Tesla CEO Elon Musk lashed out at the leading shareholder advisors on Wednesday, shining a spotlight into a corner of Wall Street that wields enormous influence among the largest institutional investors. Musk said proxy advisors Institutional Shareholder Services and Glass Lewis “have no freaking clue” after ISS last week recommended shareholders reject Musk’s near $1 trillion pay package, labeling them “corporate terrorists” on a call with analysts after Tesla’s latest earnings report. “They have made many terrible recommendations in the past,” the billionaire entrepreneur said, referring to advisors including ISS and Glass Lewis. Their past advice “would have been extremely destructive to the future” of Tesla, he said. Proxy advisory firms have long held sway over Wall Street, but their recommendations are even more prominent today, when almost two thirds of the American public has a stake in the stock market . Proxy advisors’ influence With more individual investors in the market — especially through passive funds like ETFs — there’s greater demand for professional advice when company proposals come up for shareholder vote. But since advisors’ role is to also act as a potential check on board proposals, not as a rubber stamp, they’ve also come in for mounting scrutiny from corporate executives and politicians. “While shareholder voting rights have been a feature of modern public companies since the early 1930s, the importance of proxy voting and engagement with companies grew dramatically as more people entered the capital market,” BlackRock CEO Larry Fink wrote in a letter to clients two years ago. The proxy advisors provide research and make recommendations to institutional investors on how to respond to shareholder proposals, whether they spring from boards of directors or others, such as shareholder activists and hedge funds. Together, ISS and Glass Lewis comprise more than 90% of the proxy advisory market, according to Paul Rose, a law professor focused on corporate governance and the dean of the law school at Case Western Reserve University in Cleveland. At a Congressional hearing on proxy advisors earlier this year, Rose said that more than 100 institutional investors voted in almost total lockstep with ISS or Glass Lewis recommendations in 2020. He called the firms the “de facto gatekeepers of corporate governance” and noted that hundreds of institutional investors “outsource” their decision-making to the advisors. “Their recommendations can swing vote outcomes and shape the governance of publicly traded companies,” Rose said. “Yet these firms operate without fiduciary obligations, limited transparency and minimal accountability.” Many big shareholders use robo-voting, automatically following proxy advisors’ advice without doing their own analysis, said Rose, who once worked as an assistant derivatives trader at Citibank in New York before attending law school. Lawmakers in Washington have questioned the power of proxy advisory firms for years. In 2023, House Republicans held hearings on the companies’ roles in swaying votes around environmental, social and governance investing. Musk’s pay Many CEOs argue that the firms give “cookie cutter” and “generic” advice, according to Eric Talley, a professor of law and business at Columbia University. Proponents say that without this resource, investors would either be left on their own or would solely rely on companies themselves for information. At the heart of Wednesday’s rebuke from Musk is the chief executive’s new pay package that could bring him nearly $1 trillion in stock and help him become the first ever trillionaire. In rebuffing the proposal, set to be voted on at Tesla’s annual meeting next month, ISS highlighted “unmitigated concerns.” A coalition of unions and other groups joined ISS in opposition this week, launching a campaign called “Take Back Tesla.” The group, which includes the American Federation of Teachers and consumer advocate Public Citizen , called the pay package “outrageous.” Colorado Law professor Ann Lipton said that many institutional investors rely on research from the proxy advisors rather than their vote recommendations. It’s only natural that the advisors would catch heat from executives when their analysis doesn’t put company proposals in a positive light, she said. “A lot of corporate managers really have decided they don’t like proxy advisors,” Lipton told CNBC. “What they really don’t like is when proxy advisors recommend against what management wants.” Executive pay is one of the more common decisions that come up for shareholder votes, she added. Passive investors Musk warned that if index funds have a large enough ownership stake in stocks and too many passive investors “defer” to proxy advisor recommendations, it would mean a company would be “de facto” run by ISS and Glass Lewis. “This is a fundamental problem for corporate governance,” Musk said. “They’re not voting along the lines that are actually good for shareholders.” While index funds have made markets more accessible and slashed management fees, BlackRock’s Fink said that the funds are considered the ultimate long-term investors, and unlike active investors, don’t usually dump stocks when corporate governance issues arise. But because index funds hang on to their holdings for long periods, voting is even more important for this group, Lipton said. Passive investors will hold a stock just because it’s in an index — meaning voting is one of few ways to make their voices heard, she said. Voting Even without Musk’s barbs, engaging shareholders and voting around the best corporate governance practices have long been a hot topic. BlackRock has a “voting choice” offering that aims to make shareholder voting accessible for more investors in its funds, according to Fink. The chief executive said his goal is for every investor — including individuals — to have access to voting choice. Lipton said Musk is one of many well-known CEOs who have pushed back against proxy advisors. Their anger boils down to preferring that shareholders follow the lead of boards of directors and other corporate managers rather than the analysis of independent third parties. “Corporate management is really just objecting to the fact that shareholders have a voice,” Lipton said. “They would prefer shareholders be seen and not heard.” Despite the criticism, Columbia University’s Talley doesn’t expect proxy advisors to lose their status anytime soon — especially as more retail investors enter the market who don’t have the time to dive into proposals themselves. “The fact of the matter is, stockholder votes continue to matter a lot,” Talley said. “If a proxy advisory firm issues a public report, then that’s going to be information that is going to be at least of some use to outside investors.”
