Tesla CEO Elon Musk has ignited a fresh controversy, publicly criticizing leading shareholder advisory firms and drawing attention to their considerable influence on institutional investor voting. In a recent analyst call following Tesla’s earnings report, Musk dismissed Institutional Shareholder Services (ISS) and Glass Lewis as having “no freaking clue,” after ISS recommended shareholders reject his proposed compensation package, estimated to be near $1 trillion. Musk accused the firms of making “terrible recommendations” in the past, labeling them “corporate terrorists.”
The outburst underscores a growing tension between corporate executives and proxy advisory firms, whose recommendations increasingly sway shareholder votes. ISS and Glass Lewis command a dominant position in the proxy advisory landscape, wielding significant influence over how institutional investors approach shareholder proposals. Their expertise is particularly vital at a time when a majority of Americans hold stakes in the stock market, often through passive investment vehicles like ETFs.
According to Paul Rose, a law professor at Case Western Reserve University, ISS and Glass Lewis together control more than 90% of the proxy advisory market. Rose testified before Congress earlier this year, stating that over 100 institutional investors voted almost entirely in accordance with ISS or Glass Lewis recommendations in 2020. He characterized these firms as the “de facto gatekeepers of corporate governance,” noting that many institutional investors effectively “outsource” their decision-making to them.
This reliance on proxy advisors has drawn scrutiny from corporate leaders and some politicians, who express concerns about transparency and accountability. Critics argue that the firms’ recommendations often lack nuance and can negatively impact long-term value creation. Eric Talley, a professor of law and business at Columbia University, suggests that many CEOs believe the advice is too “cookie cutter” and “generic.”
Musk’s sharp criticism is rooted in ISS’s recommendation against his proposed compensation package, which could potentially make him the world’s first trillionaire. ISS cited ‘unmitigated concerns’ regarding the magnitude and structure of the pay plan. A coalition including unions and consumer advocacy groups has joined the opposition, launching a campaign dubbed “Take Back Tesla.”
However, proponents of proxy advisors argue that their research and recommendations provide a valuable service to investors, especially those lacking the resources to conduct independent analyses. Ann Lipton, a law professor at the University of Colorado, notes that the pushback from executives is a natural consequence of advisors urging shareholders to challenge management proposals. She contends that corporate managers often simply “don’t like is when proxy advisors recommend against what management wants.”
Musk specifically worries that the growing influence of passive investors, many of whom automatically follow proxy advisor recommendations, could lead to a situation where ISS and Glass Lewis effectively control companies. He suggests this could undermine corporate governance and prioritize the agendas of the advisory firms over the best interests of shareholders.
BlackRock CEO Larry Fink has emphasized the importance of shareholder voting, particularly for index funds that tend to hold stocks for the long term. He has also advocated for expanded “voting choice” options to empower individual investors in their fund holdings.
Despite the ongoing debate, experts believe proxy advisory firms are likely to remain influential, particularly as more retail investors enter the market and seek guidance on complex corporate governance issues. According to Columbia University’s Talley, “stockholder votes continue to matter a lot,” and proxy advisory firms will remain a source of useful information for external investors.
The clash between Musk and the proxy advisors highlights a fundamental question about corporate governance: who should ultimately decide the direction of publicly traded companies – management, institutional investors, or independent advisors? As the debate continues, the role and influence of proxy advisory firms will likely remain a key point of contention on Wall Street.
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