ISS Glass Lewis Proxy Advisor Methodology Explained

Key Takeaways

• ISS and Glass Lewis together hold roughly 97% of the global proxy advisory market and each publish detailed annual benchmark policies.
• An ISS Against recommendation on say-on-pay shifts institutional support by an estimated 15–30 percentage points on average.
• The two firms diverge meaningfully on board tenure, auditor ratification, and equity-plan cost models, winning one does not guarantee the other.
• A growing share of institutional votes use custom or specialty policies, so the public benchmark recommendation can overstate any single fund's likely vote.

What It Is

A proxy advisor is a research firm that analyses ballot items at public-company shareholder meetings and issues voting recommendations (For, Against, Abstain, Withhold) to its institutional-investor clients. ISS, founded in 1985, and Glass Lewis, founded in 2003, together hold roughly 97 percent of the global proxy advisory market.

Both firms publish detailed annual benchmark policies covering director elections, executive compensation, capital structure proposals, shareholder resolutions, mergers, and governance changes. Clients can adopt the benchmark policy directly, apply a specialty policy (for example a climate, socially responsible, or public-pension variant), or use a custom policy where the advisor applies the client's own rules.

The Intuition

A large index fund holds thousands of companies. Reading every proxy statement from cover to cover, across dozens of markets and languages, is not realistic. Proxy advisors do the heavy lifting: they ingest the proxy, apply a consistent framework, and deliver a recommendation that slots into the client's stewardship workflow.

The upside is consistency and scale. The downside is concentration. When one firm's policy labels a compensation plan problematic, that label flows through to hundreds of voters at once. Regulators, companies, and academics have debated for years how much voting outcome the advisors actually drive versus simply predict.

How It Works

Both firms apply a similar four-step process, but with distinct policies.

Step 1, data ingestion. The advisor scrapes the DEF 14A (US), management information circular (Canada), or equivalent international filing. Compensation data, board composition, attendance, overboarding, and capital-structure items are extracted.

Step 2, policy application. Each ballot item is scored against the benchmark policy. For director elections, ISS reviews independence ratios, committee composition, attendance (below 75 percent triggers Against unless explained), overboarding (more than five public-company boards for a non-CEO director, or more than two for a sitting CEO), and responsiveness to prior majority-supported shareholder proposals. Glass Lewis applies similar thresholds with its own nuances, such as stricter scrutiny of long-tenured directors.

Step 3, say-on-pay analysis. ISS runs a proprietary Pay-for-Performance (PFP) test comparing CEO compensation to a peer group and to total shareholder return, producing a qualitative concern level (Low, Medium, High). High concern combined with weak responsiveness usually produces an Against recommendation. Glass Lewis uses its own Pay-for-Performance grade (A through F) built from similar peer-relative inputs but different weightings.

Step 4, shareholder proposals. Each firm evaluates Rule 14a-8 proposals case by case. ISS and Glass Lewis tend to support proposals on independent chairs, proxy access, simple majority voting, and climate-risk disclosure more often than management does.

Studies summarised by the SEC and Harvard Law cite estimates that an ISS Against recommendation on a say-on-pay vote shifts support by roughly 15 to 30 percentage points on average. That is the range most often referenced when people say proxy advisors "drive" votes, but the causal share is debated: large passive managers publish their own guidelines and may reach the same conclusion independently.

Worked Example

A large-cap issuer, ExampleCo, files its proxy. The CEO earned 25 million dollars in a year when total shareholder return trailed the peer median by 12 percentage points. ISS runs its Pay-for-Performance screen, flags High concern, and recommends Against on say-on-pay.

Glass Lewis reaches a similar conclusion using its own peer-relative grade of D. A shareholder proposal requesting an independent chair is on the ballot. ISS recommends For, citing weak responsiveness to last year's 28 percent support on a similar proposal. Glass Lewis also recommends For.

On the day, say-on-pay passes with 62 percent support, a sharp drop from the prior year's 94 percent. The board opens a formal shareholder engagement cycle and commits to changes in the following proxy. No rule required this: the drop itself forced the response.

Common Mistakes

1. Assuming the advisors are interchangeable. ISS and Glass Lewis overlap heavily but diverge on specific issues: board tenure, auditor ratification after long relationships, and equity-plan cost models. An issuer that wins one often loses the other.

2. Treating recommendations as mechanical. Both firms publish written rationales. Those rationales often signal the fix (for example, clawback language or a tenure cap) that would flip a future vote. Companies that engage early can move an Against to a For.

3. Ignoring custom policies. A growing share of large institutional votes use custom or specialty policies, not the headline benchmark. The public recommendation may overstate how a particular fund will actually vote.

4. Confusing correlation with causation. Academic work has repeatedly shown that Against votes correlate with low-quality plans that many holders would oppose on their own. Attribution studies that control for this find smaller causal effects than raw correlations suggest.

5. Overlooking the regulatory overlay. In the US, the SEC's 2020 amendments codified that proxy voting advice is a solicitation under Rule 14a-1(l), with associated anti-fraud duties under Rule 14a-9 and required disclosure of conflicts of interest. The 2022 reforms reversed some company-engagement requirements but kept the solicitation status.

Frequently Asked Questions

Q: What do ISS and Glass Lewis actually do? ISS and Glass Lewis are proxy advisory firms that read every shareholder meeting ballot at public companies, apply their published policy frameworks, and deliver For/Against/Abstain recommendations to institutional investor clients. Clients use those recommendations to vote thousands of proxies consistently without reading every filing themselves.

Q: How do ISS and Glass Lewis recommendations affect investment decisions? An ISS Against recommendation on say-on-pay has historically shifted institutional support by 15–30 percentage points. A board that receives a sharp vote decline signals governance weakness that can affect director elections the following year and, in extreme cases, trigger shareholder campaigns.

Q: What is a real-world example of proxy advisor influence? ExampleCo's CEO earned $25 million while TSR trailed peers by 12 points. ISS flagged High concern on its Pay-for-Performance screen and recommended Against say-on-pay. Glass Lewis issued a D grade and recommended the same. Say-on-pay passed at 62%, down from 94% the prior year, forcing a board engagement cycle.

Q: How can companies prepare for an ISS or Glass Lewis review? Read both firms' benchmark policies published each January. Engage with advisors before the proxy is filed, ISS in particular runs a formal company engagement process. Address prior year concerns in the CD&A narrative. Models that show peer-relative pay alignment are far easier to defend than plans with discretionary adjustments.

Q: How is ISS different from Glass Lewis? Both firms cover similar ground but diverge on several specifics: Glass Lewis is stricter on long-tenured directors and applies a harder letter-grade to pay-for-performance. ISS has a broader custom-policy offering and more granular overboarding thresholds. Winning one recommendation does not guarantee the other.

Sources

1. Institutional Shareholder Services. "Benchmark Policy Guidelines (United States)." https://www.issgovernance.com/policy-gateway/voting-policies/
2. Glass Lewis. "Policy Guidelines (United States)." https://www.glasslewis.com/voting-policies-current/
3. SEC. "Exemptions from the Proxy Rules for Proxy Voting Advice (Release No. 34-89372)." https://www.sec.gov/rules/final/2020/34-89372.pdf
4. Harvard Law School Forum on Corporate Governance. "The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry." https://corpgov.law.harvard.edu/2018/05/25/the-big-thumb-on-the-scale-an-overview-of-the-proxy-advisory-industry/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.