The US is in for another bout of corporate governance upheaval in the wake of a new executive order from Donald Trump, pushing regulators to review the role of proxy advisers ISS and Glass Lewis and, in particular, their stance on issues such as diversity and ESG.

The president said he wanted the US Securities and Exchange Commission to “examine” whether the practice of fund managers following the advice of proxy advisers on issues such as DEI and ESG was “inconsistent with their fiduciary duties”.

The order also calls on the SEC to investigate whether proxies “engage in unfair methods of competition or unfair or deceptive acts” through “conspiring or colluding, explicitly or implicitly, to diminish the value of consumer investment”; failing to declare conflicts of interest; and providing misleading information.

The order claims: “These proxy advisors regularly use their substantial powers to advance and prioritise radically politically-motivated agendas—‘diversity equity and inclusion’ and ‘environmental, social and governance’, even though investor return should be the only priority.”

The order comes as the latest attack on proxies under the Trump administration, which has also attacked the value of DEI programmes or ESG principles.

Putting the ‘cartel’ before the house

The House of Representatives has been staging a series of hearings throughout the year entitled “Exposing the proxy advisory cartel”, which has offered a platform for a host of critics of the current system.

However, there have been defenders, too. Nell Minow, chair of ValueEdge Advisors and a former board member of ISS, told the committee that, 90% of the time, proxies recommend voting with company managers at AGMs.

“Proxy advisors publish reports that financial services firms and other institutional investors can purchase if they wish.

“There is no requirement to subscribe. No fund manager is required to follow their advice.

“The proxy advisory services constantly adapt and improve their recommendations according to client preferences, like any other business.”

‘Misconceptions’

Jen Sisson, chief executive of the International Corporate Governance Network, also defended proxies in a letter to the House committee, seeking to clarify “misconceptions” about proxy advisers.

“It is important to remember that the investor remains the decision-maker. Proxy advisors don’t vote. Investors do.”

She added: “We are worried that a hearing entitled ‘Exposing the Proxy Advisory Cartel: How ISS & Glass Lewis Influence Markets’ does not create a helpful environment for an unbiased, factual, and balanced conversation.”

However, the most recent hearing in September heard stiff criticism. Committee chair Ann Wagner applauded the executive order: “For too long, a small number of firms have held disproportional influence over corporate governance decisions that impact millions of investors.”

ESG and DEI remain areas of attack for the White House despite widespread recognition they represent significant risk areas. That may, in the end, make the US a global outlier.