August 26, 2025

Texas Takes a Stand on Proxy Advisory Firms

News Summary

Texas is moving forward with Senate Bill 2337, which aims to enhance transparency and accountability among proxy advisory firms influencing shareholder votes. The new law requires these firms to disclose when non-financial factors, such as ESG and DEI considerations, impact their recommendations. Advocates see this as key to improving investor confidence and corporate governance. However, major proxy advisory firms are pushing back, citing potential legal challenges. As Texas enforces this law, its implications for shareholder engagement and compliance costs are closely monitored.

Texas – A new law, Senate Bill 2337 (SB 2337), has garnered support from business groups like the Texas Association of Business (TAB) and the Texas Stock Exchange (TXSE). The bill, authored by State Senator Bryan Hughes, aims to enhance transparency and accountability among proxy advisory firms that play a significant role in influencing shareholder votes in publicly traded companies. Set to take effect on September 1, 2025, the legislation is part of a broader strategy to bolster investor confidence and improve corporate governance in Texas.

SB 2337 mandates proxy advisory firms to disclose their recommendations when they are founded on non-financial factors, as well as when they present conflicting advice to various clients. This requirement aims to ensure that shareholders receive accurate and truthful guidance for their decision-making processes. The law does not impose restrictions on the content of proxy advisors’ advice but focuses on promoting clarity regarding how such advice is presented to investors.

The legislation has emerged as a direct response to growing concerns regarding the politically motivated recommendations from proxy advisors that may not serve shareholders’ best financial interests. Critics have argued that a lack of competition and transparency among proxy advisory firms has resulted in an environment where potentially misleading advice can proliferate. By establishing clear guidelines for proxy advisory firms, SB 2337 seeks to curtail such practices and promote accountability.

Specifically, the law requires disclosures concerning non-financial criteria such as environmental, social, and governance (ESG) metrics, as well as considerations related to diversity, equity, inclusion (DEI), and sustainability. Proxy advisors must inform shareholders, affected companies, and the Texas attorney general if their recommendations deviate from financial interests and cover these non-financial aspects. Furthermore, the bill requires proxy advisors to outline any “materially different” advice given to different shareholders, ensuring that all parties are aware of varying opinions.

However, the introduction of SB 2337 has sparked legal challenges. Glass Lewis and Institutional Shareholder Services (ISS), two dominant proxy advisory firms in the United States, have filed lawsuits against the state of Texas, claiming that the law violates their First Amendment rights and is vague. They argue that it compels speech in unconstitutional ways, potentially affecting their advisory roles and service provision. A hearing is scheduled for August 28, 2025, to review the request for a preliminary injunction against the law. Despite the ongoing litigation, Glass Lewis has stated it will comply with the law unless a court ruling dictates otherwise.

Supporters of SB 2337, including the TAB, argue that the law is vital for ensuring shareholders receive reliable advice necessary for making informed decisions. The TAB President has emphasized the importance of accurate and truthful guidance, asserting that shareholders deserve a transparent process when it comes to proxy advice. Additionally, the legislation is promoted as a measure that will help reaffirm Texas’s status as an attractive destination for businesses looking to move away from higher-tax states.

On the other hand, detractors of the law have raised concerns that it could lead to increased compliance costs for proxy advisory firms, potentially shifting recommendations to favor management over shareholder interests. They warn that these changes may inadvertently restrict shareholder engagement and alter the dynamics of voting on significant corporate matters.

As SB 2337 moves forward, its effects on the landscape of proxy advisory services, shareholder voting, and corporate governance in Texas will be closely monitored by both supporters and critics. The ongoing legal challenges will likely shape the contours of the law and its application in the coming years, igniting ongoing debates about the balance between shareholder accountability and the freedom of proxy advisors.

In summary, SB 2337 aims to reshape how proxy advisory firms operate in Texas, focusing on transparency and shareholder accountability while navigating the complexities of compliance and legal challenges that lie ahead.

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Author: STAFF HERE GEORGETOWN

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