendations. For 

example, officials from the four large institutional investors told us that 

they conduct their own research and analyses to make voting decisions 

and use the research of proxy advisory firms only to supplement their 

internal research and analyses. Officials from one proxy advisory firm 

also told us that while firms provide vote recommendations, it is the 

institutional investor that makes the actual vote decision, which is most 

often based on the institutional investor’s own voting policies. Moreover, 

they noted that as clients of the proxy advisory firm, institutional investors 

always retain the ability to change the vote that the proxy advisory firm 

casts on their behalf.

According to large institutional investors and a few investor association 

representatives that we spoke to, some smaller institutional investors who 

do not have their own in-house research staffs to analyze the many proxy 

voting issues and companies in their portfolio will obtain such services 

from proxy advisory firms and rely more on the research and 

recommendations proposed by the firms. In these cases, the resulting 

vote recommendation could have more of an influence on the voting, 

because some of these smaller institutional investors have a tendency to 

adopt the firms’ recommendations and vote accordingly. One small 

institutional investor told us that it relies on the research and the vote 

 37See GAO-07-765. 
Page 18 GAO-17-47 Corporate Shareholder Meetings

recommendations of ISS and will consider the firm’s recommendations on 

certain actions before making voting decisions.

Other studies that we reviewed showed that proxy advisory firms also 

have an influence on corporate governance practices. For example, a 

2015 study found that to avoid a negative vote recommendation, 

companies changed their compensation programs before the formal 

shareholder vote in a manner consistent with the features known to be 

favored by proxy advisory firms.38 A 2013 study also found that more than 

half of companies involved in the study responded to a shareholder vote 

triggered by a negative recommendation from the proxy advisory firms by 

making changes to their compensation plan.39 In addition, a 2012 study 

found that more than two-thirds of U.S. companies say their executive 

compensation program is influenced by the policies and voting 

recommendations of the two largest proxy advisory firms—ISS and Glass 

Lewis. In particular, a majority of companies say they are likely to make 

changes to their compensation program to gain a favorable “say-on-pay”

recommendation from these firms.40 Two corporate issuers also told us 

that proxy advisory firms have some influence on the development of their 

governance practices and they would generally accept the firms’ advice 

on corporate governance requirements.

Officials from one proxy advisory firm with whom we spoke stated that 

they agree that proxy advisory firms have influence on corporate

governance practices. The proxy advisory firm further indicated that its 

policy frameworks reflect its institutional investor clients’ preferences for 

better disclosure, strong shareholders’ rights, and adoption of best 

practices governance standards. They noted that such influence is good 

and ultimately they want to have a positive influence on their clients 

because they view that as part of their responsibility—to promote good 

governance. Similar to the views expressed by the officials of the proxy 

advisory firm, investor association representatives also suggested that 

consideration be given to the context in which influence is often viewed. 

 38David F. Larcker, Allan L. McCall & Gaizka Ormazabal, “Outsourcing Shareholder 

Voting to Proxy Advisory Firms,” 58 J.L. & ECON. 173, 173 (2015). 

39Yonca Ertimur, Fabrizio Ferri, and David Oesch, “Shareholder Votes and Proxy 

Advisors: Evidence from Say on Pay,” Journal of Accounting Research, vol. 51, no. 5 

(December 2013). 

40David F. Larcker, Allan L. McCall, and Brian Tayan, “The Influence of Proxy Advisory 

Firm Voting Recommendations on Say-on-Pay Votes and Executive Compensation 

Decisions,” The Conference Board: Director Notes (March 2012). 
Page 19 GAO-17-47 Corporate Shareholder Meetings

They noted that most often, influence is viewed negatively. However, the 

representatives said that proxy advisory firms’ influence can be positive. 

That is, if the recommendations proxy advisory firms make help to 

promote good governance, then the firms’ influence on voting is beneficial 

to shareholders. Additionally, a 2009 study found that proxy advisory firm 

recommendations—at least for uncontested director elections—appeared 

to be based on factors that should matter to institutional investors, such 

as good governance, director attention, and performance.41

Proxy advisory firms develop their general voting policies and update 

them through an iterative process involving analysis of institutional 

investor and corporate issuer input, industry practices, and discussions 

with other stakeholders. These policies are similar to or in some cases 

stricter than other standards such as those from the New York Stock 

Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ). Proxy 

advisory firms have taken steps to communicate with corporate issuers 

when developing voting recommendations and have allowed some to 

review proxy reports for accuracy before they are final. While some 

corporate issuers said they still do not understand the bases for some 

vote recommendations and would like to have a dialogue about the proxy 

reports, proxy advisory firms said that to maintain objectivity and satisfy 

research reporting timelines for clients they have to limit the breadth of 

such discussions.

Proxy advisory firms’ voting policies outline their approaches for 

evaluating positions on, and rationales for, recommendations on 

corporate governance issues. For example, ISS and Glass Lewis officials 

said they develop three types of policies: general, specialized, and clientcustomized.

• General policies reflect the firm’s own positions and rationales on 

various corporate governance issues and are generally used in 

developing their vote recommendations. The policies may take into 

account national and international corporate governance codes and 

practices, as well as the views of institutional investors, corporate 

issuers, and other stakeholders.

 41Stephen J. Choi, Jill E. Fisch & Marcel Kahan, “Director Elections and the Role of Proxy 

Advisors,” 82 S. CAL. L. REV. 649, 696 (2009).

Proxy Advisory Firms 

Have Increased 

Engagement with 

Market Participants 

and Stakeholders in 

the Vote 

Recommendation 

Process

Proxy Advisory Firms 

Have Increased 

Engagement with 

Stakeholders in 

Development of Their 

Voting Policies to Address 

Concerns
Page 20 GAO-17-47 Corporate Shareholder Meetings

• Specialized policies reflect the institutional investor clients’

perspective on specific governance issues such as sustainability, 

socially responsible investing, public funds, labor unions, or mission 

and faith-based investing. Since these policies reflect specific 

institutional investor perspectives or needs of different institutional 

investors, voting recommendations developed under these policies 

may in some cases differ from recommendations formed under 

general policies.

• Client customized policies are based on institutional investor clients’

unique corporate governance guidelines, and reflect each investor’s 

specific philosophies and approaches. For these clients, the proxy 

advisory firm prepares voting recommendations based on these 

policies. As a result, the vote recommendations issues under these 

policies may differ from those issued under general policies.

Since specialized and client customized policies reflect different 

perspectives of different institutional investors, voting recommendations 

developed under these policies in some cases may differ from 

recommendations formed under general polices. The following discussion 

focuses on general policies, which represent the general guidelines the 

firms use for their analyses in developing vote recommendations.

According to the two largest proxy advisory firms—ISS and Glass 

Lewis—they develop their general voting policies and update them 

through an iterative process, which recently has included increased 

engagement with institutional investors, corporate issuers, and other

stakeholders.42 ISS and Glass Lewis have taken steps to obtain input 

from and communicate with market participants about voting policies. 

Some corporate issuers we interviewed said that both ISS and Glass 

Lewis recently have made more of an effort to engage market participants 

in the general policy development process unlike in the past when their 

outreach was less frequent or formal.43 When we spoke to both proxy 

advisory firms, they also said that they made their processes more 

transparent than they were in the past. For example, they have begun to 

 42We focused most of our discussion on ISS and Glass Lewis, the two firms that have the 

largest number of clients in the proxy advisory firm market in the United States. Market 

participants we interviewed also mostly spoke of ISS and Glass Lewis. 

43As previously noted, we interviewed various officials and representatives with 

knowledge of the industry, including SEC officials, 5 proxy advisory firms, 13 institutional 

investors, 11 corporate issuers, 4 proxy solicitors, 2 international regulatory organizations, 

and 8 industry and advocacy groups.
Page 21 GAO-17-47 Corporate Shareholder Meetings

conduct engagement meetings, hold roundtables, and post guidelines to 

their websites. Specifically, Glass Lewis officials said they have created a 

corporate issuer resource website that offers links to its guidance 

documents, forms to request engagement meetings, and responses to 

frequently asked questions. ISS officials said they invite institutional 

investors, corporate issuers’ management and board directors, and other 

industry stakeholders to participate in its annual proxy voting policy 

survey.44 According to ISS, the survey is designed to provide input on key 

issues that are factored into the development of ISS’s general policy 

guidelines, including proposed policy updates as well as new policies. 

See figure 3 for examples of the types of communication mechanisms 

used.

 44ISS publicly announces the opening of the annual survey through methods such as 

press releases and social media.
Page 22 GAO-17-47 Corporate Shareholder Meetings

Figure 1: Examples of Communication Mechanisms Institutional Shareholder Services (ISS) and Glass Lewis Used for Proxy 

Voting Policy Development, as of September 2016
Page 23 GAO-17-47 Corporate Shareholder Meetings

A few corporate issuers told us that although input is obtained from both 

corporate issuers and institutional investors, it does not necessarily make 

its way into the final general policy guidelines. One corporate issuer we 

interviewed said there has been a noticeable increase in outreach (a lack 

of outreach was evident in the past). But the corporate issuer also said 

there is a difference between proxy advisory firms soliciting input and 

using input to modify policies. Another corporate issuer, who said it was 

not solicited for feedback, said it seemed like policies were sometimes 

developed in a vacuum. However, Glass Lewis officials said that they 

have responded to issuer feedback, for example, Glass Lewis changed its 

approach for selectin issuer peer groups used in its pay for performance 

analysis. Also, Glass Lewis officials said that they work with an 

independent advisory council that provides guidance in the development 

and updating of its voting policies.45

Further, some have raised concerns about ISS’s policy survey and 

published results. For example, one market participant we interviewed 

said that a relatively small number of institutional investors drive ISS’s 

policy formation process in part because a small number of ISS investor 

clients participated in the survey. In a February 2013 working paper, the 

authors also noted that ISS’s policy survey relied on a small number of 

participants and provided little detail about the composition of the 

respondent pool.46 ISS officials said there has been consistency in the 

relative mix of institutional investors and corporate issuers responding to 

the survey, with more corporate issuers than institutional investors 

answering the survey questions.

 45According to Glass Lewis, the Research Advisory Council consists of individuals from 

the fields of corporate governance, finance, law, management, and accounting. The 

council meets annually, but is available year round for questions related to policy 

development. 

46David F. Larcker, Allen L. McCall, and Brian Tayan, And Then a Miracle Happens! How 

Do Proxy Advisory Firms Develop Their Voting Recommendations? Stanford University 

Closer Look Series (Feb. 25, 2013). 
Page 24 GAO-17-47 Corporate Shareholder Meetings

Based on our review of selected general voting policies of proxy advisory 

firms and other market standards on corporate governance, the firms’

policies were similar to or in some cases stricter than the other standards 

and covered a broader range of issues. We reviewed selected policies 

from the five proxy advisory firms, NYSE, NASDAQ, and a large 

institutional investor, and looked specifically at the issues of director 

independence, overboarding (number of public company boards for which 

a director can serve before being considered overextended), independent 

chairman/chief executive officer (CEO), and proxy access,47 as illustrated 

in the following examples:

• Board independence. Proxy advisory firms and the exchanges 

(NYSE and NASDAQ) require some level of independence on 

corporate boards. Specifically, both exchange listing requirements 

and firm voting policies call for a majority of independent board 

directors on corporate boards.48 However, these bodies vary on the 

“look-back” period required for directors to be deemed independent 

from the company. The five proxy advisory firms and one institutional 

investor policy that we reviewed require a 5-year look back, while the 

exchanges require 3 years. One proxy advisory firm’s rationale for this 

difference was that 5 years allows enough time for management and 

board members to settle any conflicts of interest. This firm also notes 

that it does not automatically apply the 5-year threshold and will 

consider the type of relationship the nominee has with the company.

• Overboarding. Proxy advisory firms and some institutional investors 

have policies on overboarding, but the exchanges do not. In 2016, 

both ISS and Glass Lewis updated their director overboarding policies 

to reflect concerns about directors overcommitting themselves. 

Specifically, a few institutional investors expressed the position that if 

directors served on too many boards, they would not have sufficient 

time to focus on the issues related to any one company. The 

institutional investor policy we reviewed—which had a lower threshold 

 47We selected NYSE and NASDAQ because they have corporate governance 

requirements that corporate issuers must meet to be listed on the exchanges and some of

these requirements cover the same issues in the voting policies proxy advisory firms use 

to make vote recommendations. We selected one large institutional investor that has 

developed its own voting policies on corporate governance issues because several

institutional investors develop their own voting policies rather than rely on proxy advisory 

firms. Although some of the proxy advisory firms have voting policies for different 

countries, we focused on the proxy voting policies for the United States. 

48Market participants define independent directors as having no current familial or 

financial relationships with the company on whose board they serve. 

Proxy Advisory Firms’

Voting Policies for 

Selected Governance 

Issues Generally Were 

Similar to or Stricter Than 

Those of Other Selected 

Market Participants

Selected Corporate Governance Issues

Board independence: A board of 

directors comprises members whose 

position on the board does not pose a 

potential conflict of interest to the company 

they oversee.

Overboarding: The number of public 

company boards for which a director can 

serve before being considered 

overextended.

Independent chairman/chief executive 

officer (CEO): The separation of the roles 

of board chairman and CEO creates the 

ability to, for example, monitor and advise 

the CEO.

Proxy access: The ability of shareholders 

to nominate board directors and require 

companies to provide information about, 

and the ability to vote for, those 

shareholder nominees in the companies’

proxy materials.

Source: GAO. | GAO-17-47
Page 25 GAO-17-47 Corporate Shareholder Meetings

than that of the proxy advisory firms—explained that generally it is 

unlikely that a director will be able to commit sufficient focus to a 

particular company when a director commits himself or herself to a 

large number of boards. Both ISS and Glass Lewis’s policies outline a 

phased transition to a lower board membership threshold for directors. 

ISS policy states, for example, that it will recommend that 

shareholders vote against directors who sit on more than six boards, 

but beginning in 2017, ISS policy states that it plans to make negative 

recommendations for directors sitting on more than five. Glass Lewis 

policy also states that it plans to note a concern for these directors in 

its report, thus providing a transition period before putting the full 

policy into effect. The current policy cites six boards, but in 2017 

Glass Lewis’ policy also recommends voting against a director who 

serves on more than five boards. Further, a couple of the firms have 

changed their policy on the number of boards that a CEO should 

serve on. For example, in 2016, Egan-Jones changed its 

overboarding policy limiting the number of outside boards a CEO may 

serve on to one. Glass Lewis plans to make a similar adjustment in 

2017. Glass Lewis policy states that during the 2016 proxy season, it 

plans to note as a concern CEOs serving on more than one outside 

boards, and then beginning in 2017 it will base its recommendation on 

this lower threshold. ISS policy recommends a vote against CEOs 

who sit on more than two outside boards. 

• Independent chairman/CEO. The issue of an independent 

chairman/CEO is another example of an issue area covered by the 

proxy advisory firms’ and large institutional investor’s policy, but not 

addressed by the exchange listing requirements. Specifically, all five 

proxy advisory firms have independent chairman/CEO policies. One 

firm said the development of this policy was guided by feedback from 

institutional investor clients. Similar to the five proxy advisory firms, 

the large institutional investor policy we reviewed generally supports 

the separation of chairman and CEO when a company does not have 

a lead independent director.49 The institutional investor policy states 

that support for independent leadership is important given the roles 

that the chairman plays, such as contributing to oversight of CEO 

succession planning and serving as an advisor to the CEO.

• Proxy access. The issue of proxy access is another area not covered 

by the exchange listing standards, but addressed by the proxy 

 49A lead independent director has power to provide formal input on board agendas, call 

meetings, and preside over meetings without the presence of the CEO who serves as 

chairman of the board. 
Page 26 GAO-17-47 Corporate Shareholder Meetings

advisory firm and institutional investor policies. Specifically, the five 

proxy advisory firms have a proxy access policy. According to market 

participants, the increased rise of shareholder activism also saw 

increased attention on the issue of proxy access. One market 

participant we interviewed said that proxy advisory firm policies have 

become more complex and nuanced, and the firms have enhanced 

policies on proxy access as the issues have received more attention. 

Similarly, the institutional investor policy we reviewed supports proxy 

access, stating that long-term shareholders should have the 

opportunity to nominate directors.

Market participants with whom we spoke generally viewed proxy advisory 

firms’ policies on corporate governance as stricter than other industry 

standards but reflective of institutional investors’ interests. Specifically, for 

select corporate governance issues, proxy advisory firm policies may call 

for higher standards of compliance than other industry standards, such as 

exchange listing requirements. Some market participants said that these 

stricter standards are a reflection of the higher standards for which some 

investors look and that in their view help promote better governance 

practices. They stated that exchange listing standards tend to only serve 

as a baseline for publicly traded companies. A few institutional investors 

pointed out that their policies require even higher standards of 

compliance than the proxy advisory firms have developed. For example, 

representatives of one institutional investor told us that their company’s 

overboarding policy is stricter than both ISS’s and Glass Lewis’s policies. 

The officials added that the issue of overboarding is a case in which 

institutional investors were ahead of the marketplace and proxy advisory 

firms were just now “catching up.”

Proxy advisory firms’ approaches for developing vote recommendations 

can be case-by-case or rules based. Policy application may depend on 

factors such as the type of vote cast or the voting instructions provided by 

institutional investor clients. A more rules-based approach might be 

applied with some board of director issues such as board independence, 

which uses a time period threshold to ensure that directors with previous 

work history with a company have been separated long enough to be 

independent. However, such issues may still be subject to a case-by-case 

review. For example when applying the look-back period for director 

independence, Glass Lewis’s proxy policy states that it will not 

automatically recommend voting against former executives of a company 

who have consulting agreements with the company during the look-back 

period.

Proxy Advisory Firms 

Considered CompanySpecific Information in 

Vote Recommendations 

and Allowed Some 

Corporate Issuers 

Opportunities to Correct 

Data
Page 27 GAO-17-47 Corporate Shareholder Meetings

In contrast, vote recommendations on mergers and acquisitions would 

always be applied on a case-by-case approach that considered the facts 

and circumstances of the companies involved. The proxy advisory firms 

state in their respective general policies that they consider the benefit that 

implementation of a proposal would have on shareholders of the 

company being evaluated. For example, in proxy reports we reviewed of 

a merger, both ISS and Glass Lewis evaluated the potential benefits of 

the merger to investors on both sides of the proposed transaction. Both 

ISS and Glass Lewis found that investors for one company would benefit 

and thus recommended in favor of the merger for investors of that 

company, but recommended against the merger for investors of the other 

company because it would not be to their benefit.

In conducting evaluations such as these, ISS and Glass Lewis officials as 

well as some corporate issuers we interviewed also said that the firms 

consider new and company-specific information. For example, in 2015 

reports on this merger, ISS made adjustments to its original reports to 

account for company-specific information that clarified two data points, 

adjusting the estimated fair value of one of the companies. The updates 

were included in the reports and clients were notified through an alert or 

note—a process the proxy advisory firms use when they have updated or 

revised information in their reports. Proxy advisory firm officials also 

pointed out that while analysts have the discretion to engage with clients 

as well as with some corporate issuers during each proxy season, the 

firms only consider new or company-specific information that is publicly 

available to help ensure their reports and recommendations are based on 

the same information available to clients and the broader investing public.

Both Glass Lewis and ISS officials acknowledged that corporate issuers 

expressed an interest in reviewing proxy reports for accuracy in advance 

of proxy meetings. In addition, international regulatory organizations, such 

as European Securities and Markets Authority and Canadian Securities 

Administrators, have promoted increased engagement and transparency 

between corporate issuers and proxy advisory firms. Therefore, the proxy 

advisory firms have developed specific procedures that corporate issuers 

or their representatives may use to review or report errors related to the 

proxy reports prepared by the firms (see fig. 4).
Page 28 GAO-17-47 Corporate Shareholder Meetings

Figure 2: Institutional Shareholder Services’ (ISS) and Glass Lewis’s Review Processes for Proxy Reports, as of September 

2016

Note: In addition to the general drat review process, ISS has a data verification process for equity 

plans that allows issuers with an equity plan on their ballot to preview and update data used in ISS’s 

assessment of the plan. 

Specifically, Glass Lewis developed a new process in 2015 by which 

companies can receive a draft data-only version of a report for review 

before the firm completes its analysis. These data-only versions do not 

contain the firm’s recommendations. Companies interested in receiving a 

report must submit a request. Corporate issuers are given a 48-hour 
Page 29 GAO-17-47 Corporate Shareholder Meetings

window to review the draft and provide corrections. ISS offers a similar 

opportunity to Standard and Poor’s 500 companies and to companies in 

comparable large capitalization indices in some countries outside the 

United States.50 However, unlike the data-only versions of the reports 

provided by Glass Lewis, these reports contain ISS’s analyses and vote 

recommendations. Other corporate issuers have the option of requesting 

a copy of the published report in advance of the company’s annual 

meeting. Standard and Poor’s 500 companies have the opportunity to 

review ISS’s draft reports and provide feedback within 1-2 business days. 

One stakeholder we interviewed said that this time window did not always 

allow corporate issuers enough time to review. However, Glass Lewis and 

ISS officials indicated that these time windows allow them to meet their 

report publishing deadlines. In addition to the draft review process, ISS 

officials said ISS has a Feedback Review Board that provides a 

mechanism for stakeholders to communicate with ISS throughout the 

year regarding the accuracy of data, research, and general fairness of 

policies. 

ISS and Glass Lewis documents state that the opportunity to review 

advance copies of each company’s specific report is only an opportunity 

to check data for factual errors and not a mechanism for conveying 

disagreement with ISS’s or Glass Lewis’s methodologies or analyses. 

Some corporate issuers stated that there are differences of opinion, 

conflicting points of view, and misinterpretations of the data. However, 

ISS documentation indicated that although the review process allows for 

a verification of data, it has to limit the breadth of the review because it 

adds operational complexity and significant time to the research 

production process. Glass Lewis policy states that during proxy season it 

has to limit discussions on its policies or recommendations to help it 

remain objective. However, Glass Lewis officials said that it engages with 

issuers extensively outside of proxy season on issuer-specific issues 

including specific recommendation as well as general policies. Both 

corporate issuers and institutional investors we interviewed said that the 

data errors they found in the proxy reports were mostly minor, but as we 

discuss below, some errors can lead to negative recommendations.

Some issuers raised other concerns regarding how policies were applied 

during recommendation development and that the approaches used did 

 50Large-cap (large capitalization) indices are indices of companies with market 

capitalization values of more than $5.3 billion.
Page 30 GAO-17-47 Corporate Shareholder Meetings

not always account for differences across corporate issuers. For example, 

ISS’s and Glass Lewis’s general compensation policies lay out a set of 

criteria they use in evaluating an executive compensation package. 

Corporate issuers we interviewed expressed concern that firms applied 

these policies in a one-size-fits-all or rules-based manner. A few 

corporate issuers said they had to initiate outreach to the firms to explain 

the corporate issuers’ unique circumstances before the recommendations 

were reversed. Corporate issuers with whom we spoke pointed to another 

example of one-size-fits-all application involving overboarding policies. As 

mentioned earlier, ISS and Glass Lewis general policies provide a 

threshold (number) for public company boards on which a director can 

serve before being considered overextended. One small corporate issuer 

we interviewed said it was unsuccessful in trying to make a case for 

keeping a highly qualified director who contributed needed expertise but 

was deemed overboarded. Given the company’s small size, 

representatives found it very important to have this individual on its board. 

Although a few corporate issuers with whom we spoke were frustrated 

that consideration has not been given for special circumstances or the 

effect the decision would have on the company, one proxy advisory firm’s 

policy refers to institutional investor concerns about directors being 

overextended. As previously discussed, a 2013 study found limited 

evidence of a one-size-fits-all approach in the context of mandatory sayon-pay. The study found that proxy advisory firms take into consideration 

mitigating company-specific circumstances, severity of the issue, the 

firm’s rationale, and the overall quality of the compensation plan when 

policies were applied during recommendation development.51

Furthermore, some corporate issuers and stakeholders would like further 

insight into how the proxy advisory firms arrived at their vote 

recommendations. A few stakeholders also told us they hire consultants 

with expertise on executive compensation and have developed models 

similar to those used by proxy advisory firms to help them better 

understand how firms produce their results and recommendations.

To further increase transparency into the proxy advisory firm vote 

recommendation process, stakeholders have proposed making the 

reports available to the public at some time after the annual meeting. 

Market participants and other stakeholders told us there are advantages 

 51Yonca Ertimur, Fabrizio Ferri, and David Oesch, “Shareholder Votes and Proxy 

Advisors: Evidence from Say on Pay,” Journal of Accounting Research, vol. 51, no. 5 

(December 2013). 
Page 31 GAO-17-47 Corporate Shareholder Meetings

and disadvantages to making proxy advisory firm reports public at an 

appropriate time. For example, some market participants said a possible 

advantage to making the reports public is that it would allow for greater 

scrutiny and the ability to further evaluate the validity of proxy firm 

recommendations and whether the recommendations have a positive 

effect on shareholder value. But several stakeholders agreed that making 

them public would negatively affect proxy advisory firms’ ability to be 

profitable. Proxy advisory firms did not support the idea of making their 

reports publicly available at no cost after the relevant shareholder 

meeting because it would undermine their business model. They noted 

that their clients use these reports throughout the year and not just as a 

basis for voting proxies.

Since 2007, SEC oversight of proxy advisory firms and the services they 

provide has included information gathering on issues relating to the firms, 

issuance of guidance, and examinations of firms registered as investment 

advisors and of registered investment companies or investment advisers 

using proxy advisory services (see fig. 5).

SEC Oversight 

Activities of Proxy 

Advisory Services 

Have Included 

Information 

Gathering, Guidance, 

and Examinations
Page 32 GAO-17-47 Corporate Shareholder Meetings

Figure 3: Securities and Exchange Commission (SEC) Oversight Actions Related to the Proxy Voting System and Use of 

Proxy Advisory Firms, 2007–2016

Concept release. Since our last report in 2007, SEC sought public 

comment on concerns that had been raised by stakeholders in the proxy 

advisory industry in its 2010 Concept Release on the U.S. Proxy 

System.52 According to SEC staff, the agency occasionally publishes 

concept releases to raise awareness and collect the public’s view on 

certain securities issues so the agency can better evaluate the need for 

future rulemaking. The 2010 concept release discusses, among other 

things, concerns that had been raised by corporate issuers and industry 

participants about the level of accuracy and transparency in how proxy 

advisory firms formulate voting recommendations and potential conflicts 

of interest. Concerns related to accuracy and transparency include that 

firms’ voting recommendations may be based on inaccurate or incomplete 

data. Additionally, the 2010 concept release reiterated what we reported 

on in 2007, that a conflict of interest for a proxy advisory firm could arise if 

it provided both proxy voting recommendations to institutional investors 

and consulting services to companies on the same matter. And as we 

reported in 2007, the most commonly cited potential for conflict of interest 

 52Concept Release on the U.S. Proxy System, 75 Fed. Reg. 42,982 (July 22, 2010).
Page 33 GAO-17-47 Corporate Shareholder Meetings

involved ISS; specifically, that ISS advises institutional investors on how 

to vote proxies and provides consulting services through its subsidiary, 

ISS Corporate Solutions, Inc., to companies seeking to improve their 

corporate governance. The concept release also discussed other types of 

potential conflicts of interest on which we reported in 2007, such as when 

owners or executives of the proxy advisory firm have significant 

ownership interest in, or serve on the board of directors of companies 

(corporate issuers) with matters being put to shareholder vote and on 

which the proxy advisory firm is offering vote recommendations.

The concept release also requested public comments on a list of potential 

regulatory solutions for addressing conflicts of interest and accuracy and 

transparency issues. For example, SEC asked for comments about 

revising interpretive guidance or regulations to require more specific 

disclosure of the presence of a potential conflict and the extent of controls 

and procedures ensuring the accuracy of proxy research reports provided 

to institutional investor clients.

SEC received about 300 comment letters on these and other issues 

discussed in the release. SEC staff stated these comment letters helped 

to inform subsequent work on proxy advisory firms (as discussed below). 

Furthermore, SEC staff stated that they continue to routinely review 

issues raised in the concept release, and have met with several 

stakeholders and associations representing corporate issuers, investors, 

and proxy advisory firms to see if the issues are still prevalent and plan to 

continue these discussions with various stakeholders.

Roundtable. In December 2013, SEC held a roundtable to discuss 

issues facing the proxy advisory industry. Participants included the SEC 

Chair as well as four SEC Commissioners and various officials and 

representatives from institutional investors, investment advisers, 

corporate issuers, academia, law firms, and proxy advisory firms. 

According to statements by the Chair, the roundtable continued the 

review of the use of proxy advisory services and related issues that were 

discussed in the 2010 concept release.

The roundtable discussed the use of proxy advisory firms in general and 

also reviewed key topics of interest, including potential conflicts of interest 

for proxy advisory firms and users of their services, the transparency and 

accuracy of the recommendations the firms make, and what the nature 

and extent of institutional investor reliance on proxy advisor 

recommendations is and should be. The Chair stated she was particularly 

interested in the discussion of potential conflicts of interest. One 
Page 34 GAO-17-47 Corporate Shareholder Meetings

Commissioner also drew attention to these issues in a number of 

speeches in 2013 and 2014.53

Guidance. SEC staff addressed some of the issues discussed above 

through guidance. After the concept release and the roundtable, SEC 

staff took steps to address issues in the proxy system in a 2014 Staff 

Legal Bulletin.54 SEC staff stated the bulletin summarized the staff’s views 

on laws and SEC regulations related to proxy advisory firms. For 

example, SEC staff provided guidance that spelled out various 

responsibilities for disclosure of conflicts of interest. The guidance made it 

clear that proxy advisory firms must provide notice of the presence of a 

significant relationship or a material interest. In addition, according to the 

Staff Legal Bulletin, such disclosure should enable the recipient to 

understand the nature and scope of the relationship or interest, including 

the steps taken, if any, to mitigate the conflict. The disclosure should also 

provide sufficient information to allow the recipient to make an 

assessment about the reliability or objectivity of the recommendation.

Additionally, the bulletin clarified and restated responsibilities of 

investment advisers to demonstrate that proxy votes are cast in 

accordance with clients’ best interests and the adviser’s proxy voting 

procedures. Among other things, the guidance states that investment 

advisers who use proxy advisory firms should ascertain whether the proxy 

advisory firm has the capacity and competency to adequately analyze 

proxy issues. In doing so, the guidance states that investment advisers 

could consider, among other things, the robustness of the proxy advisory 

firm’s policies and procedures regarding its ability to ensure that proxy 

voting recommendations are based on current and accurate information 

and to identify and address any conflicts of interest. The Staff Legal 

Bulletin further states that investment advisers who use the services of 

proxy advisory firms could also consider the adequacy and quality of the 

firm’s staffing and personnel.

 53Commissioner Daniel M. Gallagher, remarks at national conference of Society of 

Corporate Secretaries and Governance Professionals (now, the Society for Corporate 

Governance) (Seattle, Wash.: July 11, 2013); Commissioner Daniel M. Gallagher, remarks 

at Transatlantic Corporate Governance Dialogue Conference, “The Realities of 

Stewardship for Institutional Owners, Activist Investors, and Proxy Advisors” (Washington, 

D.C.: Dec. 3, 2013); and Commissioner Daniel M. Gallagher, remarks to the Forum for 

Corporate Directors (Orange County, Calif.: Jan. 24, 2014).

54Securities and Exchange Commission, Division of Corporate Finance, Division of 

Investment Management Staff Legal Bulletin No. 20 (June 30, 2014).
Page 35 GAO-17-47 Corporate Shareholder Meetings

Institutional investors with whom we spoke told us they perform due 

diligence on proxy advisory firms in various ways. A few institutional 

investors reported conducting various types of compliance reviews of 

firms, including site visits and analyst interviews. For example, one 

institutional investor has analysts dedicated to conducting ongoing due 

diligence on the data quality of the proxy advisory firm’s reports. This 

institutional investor validates the firm’s data and communicates any 

errors it identifies to the firm. The institutional investor said that the errors 

found in proxy reports generally were minor and that firms typically were 

able to update and correct their reports.

Examinations. SEC staff also considered some of the issues discussed 

previously through examinations of proxy advisory firms registered as 

investment advisers and registered investment companies using proxy 

advisory firms. As discussed, proxy advisory firms that are registered 

investment advisers under the Advisers Act are subject to examination by 

SEC.55 According to SEC staff, proxy voting issues and proxy advisory 

firms may not be examined on a regularly scheduled basis because SEC 

uses a risk-based approach to identifying examination priorities each 

year. As noted previously, all entities, including proxy advisory firms, that 

meet the statutory definition of an investment adviser (where no exclusion 

from the definition is available), regardless of whether they are registered 

with SEC, are subject to the Advisers Act’s antifraud provisions. 

Legislation that has been proposed would require all proxy advisory firms 

to register as such, creating a new regulatory framework for the 

registration of proxy advisory firms.56

In January 2015, SEC staff announced examination priorities for 2015, 

which included select proxy advisory firms and how they make 

 55As noted previously, ISS, Marco Consulting, and ProxyVote Plus are registered as 

investment advisers, citing their work as pension consultants as their basis for registering. 

Of the other two proxy advisory firms, Glass Lewis is not registered, and Egan-Jones is 

registered as a Nationally Recognized Statistical Rating Organization; therefore, SEC 

oversight of Egan-Jones only extends to the firm’s credit ratings activities. 

56See, e.g., Corporate Governance Reform and Transparency Act of 2016, H.R. 5311, 

114th Cong. (2016). In addition to requiring registration, other provisions in this bill would 

require proxy advisory firms to provide information during registration on whether they 

have a code of ethics (and if not, provide reasons for not having one); establish and 

enforce policies and procedures to address and manage any conflicts of interest; disclose 

their methodology for the formulation of proxy voting policies and voting 

recommendations; and file financial statements with and make an annual report to SEC.

Although this bill would require proxy advisory firms to register with SEC, it would not give 

SEC examination authority.
Page 36 GAO-17-47 Corporate Shareholder Meetings

recommendations on proxy voting and how they disclose and mitigate 

potential conflicts of interest.57 The examination priorities for 2015 also 

included reviewing investment advisers’ compliance with their fiduciary 

duty in voting proxies on behalf of investors. SEC staff efforts on this 

priority were incorporated into an ongoing Never-Before-Examined 

Investment Company Initiative that launched in April 2015.58 This initiative 

involves focused, risk-based examinations in a number of higher-risk 

areas, including compliance programs. SEC staff announced that as one 

of the areas to be reviewed within the compliance program, it would 

review investment companies’ portfolio proxy voting policies and 

procedures. The examination focus would include the oversight of a proxy 

advisory firm retained by the investment company’s investment adviser, if 

applicable.

In determining examination priorities through a risk-based approach, SEC 

staff told us that the decision to examine this issue for this initiative was 

based on several factors, including the higher risk that these investment 

companies may have weaker internal controls, including procedures for 

overseeing proxy advisory services. As of August 2016, the initiative is 

ongoing. We reviewed 41 percent of the examinations completed as of 

August 2016 on SEC’s 2015 priorities addressing proxy advisory firm 

issues and confirmed that SEC examined risk areas related to conflict of 

interest, proxy voting policies and procedures, and oversight of proxy 

advisory services, among other issues.59 None of the examinations we 

reviewed resulted in serious violations leading to an enforcement action.60

SEC staff stated they may refer to the scope, process, or relevant legal 

resources used in the initiative for examinations that review portfolio 

 57Accessed on September 10, 2015, see https://www.sec.gov/about/offices/ocie/nationalexamination-program-priorities-2015.pdf. 

58Accessed on September 8, 2016, see https://www.sec.gov/about/offices/ocie/ocienever-before-examined-registered-investment-company-initiative.pdf. 

59We are not disclosing specific numbers and results of examinations because of SEC 

confidentiality considerations.

60In 2012, an SEC investigation had found that an ISS employee improperly shared

material, nonpublic client vote information, with a proxy solicitor and that ISS failed to 

establish and enforce written policies and procedures reasonably designed to prevent the 

misuse of material, nonpublic information such as client vote information. In 2013, SEC 

issued a cease and desist order against ISS and required ISS to pay a $300,000 penalty 

and engage an independent compliance consultant to review its supervisory and 

compliance policies and procedures.
Page 37 GAO-17-47 Corporate Shareholder Meetings

securities proxy voting in the future, although as of August 2016 none 

were planned. As clarified in the Staff Legal Bulletin, due diligence 

obligations over proxy advisory firms on a regular basis falls 

predominately on the investment adviser using their services. Therefore, 

regardless of persisting perceptions of issues with proxy advisory firms as 

discussed above, it is the investment adviser’s responsibility to vote the 

proxy in its clients’ best interest.

We provided a draft of this report to the Securities and Exchange 

Commission for review and comment. We also provided excerpts of the 

report to proxy advisory firms for technical comment. SEC staff as well as

officials from each proxy advisory firm provided technical comments, 

which we have included, as appropriate.

Agency Comments
Page 38 GAO-17-47 Corporate Shareholder Meetings

We are sending copies of this report to the appropriate congressional 

committees, the Chair of SEC, and other interested parties. In addition, 

the report will be available at no charge on the GAO website at 

http://www.gao.gov. 

If you or your staff have any questions regarding this report, please 

contact me at (202) 512-8678 or clementsm@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs can be found on 

the last page of this report. Key contributors are listed in appendix II.

Sincerely yours,

Michael Clements

Acting Director, Financial Markets and Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 39 GAO-17-47 Corporate Shareholder Meetings

This report discusses (1) the demand for proxy advisory services and the 

extent to which firms may influence proxy voting and corporate 

governance practices, (2) how proxy advisory firms develop and apply 

voting policies to make vote recommendations and efforts to increase 

transparency, and (3) Securities and Exchange Commission’s (SEC) 

oversight since 2007 related to proxy advisory firms and the services they 

provide.

To address all objectives, we conducted a literature review to obtain 

background information and identify issues related to proxy advisory 

firms. We used Internet search techniques and keyword search terms to 

identify publicly available information about proxy advisory firms, from 

2008 – 2016, including the history, number of firms in the United States, 

types of proxy advisory services, and past or current issues facing the 

industry. From research databases such as ProQuest and LexisNexis, we 

obtained information from publicly available documents, such as journals, 

trade publications, periodicals, studies, white papers, and congressional 

testimony.

We also identified and conducted interviews with various officials and 

representatives with knowledge of the industry (SEC staff, 5 proxy 

advisory firms, 13 institutional investors, 11 corporate issuers, 4 proxy 

solicitation firms, 2 international agencies—European Securities Markets 

Authority and Canadian Securities Administrators—and 8 industry and 

advocacy groups). The industry and advocacy groups were the Business 

Roundtable, Chamber of Commerce’s Center for Capital Markets 

Competitiveness, Council of Institutional Investors, Investment Company 

Institute, Mutual Fund Director’s Forum, National Association of 

Corporate Directors, National Investor Relations Institute, and the Society 

of Corporate Secretaries and Governance Professionals. We also 

interviewed other stakeholders from the Stanford Rock Center for 

Corporate Governance, and the NASDAQ Stock Market and New York 

Stock Exchange.

We conducted the interviews to gain an understanding of issues affecting 

the proxy advisory industry and to obtain a variety of perspectives, as well 

as to corroborate the information obtained in our other sources. The 

views of those interviewed are not representative of all institutional 

investors, corporate issuers, proxy solicitors, or industry and advocacy 

groups. Our criteria for selecting the interviewees consisted of several 

factors such as participation in prior SEC events, including roundtables; 

recommendations from market participants and other stakeholders; 

participation in prior congressional hearings; appearance in our literature 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 40 GAO-17-47 Corporate Shareholder Meetings

reviews and Internet searches; and mentions in bibliographies of relevant 

papers and studies. In selecting corporate issuers (public companies that 

develop, register, and sell securities to the investing public to finance their 

operations), we used information from the Standard and Poor’s Smallcap 

600, Midcap 400, and Large 500 indexes to randomly select a mix of 

small, midsize, and large corporate issuers. In selecting institutional 

investors for our interviews, we obtained information from the Council for 

Institutional Investors and the Investment Company Institute to 

judgmentally select a mix of 13 institutional investors (based on asset 

size) and type (mutual fund companies and pension funds). We based the 

asset size of institutional investors on the total assets under management 

(AUM), or the total market value of all financial assets the institution 

manages for its clients or on its own behalf. To ensure a mix of large and 

small institutional investors, we ranked institutional investors by the total 

reported AUM and selected seven institutions with the highest total AUM 

and six institutions with the lowest total AUM. For purposes of this report, 

we defined “large” institutional investors as those with an AUM of $600 

billion or more and “small” institutional investors as those with an AUM of 

$200 billion or less.

Throughout this report, we use certain qualifiers when describing results 

from interview participants, such as “few,” “some,” and “most.” We define 

few as a small number but less than some (two or three); some as more 

than a few relative to the total number possible (at least four or more); 

and most as nearly all or almost everyone relative to the total number 

possible (at least seven or more).

To address the first objective, we reviewed and summarized literature and 

analyzed available information on users of proxy advisory firms and the 

demand for proxy advisory services, factors that may have contributed to 

demand, and the possible influence of firms on proxy voting and 

corporate governance practices. Specifically, to describe the demand for 

services, we identified the services provided by proxy advisory firms, 

users of such services, and the rationale, if any, for institutional investors, 

in particular, to acquire proxy advisory services. To the extent that 

relevant data or literature were available, we summarized information on 

any trends, linkages, or relationships identified in the literature.

Additionally, to address the first objective, we conducted a literature 

search to identify relevant academic studies and working papers on the 

influence of proxy advisory firms. Our criteria for selection consisted of 

factors such as whether the studies and papers were based on original 

data analysis (including data that may have been gathered by others); 
Appendix I: Objectives, Scope, and 

Methodology

Page 41 GAO-17-47 Corporate Shareholder Meetings

published in a refereed medium; written or published in 2009–2016; and 

contained no serious methodological or other errors (as determined by 

our quality assessment and based on guidance for using external work in 

our engagements).We focused our analysis on published academic 

studies and academic working papers not yet published that involved 

quantitative analyses of proxy advisory firms’ influence. We analyzed the 

content of these studies and papers for data or other information on the 

extent of the firms’ influence. We reviewed whether the author concluded 

that the proxy advisory firms’ research and recommendations moved at 

least some fraction of the votes or affected a company’s governance 

decisions or practices. We also reviewed whether the author concluded 

that the firms’ influence was positive or negative in the sense that it was 

potentially helpful or harmful to shareholders or investors.

For the second objective, we identified and analyzed available information 

on how proxy advisory firms develop and apply voting policies to make 

vote recommendations. We analyzed information on the firms’ voting 

policies and guidelines, such as their general, custom, and specialty 

policies. In some instances, we focused our review on Institutional 

Shareholder Services (ISS) and Glass Lewis and Co. (Glass Lewis) 

because they have the largest number of clients in the proxy advisory firm 

market in the United States. We reviewed documentation issued by the 

SEC and its staff and international regulators such as the European 

Securities and Markets Authority and Canadian Securities Administrators 

proposing principles and guidelines related to proxy advisory firm 

transparency. In addition, we reviewed proxy advisory firm policies, 

mechanisms, and the transparency of their voting policies, procedures, 

and processes, including reviewing the firms’ websites and whether they 

disclosed information about their policies and processes. We also 

analyzed the views of market participants and other stakeholders on 

these transparency efforts.

We also compared proxy advisory firms’ policies for selected voting 

issues with related corporate governance standards developed by other 

entities, such as stock exchanges and institutional investors. Specifically, 

we reviewed four different voting policies from the five proxy advisory 

firms and compared them with corporate governance standards 

developed by the New York Stock Exchange (NYSE), NASDAQ Stock 

Market, and one large institutional investor. We selected NYSE and 

NASDAQ because they have corporate governance requirements that 

corporate issuers must meet to be listed on the exchange and some of 

these requirements are also addressed by proxy advisory firms. We also 

selected a large institutional investor that has developed its own voting 
Appendix I: Objectives, Scope, and 

Methodology

Page 42 GAO-17-47 Corporate Shareholder Meetings

policies on corporate governance issues to provide an example of how 

proxy advisory firm policies compare to voting policies of institutional 

investors. We reviewed voting policies and corporate governance 

requirements for director independence, overboarding, independent 

chairman/chief executive officer, and proxy access issues. We selected 

these four topics based on what we learned from interviews with market 

participants and other stakeholders and our literature review. Although 

some of the proxy advisory firms have voting policies for different 

countries, we focused on the proxy voting policies for the United States.

Lastly, for the second objective, we analyzed the policies firms use in 

developing vote recommendations and identified different proxy voting 

issues to illustrate the process. To select voting issues, we made a 

judgmental selection of voting events occurring after the issuance of the 

June 2014 SEC Staff Legal Bulletin on proxy voting and during the 2015 

proxy season. We selected events that were either discussed in our 

interviews with market participants or other stakeholders or publicly in the 

news media. The example events covered the areas of (1) board of 

directors’ issues, (2) mergers and acquisitions, and (3) executive 

compensation. We also reviewed available information on the steps 

conducted to ensure that data used for developing vote recommendations 

are accurate and looked at the degree of communication between proxy 

advisory firms and corporate issuers before vote recommendations are 

finalized. Specifically, we reviewed ISS’s and Glass Lewis’s draft review 

processes and analyzed the views of market participants who have been 

involved with the processes.

For the third objective, we reviewed and summarized SEC oversight 

activities since our last report in 2007 regarding proxy advisory firms and 

their clients. We reviewed the SEC 2010 Concept Release on the U.S. 

Proxy System related to proxy advisory firms and comment letters 

industry stakeholders submitted to SEC on the concept release. We 

reviewed the transcript and comments on a roundtable SEC held about 

the proxy advisory industry in 2013. We also reviewed the guidance and 

clarification provided in the 2014 Staff Legal Bulletin of the obligations of 

proxy advisory firms and their clients who are registered as investment 

advisers. To determine whether SEC addressed 2015 examination 

priorities related to proxy advisory firms registered as investment advisers 

and the services they provide to registered investment companies, we 

reviewed 41 percent of the examinations related to SEC’s 2015 priorities 

addressing proxy advisory firm and proxy voting issues completed as of 

August 2016.
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-17-47 Corporate Shareholder Meetings

We conducted this performance audit from August 2015 to November 

2016, in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 44 GAO-17-47 Corporate Shareholder Meetings

Michael E. Clements, (202) 512-8678 or clementsm@gao.gov

In addition to the above contact, Kay Kuhlman (Assistant Director), 

Michelle Bowsky (Analyst-in-Charge), Ria Bailey-Galvis, William Chatlos, 

Risto Laboski, Patricia Moye, Aku Pappoe, Barbara Roesmann, Jena 

Sinkfield and Anne Stevens made key contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100275)
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