Tesla CEO Elon Musk on Wednesday slammed major shareholder advisers, shining a spotlight on a corner of Wall Street that holds enormous sway among big institutional investors. Mr. Musk said proxy advisory firms Institutional Shareholder Services and Glass Lewis were “strangely out of touch” after ISS recommended shareholders reject Mr. Musk’s nearly $1 trillion compensation package in a conference call with analysts after Tesla’s latest earnings report last week. “They’ve made a lot of terrible recommendations in the past,” the billionaire entrepreneur said, referring to advisors such as ISS and Glass Lewis. Their past advice has been “very disruptive to Tesla’s future,” he said. Proxy advisory firms have long had influence on Wall Street, but their recommendations are even more salient today, when nearly two-thirds of Americans own stocks in the stock market. The Influence of Proxy Advisers As the number of individual investors in the market increases, particularly through passive funds such as ETFs, there is a growing demand for professional advice when corporate proposals go to shareholder votes. But because the role of advisors is not to be a rubber stamp, but also to act as a potential check on board proposals, they are also under increased scrutiny from corporate executives and politicians. “Shareholder voting rights have been a feature of modern public companies since the early 1930s, but as more people enter the capital markets, the importance of proxy voting and corporate engagement has increased dramatically,” BlackRock CEO Larry Fink said in a letter to clients two years ago. Proxy voting advisors provide research to institutional investors and make recommendations to them on how to respond to shareholder proposals, whether they come from boards of directors, shareholder activists, hedge funds, etc. Together, ISS and Glass Lewis account for more than 90% of the proxy advisory market, said Paul Rose, a law professor who specializes in corporate governance and dean of Case Western Reserve University School of Law in Cleveland. At a Congressional hearing on proxy advisors earlier this year, Rose said more than 100 institutional investors voted in 2020 in near-total alignment with the recommendations of ISS or Glass Lewis. Rose called these companies “the de facto gatekeepers of corporate governance,” noting that hundreds of institutional investors “outsource” decision-making to advisors. “Their recommendations could influence the outcome of the vote and shape the governance of public companies,” Rose said. “But these companies operate with no fiduciary duties, limited transparency, and minimal accountability.” Many large shareholders use robo-voting, automatically following the advice of their voting advisors without doing their own analysis, said Rose, who worked as an assistant derivatives trader at Citibank in New York before attending law school. Lawmakers in Washington have long questioned the power of proxy advisory firms. In 2023, House Republicans held a hearing on the role of corporations in swinging votes on environmental, social, and governance investments. Musk’s compensation Eric Talley, a law and business professor at Columbia University, said many CEOs claim their companies give them “cookie-cutter” or “generic” advice. Proponents argue that without this resource, investors would be isolated or dependent solely on information from the companies themselves. At the center of Musk’s rebuke Wednesday is the chief executive’s new pay package that gives him nearly $1 trillion in stock and could make him the first billionaire in history. In rejecting the proposal, which is expected to be voted on at Tesla’s annual general meeting next month, ISS highlighted “unmitigated concerns.” This week, a coalition of labor unions and other groups joined the movement against the ISS, launching a campaign called “Take Back Tesla.” The group, which includes the American Federation of Teachers and the consumer advocacy group Public Citizen, criticized the pay structure as “exorbitant.” Colorado law professor Ann Lipton said many institutional investors rely on proxy advisors’ research rather than their voting recommendations. He says it’s natural for advisers to face pushback from management if their analysis doesn’t paint a positive picture of a company’s proposal. “Many corporate executives have really decided that they don’t like proxy advisors,” Lipton told CNBC. “What they really don’t want is for proxy advisors to make recommendations that go against management’s wishes,” he said, adding that executive compensation is one of the most common decisions contested in shareholder votes. Mr. Musk, a passive investor, warned that if index funds have sufficient stock ownership and too many passive investors “defer” the recommendations of proxy advisors, companies will be “effectively” run by ISS and Glass Lewis. “This is a fundamental issue for corporate governance,” Musk said. “They’re not voting in a way that’s actually good for shareholders.” BlackRock’s Fink said index funds have made markets more accessible and cut management fees, but the funds are seen as the ultimate long-term investors and, unlike active investors, typically don’t sell stocks when corporate governance issues arise. But voting is even more important to this group because index funds are held for long periods of time, Lipton said. Passive investors will hold a stock simply because it is included in an index. That means voting is one of the few ways to make their voices heard, he said. Voting Even without Musk’s criticism, voting on shareholder engagement and best corporate governance practices has long been a hot topic. Fink said BlackRock has a “vote selection” service aimed at making shareholder voting available to more investors in funds. The CEO said his goal is to make voting choices accessible to all investors, including individuals. Lipton said Musk is one of many prominent CEOs who have pushed back against proxy advisors. Their anger boils down to shareholders preferring to follow the guidance of boards and other company management rather than independent third-party analysis. “Corporate management is simply objecting to the fact that shareholders have a voice,” Lipton said. “They don’t want shareholders to see and hear.” Despite the criticism, Columbia University’s Tully doesn’t expect proxy advisers to lose their status anytime soon. This is especially true as more and more individual investors, who do not have the time to consider proposals on their own, are entering the market. “The reality is that shareholder votes continue to be very important,” Tully said. “If a proxy advisory firm publishes a public report, it will provide at least some useful information to outside investors.”
