“[T]he formulation of generally applicable rules of private conduct . . . requires the exercise of legislative power.”  Department of Transp. v. Ass’n of American R.R. 135 S. Ct. 1225, 1242 (2015) (Justice Thomas concurring opinion)

ISS and Glass Lewis have arrogated to themselves the power to make law, promulgating a civil code of astounding breadth and detail, ruling over decisions on board composition, director qualifications, term limits, majority voting standards, executive compensation, capital structure, poison pills, staggered boards, the advisability of  mergers, spin-offs and recapitalizations, and, increasingly, ESG policies ranging from animal welfare to climate change, diversity, data security and political activities.  They enforce this civil code by advising their clients, institutional investors with huge, varied and increasingly concentrated holdings across the economy, to vote against proposals or against directors if any aspect of the new civil code is disobeyed.  The vote of these clients is often decisive, and the implications of the votes – especially when considered in the aggregate – have far-reaching consequences for the operation and performance of US public corporations.

ISS and Glass Lewis argue that they are providing advice, not making law, but that is disingenuous.[1]  They have created an extensive set of rules that is for all intents and purposes mandatory for US public companies.  They did this without any explicit grant or delegation of legislative authority.  Rather, they operate in a vacuum created by institutional shareholders who were meant under state corporate codes, and required under federal law, to thoughtfully exercise the voting power that comes with ownership of a public corporation and who instead largely abdicated that responsibility, delegating decision-making power to a duopoly of low-cost providers of voting advice.  These advisors in turn vastly expanded the power associated with a shareholder vote by turning every director vote into an opportunity to implement and enforce a broad new civil code of corporate governance.  The SEC’s ongoing quixotic attempts, starting in 2003,[2] to make institutional shareholders good corporate stewards have only succeeded in accelerating the delegation to, and reliance on, this duopoly,[3] expanding the scope of proxy advisors’ rulemaking authority and furthering the ability of wholly unaccountable special interests to drive the rulemaking agenda of the proxy advisors.  There is no reason to expect that the SEC’s latest attempts to force proxy advisors to provide better advice will bear fruit[4] – the simple truth is that (virtue-signaling aside) a voting record is not a point of competition among funds looking for investors, but overhead expenses and fees are.  For so long as this is the case, institutional investors will buy the cheapest advice they can get away with, and proxy advisors – in the market of providing cheap advice – will spend only as much as they need to generate that advice, and not a nickel more.

Proxy Advisors Supplant Boards of Directors – The Mechanism.

So how did ISS and Glass Lewis manage to achieve the status of de facto lawmakers?

The Delaware corporate code (and that of other states) necessarily provides for a division of authority between individual stockholders and their collective representatives on the board of directors.  Under Delaware law, the matters reserved to shareholders are quite proscribed – consisting primarily of voting on the election of directors, amendments to the charter, and certain corporate transactions such as mergers and significant asset sales.  Otherwise, Delaware law famously provides that the corporation is to be managed by its board, and not by its stockholders.[5]  Yet, in spite of the limited role for stockholders contemplated by the Delaware corporate code, proxy advisors and their clients have leveraged the power to vote on a narrow set of matters into the ability to dictate uniform corporate policies on a broad range of matters that would otherwise have been left for each individual board to decide.

The mechanism by which proxy advisors and their clients managed this has two parts – both ultimately focused on the election of directors.  First, and most directly, ISS accomplishes this by recommending their clients vote against directors who do not proactively comply with certain aspects of their civil code.  Under ISS “Accountability” requirements, ISS will recommend against the election of all directors if certain “problematic” takeover defenses or governance structures are in place.[6]  For example, although a shareholder vote is not required to adopt a poison pill, if a corporation adopts a poison pill of more than a year’s duration, ISS will recommend that its clients vote against all directors.[7]  The intended effect of this rule is not to advise shareholders how to vote on a question presented to them by the board; rather, it is to coerce the board into adopting a uniform rule promulgated by ISS.  One could question whether this maneuver directly conflicts with Section 141(a) of the Delaware corporate code, which provides that the corporation is to be managed by the board, not by ISS.

Second, shareholder proposals under Section 14a-8 of the Securities Exchange Act – once a non-binding expression of shareholder opinion that did not supplant the board’s authority – have been weaponized.  A shareholder may make a proposal on any topic covered by the ISS or Glass Lewis rules, knowing beforehand what ISS and Glass Lewis will recommend to their clients.  There is no shortage of activists, gadflies and special interest groups willing and able to take advantage of this.  For example, if a shareholder doesn’t like that a company’s directors may only be removed for cause, that shareholder can make a shareholder proposal to amend the charter on this point, knowing that, regardless of the view of the board regarding the value of this provision in protecting against activism or opportunistic takeovers or other short term behaviors, ISS and Glass Lewis will without question or investigation of any kind recommend to their clients that the shareholder proposal be approved.  And if there is no pre-existing policy on a particular topic of interest, once a governance activist succeeds in getting their proposal on a few ballots, proxy advisors will necessarily react by promulgating a new rule on that ballot proposal, effectively allowing special interest groups to drive the rule-making agenda of the proxy advisors.[8]

Most important is the enforcement mechanism.  If the board then fails to act on the shareholder proposal (assuming the proposal has – with the recommendation of ISS and Glass Lewis – been approved by shareholders), ISS will at the next board meeting recommend against the election of individual directors or the entire board.[9]  Glass Lewis will deem a board “unresponsive” if a proposal receives a mere 20% of shareholder support and the board does not demonstrate “some [unspecified] level of responsiveness to shareholders.”[10]  It turns out that voting directors off the board is an effective method of bludgeoning corporations into accepting the new civil code.  In this way, the proxy advisors and their clients (and special interest savvy enough to insert their concerns into a shareholder proposal) are able to define the matters presented for a vote, control how shares are voted, and enforce the results of the vote – ultimately formulating, implementing and enforcing a large and growing body of corporate governance law.[11]

Under Delaware law, the board is charged with managing the corporation on behalf of all its shareholders and sorting through their various priorities to focus on the priorities important for the long-term value of each individual corporation.  It seems fair to say that the Delaware legislature did not foresee the day when proxy advisors would collect the voting power ultimately held by millions of dispersed holders of mutual funds and pension plans and deploy that power to impose their priorities on corporations, effectively replacing the judgment of boards with low-cost rules designed by institutions not truly beholden to anyone.  So, how did we get here?

Regulatory Origin of the Proxy Advisory Business.

A 2003 SEC Release, together with a pair of no-action letters that followed, laid the foundation for the proxy advisory business, foisting on institutional investors a responsibility they did not want for establishing “voting policies” and ensuring that those voting policies would not be limited to questions regularly presented by boards to shareholders under Delaware law, but encompassing a far broader scope of decisions.

The 2003 SEC Release, nominally focused on the “disclosure” (and not the formulation) of proxy voting policies, proceeded from the very flawed premise that disclosure of fund voting policies would be beneficial, enabling retail investors in mutual funds to “monitor their funds’ involvement in the governance activities of portfolio companies, which may have a dramatic impact on shareholder value.”[12]  “Enabling” retail investors to monitor governance activities, however, is very different from interesting retail investors in those policies.  There was no evidence then, and there is no evidence now, that retail investors care at all about their funds’ voting policies, or pay any attention to those policies.[13]  In fact, 15 years after adoption, you can look at reams of advice on which mutual funds to buy without seeing a word about those mutual funds’ voting policies.  If retail investors don’t care about voting policies, funds are unlikely to make any substantial investment in developing and implementing those policies.  The obvious consequences followed.

The futility of the SEC’s approach was previewed in the 2003 SEC Release itself.  The 2003 SEC Release notes that “a large number of fund industry participants strongly opposed” disclosure of fund voting, arguing that retail investors were “not interested in this disclosure, with many fund groups claiming that they received virtually no requests from their shareholders  for proxy voting information.”[14]  Yet the SEC continued undeterred, apparently believing it would all be worthwhile because the “greater transparency… may encourage funds to become more engaged in corporate governance of issuers… which may benefit all investors and not just fund shareholders.”[15]

And the SEC, to be clear, was not simply asking that funds disclose how they decide to vote in a merger situation, or even in a contested board situation.  Rather, they wanted evidence of policies on “anti-takeover provisions such as staggered boards, poison pills, and supermajority provisions… stock option plans and other management compensation issues, and social and corporate responsibility issues” (emphasis added).[16] The SEC, as regulator of institutional shareholders, required these shareholders, rather than boards, to determine corporate policy on these matters for every US public company in their portfolio.  In hindsight, this seems a huge land grab by the SEC – taking jurisdiction over the broadest possible definition of corporate governance matters by proxy – requiring the investors they regulated to make rules on these topics.  In doing so, the SEC overruled by administrative release the corporate law of virtually every state – replacing a board led model of corporate governance in favor of a shareholder directed model.

Institutional investors, faced with this massive new responsibility for developing policies on such a broad and undefined set of issues, knew that the task ahead would be expensive, and knew that it would put them in the uncomfortable position of prioritizing the interests of certain of their investors over others – again, traditionally a job for the board of directors.  Outsourcing these decisions to a third party standard setter would both reduce costs and avoid criticisms that would inevitably arise from prioritizing the interests of their various investors.

The breadth of the voting policies institutional investors were being asked to formulate and disclose held a further, quite troubling, hazard that was also previewed in the comments to the 2003 SEC Release.  Commenters worried that disclosure of voting policies would “subject them to orchestrated campaigns in the media and elsewhere by special interest groups with social or political agendas different from those of the fund shareholders.”[17]  In other words, even before the turbocharged combination of 14a-8 shareholder proposals and proxy advisor recommendations, there was a worry that people and institutions without an economic stake in a corporation, but with a strong point of view on a particular corporate governance issue, would be able to push their way into the acceptance of those issues.  This has come to pass – SEC Commissioner Elad Roisman has noted that “some proponents [of 14a-8 proposals] appear to be using this system to promote their own social or political agenda without any regard for the specific company funding the ballot and its long-term success.”[18]

To be fair, maybe this might somehow all have worked out in accordance with the initial rosy vision of the SEC – maybe there was a chance that institutional investors, after decades of following the “Wall Street rule” of voting with management or selling the stock, would instead simultaneously have realized that supporting thoughtful corporate governance rules would increase the value of all their portfolio companies, increasing AUM and, accordingly, fee income, but that was not the calculation that was made at the time.  As the immediate consequence of the 2003 SEC Release was to tell fund complexes that they had to formulate voting policies and thereby increase their expenses, it was viewed as deadweight.  Moreover, if any fund did spend on developing good rules and a robust staff to decide on the application of those rules in individual cases, that expense would equally advantage its free-riding competitors.  So, the more spent on these rules and staff, the less competitive position the fund would be in.

Accordingly, like any good profit-seeking companies, the funds sought to squeeze this particular regulatory expense down into the smallest box possible.  The SEC gave institutional investors full license to do so in a pair of no-action letters (recently withdrawn) allowing funds to rely on third party advisors to fulfill their duties to vote responsibly – thus were ISS and Glass Lewis born into their full glory.[19]  Instead of pushing corporate governance decision-making down to the lowest, most situationally knowledgeable, level – that of the boards of individual corporations – the SEC pushed decision-making up past the board, past individual retail investors (who have an actual economic interest in the company), past the vast investment pools run by institutional investors, up to a duopoly of low-cost service providers with no economic interest in the corporations themselves.  This solution guarantees the least diverse, thoughtful, competitive, and situationally appropriate, decisions.

Is this the Right Way to Make Law?

There is an interesting question as to whether the 2003 SEC Release constituted an unlawful delegation by the SEC of its rulemaking authority.  In one sense, the question is easily answered, in that the SEC itself has no authority to make rules of the scope promulgated by ISS and Glass Lewis, and the SEC did not purport to grant authority to proxy advisors – rather it required institutional investors to use their own existing voting power to create corporate governance rules.  The SEC then allowed for the centralization of the rulemaking process in its no-action letters that permitted institutional investors to rely on proxy advisors.  The SEC used its regulatory authority to cause regulated private entities to make rules that the SEC itself could not.  This quasi-delegation would clearly be unconstitutional if the SEC had the power to make these rules and delegated that authority to private entities with a direct financial interest in the adoption and implementation of those rules.[20]  It would be strange to think that the SEC’s absence of regulatory power is the only fact supporting the legality of its vast rulemaking initiative.

Leaving that argument aside for the moment, in considering the costs of allowing law to be made in this way, it is instructive to consider the restrictions put on regulatory agencies when legislatures deliberately delegate law-making authority.  Consider for a moment what would be involved if a legislature charged with making corporate governance laws had intentionally delegated this authority to a private entity – or, since such delegation to a private party would likely be unconstitutional – if the delegation were to a regulatory agency.  In other words, consider what a traditional regulatory effort would look like, as opposed to the ad hoc effort the SEC continues to engage in to turn economically disinterested actors into model shareholders.

A legislature delegating authority to a newly created administrative agency would first define a scope of authority for the agency – the authority seized by ISS and Glass Lewis is limitless and has only expanded since inception.  Should the same agency be permitted to make rules on executive compensation and recapitalization proposals, mergers and staggered boards and climate change and animal welfare?  The range of expertise needed to staff such an agency would be astounding.

Second, and key to a permissible delegation, a legislature would provide an underlying purpose and objective for the agency –  an “intelligible principal” to guide the discretion of those charged with making and implementing rules.  Are the rules to be designed to maximize short-term value for shareholders?  To maximize value for long-term shareholders?  To provide for the interests of all stakeholders?  To implement legislative priorities on capital investments, employment or climate change?  Or should the rules be designed as a hodge-podge of reactive positions satisfying the loudest voices among paying clients and assorted special interests?

Third, the legislature would retain some oversight, to be sure the purpose was being fulfilled and authority properly exercised and conflicts of interests avoided.  Professors Larker, Tayan and Copland note that ISS “receives consulting fees from companies whose governance practices they evaluate,” which terms are not disclosed.[21]  It is hard to believe this sort of conflict would be tolerated in the rulemaking of a regulatory agency.

Fourth, the legislature would give some consideration as to how the agency would be staffed, deciding on minimum qualifications for officials and rotating leadership to reflect legislative priorities.  The hiring decisions of ISS and Glass Lewis are opaque.  However, Professors Larker, Tayan and Copland note in the context of discussing resource constraints that ISS employs 1000 people (including non-research personnel), contrasting that with Moody’s Corporation, which rates credit instruments and employs 11,700 individuals.[22]  This stark difference in staffing speaks volumes about the perceived contribution of corporate governance rulemaking to the bottom line of institutional investors.

Fifth, the legislature would provide for transparency and public input in the making of rules.  Glass Lewis does not even disclose the process used for updating its policy guidelines, although it seems to solicit “user feedback from an online form on its website”.[23]   ISS is somewhat better on this score, conducting surveys, and holding roundtable discussions, but academics and the US Government Accountability Office (GAO) have questioned whether the final policy guidelines reflect input from corporate issuers and institutional investors, and the extent to which they are based on “the extensive body of peer-reviewed, third party research on governance.”[24]

Finally, application of the rules promulgated by the agency would be subject to review by courts or at least by the agency itself pursuant to fixed agency procedures.  ISS and Glass Lewis are required by proposed rules to provide some period for companies to comment on or object to proxy advisor recommendations, but the proxy advisors have resisted even this modest reform mightily.  It remains to be seen whether the proposed rules will advance to final adoption.[25]  Otherwise, there is no recourse of any kind for companies to contest the recommendations made to so many of their shareholders.

In short, as a matter of administrative law, the delegation to ISS and Glass Lewis lacks every normal safeguard.

The Costs of the New Civil Code.

Were the proxy advisory firms infallible, there would be little to worry about.  But there is considerable evidence that the proxy advisory firms often get the wrong answer, and then apply that wrong answer mechanically and uniformly across the US economy, costing investors and other stakeholders billions.

This can perhaps most clearly be seen in the proxy advisors’ full-throated devotion to stripping all corporate defenses from US public corporations, making their boards and management hyper-sensitive to the vocal demands of activists – which demands are in turn often designed (fairly transparently) to achieve short-term stock price movements.  While good traders can benefit from volatility, the creation of volatility should not be the guiding principal in designing corporate governance law.

One prominent example of this behavior was the proxy advisors’ blind support of the Harvard Law School’s Shareholder Rights Project, which resulted in the declassification of the boards of over 100 US public corporations.  This mechanical stripping of a vital corporate defense was later found in one study to have cost shareholders an astounding $90 to $149 billion in lost value at the targeted firms.[26] The proxy advisors forged ahead in support of this initiative, leading to this dramatic loss of value, even though their reliance on one extreme in the broad academic debate on declassification was made clear, very pointedly, by other well-respected academics at the time.[27]

Perhaps more astonishingly, and more revealing for our purposes, the proxy advisors continue to persist in enforcing their thorough-going opposition to classified boards, even after numerous empirical studies have shown this position to be value destructive.  Why don’t they change their minds?  Because no one pays them to.

In fact, it seems as if no one even asks them to reconsider their views.  Glass Lewis in their 2020 Guidelines bases its support for declassification only on studies published in 2002, 2004 and 2010 by a single professor and his colleagues, ignoring all subsequent studies and prior studies from a different source.[28]  (In a lovely Orwellian touch, Glass Lewis further supports it position by noting that shareholder votes, which they and ISS largely control, have increasingly supported de-classification.)  This is not the diligent and thoughtful behavior one would hope for from a lawmaker of such enormous sway, but it is the behavior one would expect from a for-profit entity checking the box for clients bludgeoned by regulators into pretending to care about their voting policies.

And this is far from the only evidence that the proxy advisors are costing beneficial owners money. Professors Larker, Tayan and Copland cite studies which conclude that equity compensation plans that “conform to ISS criteria exhibit lower future operating performance and higher employee turnover.”[29]  Similarly they note another study which found that proxy advisors’ policies on “say-on-pay” votes appear “to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value.”[30]  Professors Larker, Tayan and Copland conclude that, for the most part, the influence of proxy advisory firms on “corporate behavior and shareholder value is shown to be negative.”[31]

These professors go on to propose an interesting hypothesis: namely, that unlike in situations where shareholders are making immediate high-value decisions (such as voting on proxy contests and mergers and acquisitions) “when it comes to general issues common across the broad universe of companies – such as compensation design and director elections – resource and time constraints might compel proxy advisory firms to employ more rigid and therefore arbitrary standards that are less accommodating to situational information that is unique to a company’s situation, industry, size or stage of growth.”[32]

This is consistent with the idea that the proxy advisory firms should not have seized from corporate boards such a broad policy making portfolio, but rather, consistent with the role envisioned for shareholders by state corporate law, should have stuck to making recommendations on high value votes presented to them by the board.  Formulating a new civil code of corporate governance for all US public companies gives proxy advisors enormous unsupervised power over a large chunk of the US economy, power that state legislatures did not envision delegating to the proxy advisors, and power that the SEC had no authority to delegate to the proxy advisors.  The new civil code, which is being expanded every day, is destroying shareholder value and imposing a chaotically random, under-researched, and overly uniform set of governance rules on US public companies.  It is time that boards were once again freed to exercise their own judgment in determining the most situationally appropriate course for companies to take.

[1] The claim brings to mind the famous explanation by Boston ward boss, Martin Lomasney, of his role: “We don’t tell them how to vote, we simply suggest.”  For a more scholarly examination of this claim, see James Copland, David F. Larcker & Brian Tayan, The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry, Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP72 (2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3188174 [hereinafter Copland et. al., The Big Thumb on the Scale].  After reviewing various academic studies, and some basic facts, including that ISS and Glass Lewis together own 97 percent of the market for providing voting advice to institutional investors, that institutional investors in turn own 70 percent of the outstanding equity of US publicly traded corporations while individual investors own only 30 percent, that institutional investors vote 91 percent of the shares they own, while individual investors vote only 29 percent of the shares they own, and that ISS votes in 40,000 shareholder meetings per year and Glass Lewis in 20,000, the authors reach the understated conclusion that “[t]here is considerable evidence that proxy advisory firms influence proxy voting outcomes.”  Id. at 3.

[2] Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Investment Company Act Release No. 25922, 17 C.F.R. §§ 239, 249, 270, 274 (Jan. 31, 2003) [hereinafter Disclosure of Proxy Voting Policies].

[3] In fact, the SEC in 2003 explicitly noted that institutional investors could discharge their duty to develop voting policies by outsourcing that role to proxy advisors.  It was entirely foreseeable that doing so would result in a sort of cooperative race to the bottom, where institutional investors could all find one or two low cost advisors to limit the overhead of running their funds.  See id.

[4] See Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Securities Exchange Act Release No. 34-87457, 17 C.F.R. § 240 (Nov. 5, 2019), available at https://www.sec.gov/news/press-release/2019-231 [hereinafter Amendments to Proxy Rules] (describing how the SEC’s proposed rule amendments would “amend Exchange Act Rule 14a-2(b), which provides exemptions from the proxy rules’ filing and information requirements for certain kinds of solicitations, call for enhanced disclosure of material conflicts of interest, a standardized opportunity for registrants and other soliciting persons to review proxy voting advice, and an improved means for investors to be informed about differing views on the advice”).

[5] See Del. Code Ann. tit. 8, § 141(a) (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.”); see also Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC (Del. Ch. 2011); In re Airgas, Inc. Shareholders Ligation., C.A. No. 5256-CC (Del. Ch. 2011).

[6] ISS, United States Proxy Voting Guidelines – Benchmark Policy Recommendations, 12 (November 18, 2019), https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf [hereinafter ISS, Proxy Voting Guidelines].  Glass Lewis will recommend a vote against every director on the governance committee, or, if there is no governance committee, every director, if, inter alia, a board dares to eliminate the ability of shareholders to call a special meeting, act by written consent or remove a director without cause, or in the event the board seeks to adopt a classified board.  Glass Lewis, 2020 Proxy Paper Guidelines United States, 15, https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf [hereinafter Glass Lewis, Proxy Guidelines].

[7] ISS, Proxy Voting Guidelines, supra note 6, at 12-13.

[8] The ferocious opposition to the SEC’s recent and exceedingly modest proposal to limit the ability to make shareholder proposals to shareholders holding $25,000 of stock for one year (or just $5,000 of stock for three years) is perhaps the best evidence of how greatly special interest groups – and in some cases just old fashioned cranks – rely on 14a-8 proposals to drive the corporate governance agenda.  See Tom Zanki, SEC’s Shareholder Voting Proposals Endure Heavy Criticism, Law360 (February 7, 2020), https://www.law360.com/articles/1242028/sec-s-shareholder-voting-proposals-endure-heavy-criticism (noting that the SEC’s proposals on regulating proxy advisors and mildly restricting 14a-8 proposals had generated over 1500 comment letters).

[9] ISS, Proxy Voting Guidelines, supra note 6, at 13.

[10] Glass Lewis, to their lawyers’ credit, has a more subtle enforcement mechanism – they “may” recommend against directors at companies whose “overall corporate governance, pay-for-performance alignment, and board responsiveness to shareholders” do not match up to their peers and who “have not taken reasonable steps to address the poor performance.”  Glass Lewis, Proxy Guidelines, supra note 6, at 7.  Presumably “poor performance” in this situation can be read to mean a failure to adopt policies recommended by Glass Lewis.  It is also worth noting that a board will likely be considered “unresponsive” by Glass Lewis if a mere 20% of shareholders vote against management on any shareholder or management sponsored proposal and the board then fails to “demonstrate some level of responsiveness to shareholders” – meaning that Glass Lewis, while apparently retaining more discretion, has more of a hair trigger in evaluating the board’s deference to a minority of its shareholders. Id. at 8.

[11] The extended uproar over proxy access, a proposal ultimately adopted by hundreds of US public companies, which ended in a most pathetic whimper of irrelevance, is an excellent example of how special interests can drive a process that leads only to great resources being spent on a useless idea.

[12] Disclosure of Proxy Voting Policies, supra note 2.

[13] Some may point to social impact investing as evidence that retail investors do indeed care about corporate governance policies of the portfolio companies in their funds, but in fact social impact funds do not market themselves based on the particularities of corporate governance, rather, they are focused on the social and environmental impact of their portfolio companies.  The closest social impact investing comes to concern with corporate governance policies are with respect to ESG policies, which at this point are simply disclosure requirements under the new civil code.  Moreover, if social impact funds were interested in corporate governance, they would presumably demonstrate an interest in fostering commitment to long term goals, supporting staggered boards and robust corporate defenses for their portfolio companies.  That does not seem to have been part of any sales pitch as yet.

[14] Disclosure of Proxy Voting Policies, supra note 2.

[15] Id.

[16] Id.

[17] Id.

[18] Zanki, SEC’s Shareholder Voting Proposals Endure Heavy Criticism, supra note 8.

[19] See Egan-Jones Proxy Services, SEC No-Action Letter, 2004 WL 1201240 (May 27, 2004), available at http://www.sec.gov/divisions/investment/noaction/egan052704.htm (providing that a proxy advisory firm could be considered independent despite receiving compensation from a company for separately providing advice on corporate governance issues); Institutional Shareholder Services, SEC No-Action Letter, 2004 WL 2093360 (Sept. 15, 2004), available at http://www.sec.gov/divisions/investment/noaction/iss091504.htm (stating that investment advisors could satisfy their fiduciary duties by examining a proxy advisory firm’s conflict procedures and their implementation rather than a case by case examination of potential conflicts).

[20] See Carter v Carter Coal Co., 298 U.S. 238, 311 (1936) (delegation to a private party was “delegation in its most obnoxious form”).  See also, Association of American Railroads v. Department of Transportation,721 F.3d 666, 670-671 (D.C. Cir. 2013).

[21] Copland et. al., The Big Thumb on the Scale, supra note 1 at 7.  Proposed rules by the SEC would require proxy advisory firms to disclose conflicts of interest, however the proposal has received heavy opposition and the prospects for final adoption are unclear.  See Amendments to Proxy Rules, supra note 4.

[22] Id.

[23] Id. at 3.

[24] Id.

[25] See Amendments to Proxy Rules, supra note 4.

[26] See K.J. Martijn Cremers & Simone M. Sepe, Board Declassification Activism: The Financial Value of the Shareholder Rights Project, SSRN (June 26, 2017), https://ssrn.com/abstract=2962162.

[27] See Daniel Gallagher & Joseph Grundfest, Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors, Rock Center for Corporate Governance at Stanford University Working Paper No. 199 (December 10, 2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2536586.

[28] See Glass Lewis, Proxy Guidelines, supra note 6 at 23.  ISS may be even worse, simply stating in its 2020 Governance QualityScore Methodology Guide that “[s]tudies have shown a negative correlation between the existence of a classified board and a firm’s value,” language that has shown up in identical form in similar ISS documents as far back as 2010.  ISS, Governance QualityScore Methodology Guide, 73 (June 19, 2020), https://www.issgovernance.com/file/products/qualityscore-techdoc.pdf.  The statement is maddening both because ISS seems to be basing its inflexible position on findings of a general correlation, and because ISS does not acknowledge that a number of other more recent and more sophisticated studies have shown, with something closer to causation, that a classified board increases firm value.

[29] Copland et. al, The Big Thumb on the Scale, supra note 1 at 6.

[30] Id.

[31] Id.

[32] Id.