Glass Lewis and ISS, two of the best known proxy advisers, sued Texas on Thursday to block a first-of-its-kind state law limiting their ability to advise shareholders on diversity, environmental and governance practices.
In complaints filed in Austin, Texas federal court, Glass Lewis and ISS said Texas’ law was unconstitutional, undermining their First Amendment right to advise clients even if the state didn’t like the advice.
Texas’ Republican Attorney General Ken Paxton, who enforces the state’s laws and is running for U.S. Senate in 2026, is the only defendant. His office did not respond to requests for comment. ISS is short for Institutional Shareholder Services.
Signed by Republican Governor Greg Abbott in June, the Texas law targets “non-financial” advice on diversity, equity and inclusion (DEI) matters, and environmental, social and governance (ESG) matters, including for votes at shareholder meetings.
It requires proxy advisers to conspicuously tell clients that the advice is “not being provided solely in the financial interest of the company’s shareholders,” and to provide financial analyses supporting the advice.
The law takes effect on September 1.
Glass Lewis and ISS said the law would force proxy advisers to broadcast Texas’ preferred viewpoints when their own differed, including on hot-button issues that a Republican state legislator perceived as having a “hard left bent.”
Both advisers said they would likely lose clients and suffer reputational harm if forced to tell clients their advice is bad for them and not in shareholders’ financial interests.
ISS also said the law was designed to protect corporate directors and management, and harm shareholders whose votes are an “important check and balance” against boards.
“Texas’s experiment in anti-capitalism thus serves no one,” ISS said.
There’s already a lawsuit filed over an earlier law that had the effect of banning financial firms from doing business with the state because they didn’t support oil and gas hard enough. (At least one of those companies has since caved on the matter; they weren’t involved in the litigation.) This is about controlling corporate policies, and limiting the ability of shareholders to amend those policies via shareholder proxy votes. As I said with the first lawsuit, if one accepts the Mitt Romney proposition that corporations are people, then they also have First Amendment rights. I’ll let the firms that are suing say more on their own behalf:
SB 2337 rests on two premises, one more novel and dubious than the next. The first provision, in Section 101, is based on the idea that any advice on a proxy proposal that is even partly based on an environmental, social or governance factor is not being made in the financial interest of the company’s shareholders. But that is an extreme and perhaps unprecedented position. To cite just one example, the first Trump Administration’s Department of Labor, under the leadership of then-Secretary Eugene Scalia, acknowledged that environmental factors may have an impact on shareholders’ financial interests, citing the example of “a company’s improper disposal of hazardous waste.” [1] Or one can look to the $63 billion in costs borne by BP and its shareholders due to the Deepwater Horizon disaster to see how environmental and safety factors can have profound effects on shareholders’ financial interests.[2] Most institutional shareholders today – who often have their own legal responsibilities as fiduciaries to safeguard pensioners’ and other individuals’ investments – believe that effective and robust oversight of environmental and social risks is critical to ensuring the long-term viability of companies and that a failure to mitigate these risks poses real risks to enterprise and shareholder value. The notion that corporate governance cannot be a material consideration for a company’s shareholders is even more extreme. We cannot think of any institutional investor that holds that view.[3]
Nonetheless, SB 2337 would mandate that any such routine advice be accompanied by a “warning” notice to our clients – who are sophisticated institutional investors who have asked for that advice – with the often counterfactual statement that the advice we are providing them is not “solely in the financial interest of the shareholders of the company.” This would be pointless, misleading and costly. Why would an asset manager that is voting solely for the financial benefit of its client, but who disagrees with SB 2337’s extreme position that no environmental, social or governance factor can ever be material, be forced to receive a stream of notices falsely suggesting it is not acting in shareholders’ financial interest? Likewise, if a religious institution or its asset manager engages us to provide them recommendations under our Catholic Policy, what possible interest would be served by requiring us to warn them each time we make a recommendation to them under the policy they’ve chosen to adhere to their religious beliefs? Worse yet, the bill would also require proxy advisors to provide “immediate” notices to Texas companies when they advise their clients based on these common considerations, a measure that would be costly, disruptive, and could breach a proxy advisor’s duty of confidentiality to its client.
Section 102 is even more problematic. It requires a similar warning notice to our clients, companies, and the Texas Attorney General whenever we provide different advice to different clients that have not “expressly requested services for a nonfinancial purpose.” It also mandates that proxy advisors decide and disclose which of the differing recommendations was in the financial interest of shareholders.
A significant majority of Glass Lewis’s 1300+ clients have their own custom voting policy, meaning they have chosen to receive recommendations based on a policy other than our benchmark policy. This is widely considered a best practice. It ensures that our clients – who have different investment strategies and time horizons, as well as their own views on proxy voting issues – are receiving recommendations based on their own unique needs and views on corporate governance issues.
SB 2337, however, would turn this common understanding on its head, taking the unprecedented position that serving our clients in this manner is a “conflict” and mandating that those clients, who have asked for this service, be warned about it. SB 2337 compounds this by forcing proxy advisors to decide and disclose which of their clients are receiving advice in the financial interest of shareholders. Even the largest, most sophisticated asset managers vote differently on proxy voting matters all the time, consistent with the SEC’s views that there is no “correct viewpoint” on these matters.[4] SB 2337 would – irrationally and at the risk of spurring unwarranted litigation – mandate that their proxy advisor somehow decide and publicize which of them is acting in shareholders’ financial interest.
Finally, we note that the bill, in its current form, has significant technical flaws that could cause unintended consequences. In particular, SB 2337 defines “proxy advisor” and “proxy advisory service” so broadly as to capture a number of players in the proxy voting ecosystem – not just Glass Lewis and its competitors – that we assume Texas has no intention of covering. A deliberative, considered legislative process would allow these flaws to be fixed.
Sounds pretty badly conceived to me, but we’ll have to see what the courts make of it. I’m sure Ken Paxton will hire a bunch of expensive outside lawyers to defend the state in this matter. Business Law Prof Blog, which has a copy of the complaint, has more.