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Since 2016, proxy advisory firms have come under sustained pressure from regulators, corporate lobby groups, and politicians, writes Josh Black.



Their recommendations on environmental, social, and governance (ESG) matters have invited scrutiny, with their influence on proxy voting outcomes seen as a soft target for policy groups leading the anti-ESG backlash.

Though some federal initiatives to regulate proxy advice have faltered, with this month’s Supreme Court decision that vacated a 2020 rule by the Securities and Exchange Commission (SEC) that proxy advisors’ recommendations were solicitations and therefore subject to higher scrutiny, a new front has opened at the state level.

On June 20, Governor Greg Abbott signed SB 2337 into law, making Texas the first state to regulate proxy advisors. Starting September 1, firms like Institutional Shareholder Services (ISS) and Glass Lewis must accompany any recommendation against company management with a detailed financial analysis and a disclaimer disclosing the potential influence of nonfinancial factors. These materials must be shared not only with investor clients, but also with the relevant issuer and the Texas attorney general.



What SB 2337 seeks to achieve – and what it may disrupt



The new law’s proponents say it enhances transparency and protects shareholders. But practitioners see more fundamental consequences.

“It seemed to me they were trying to level the playing field for Texas investors that may have been disadvantaged by proxy advisory firms’ policies toward companies in the state,” Steve Cross, managing director and head of the Houston office of compensation consultant FW Cook told Diligent Market Intelligence (DMI) in an interview. “It could have a range of outcomes, and it could be meaningful. It could mean proxy advisors excerpting out proposals that would require additional analysis, it may result in additional analysis that attempts to quantify the financial impact of the proposal, and it could also range all the way to the proxy advisory firms hosting on their websites the disclosure that, for example, their analysis is not based primarily on the financial interest of the shareholder.”

The bill is sometimes sparse on details and certainly open to interpretation. Litigation seems inevitable. But when it goes into effect it will force proxy advisors to make a wide swathe of disclosures.

“I don’t think people are fully appreciating that proxy advisors will have to accompany any recommendation opposing management with financial analysis to support that recommendation – regardless of the ESG aspect,” Ferrell Keel, a Dallas-based partner at law firm Jones Day, said in an interview with DMI.

Cross wonders whether it will affect not just reports and recommendations, but ratings and scores created by the proxy advisors too.

“It’s going to really disrupt the corporate governance landscape in Texas and potentially have further-reaching effects,” said Keel. “It's going to be an interesting proxy season because it’s not just proxy advisors who need to navigate compliance – there will be ancillary impacts on institutional investors and companies too.”





According to Cross, the wide scope of the bill – affecting some 300 to 500 companies including a significant number of the S&P 500 – means it’s not something proxy advisors can sidestep. “When we're talking about the number of companies involved here and the high level of some of those companies, I think the proxy advisors are going to want to find a way to stay engaged.”

Institutional investors have developed a range of options to offset their use of proxy advisors in recent years, including scaling up their in-house data and analysis capabilities, direct engagement with issuers, and pass-through voting, which allows beneficial owners to make voting decisions.

One provision of the bill – requiring disclosures when proxy advisors give different advice or recommendations to different clients that haven’t been expressly requested – should make investors more prescriptive about their voting approach. “I don't think that this bill is meant to inhibit specialist custom policies – if anything, it may promote the use of them because those wouldn't be captured under this bill if the client ‘expressly requested services for a nonfinancial purpose’,” Keel said. “But requesting advice for nonfinancial reasons may present inherent challenges to institutional investors.”



Indirect consequences: redomiciling and investor behavior



Beyond the direct compliance costs for proxy advisors and investors, SB 2337 could influence decisions about where companies choose to incorporate or maintain their headquarters. While Delaware remains the traditional domicile of choice for many public companies, Texas is among the states positioning itself as an alternative – particularly for issuers aligned with the state’s approach to ESG and fiduciary oversight.

Some observers believe the law might also prompt changes in investor behavior. The higher documentation requirements could deter proxy advisors from making negative recommendations, especially when financial metrics are ambiguous. Over time, this could dampen voting participation – especially on ESG issues, where the connection to financial performance is often contested and may need to be reestablished every proxy season. “There are a lot of ways this could go, but it might result in a universe where institutional investors redefine their fiduciary duty to vote – particularly on social and political issues,” Keel told DMI. “And we may inch towards a world where fewer investors are voting, particularly passives, on certain matters.”



Looking ahead: regulatory and market dynamics in flux



Even if parts of the law are blocked or revised, the precedent it sets could encourage similar action in other conservative-led states, especially those seeking to compete with Delaware for corporate charters. One quirk of the Texas bill is that it applies to companies considering a move to Texas – so that proxy advisors would have to provide a financial analysis to justify any recommendation against such a proposal, potentially making it harder to demur.

At the federal level, the SEC under the fresh leadership of Chair Paul Atkins will be closely watched for its agenda.

Yet even as regulatory risks mount, market developments suggest resilience in the proxy advisory sector. “My thinking is that the proxy advisory firms will adapt because I do think they serve a pretty central role in helping large investors sort through a very complicated environment,” said Cross.

Deutsche Boerse’s recent steps toward an IPO of ISS Stoxx may reflect a stronger foundation or an effort to exit before conditions worsen.

For now, the corporate governance ecosystem is bracing for a period of adaptation. Proxy advisors, institutional investors, and issuers are already adjusting to changes in the first six months of 2025 – including shareholder proposal rules, 13D guidance, and now proxy advisor rules. Depending on the focus for the rest of this presidential term, Texas may only be the beginning.

IN-DEPTH: Proxy advisors, stewardship teams face new legal challenges 

 across all industries see M&A as a strategic priority and plan to discuss M&A activities at their next board meeting. While starting or expanding a company or being part of a merger or acquisition carries many opportunities, it also brings many risks. When considering a merger or acquisition (M&A), it’s crucial to consider all elements; doing your M&A due diligence is a prerequisite.

It’s vital to consider the company’s debts, liabilities, problem contracts, litigation risks, intellectual property risks and much more. Acquiring a private company carries even more risks because they haven’t stood the test of the markets, and buyers have less access to information from public sources.

Either way, it’s not a process you want to hurry through, regardless of how attractive the offer may be. The best and most secure way to ensure due diligence is with 

 that provides critical and comprehensive insights. Choosing the right due diligence software and working through an M&A due diligence checklist are the first steps in tackling mergers or acquisitions.

 and more specifically, “What is M&A due diligence?”

governance, risk and compliance (GRC) strategy

, M&A due diligence plays an important role. Expanding your business by acquiring or merging with another company can be exciting. But it can also pose compliance challenges.

Can you be sure that the company you are joining forces with takes the same thorough approach to governance and compliance that you do?

How does it manage risk, both internally and within its third-party suppliers?

ESG issues like human rights and sustainability

Discover how leading compliance teams are modernizing due diligence with smarter workflows, deeper risk insights and scalable tools for global oversight.

Rethink due diligence strategy

When you start to consider these issues, it’s easy to see that when you’re looking to acquire or merge with another organization, M&A due diligence is vital.

The reasons why M&A due diligence matters now include:

Businesses must comply with applicable regulations and legislation, as well as evidence that they are doing so. If you’re looking at M&A activity, you need confidence that the companies in your sights apply the same rigor to compliance that you do.

Anti-bribery and anti-corruption requirements are ever-growing.

 Any company you buy or merge with has to have the same standards of 

; if you’re considering an M&A, you need to ensure you’re not opening your company to unexpected risks. Establishing the financial position of the business you want to merge with is essential.

Reputation risk can be a real threat to today’s corporations.

 An M&A that potentially jeopardizes your company’s reputation can have severe repercussions — a watertight M&A due diligence process can help to prevent this.

It’s more important than ever that you’re on top of issues like ethics, provenance and sustainability.

 that mandates approaches to these throughout the supply chain makes it essential for companies to manage their own and their suppliers’ track records here. And, of course, this 

 is also highly relevant if you’re buying another business.

 Hacks and breaches can expose acquirers to breaches, data loss or regulatory penalties and even harm your own infrastructure. Due diligence can uncover technology weaknesses and opportunities to fix them.

Third-party and supply chain exposure could create hidden vulnerabilities. 

Your target’s critical vendors may lack resilience or compliance, exposing them and, by association, you to undue risk.

Geopolitical shifts can also impact operations. 

Sanctions and trade restrictions have become a calling card for 2025. If a target is subject to them, it could limit their operations, market access and regulatory requirements.

Behind the most successful mergers and acquisitions is a collaborative due diligence effort. Multiple stakeholders own the process, each with a distinct role in assessing risks and uncovering value. While the overall responsibility typically sits with the acquiring company, a full due diligence team spans internal experts and external advisors, including due diligence consultants, legal counsel and technical specialists.

 This team leads the overall M&A process, coordinates timelines, and ensures strategic objectives are aligned. They oversee the due diligence plan, engage internal and external experts and synthesize findings for executive decision-making.

Some acquirers engage a third-party expert to conduct independent evaluations. The consultant will investigate financial, operational, cybersecurity and compliance domains, offering unbiased insights and risk mitigation strategies.

Led by the CFO, the acquirer’s finance team will evaluate financial health and deal valuation. They review historical financials, forecasts, cash flow, tax liabilities and potential financial red flags.

The legal team is responsible for legal exposure and compliance risks. They analyze contracts, intellectual property, pending litigation, regulatory filings and employment law compliance.

The CISO, cybersecurity team, and human resources will analyze the target company within their areas of expertise. CISOs conduct 

 and evaluate IT systems, while HR takes a closer look at talent and cultural alignment. Other functions may engage in the process, depending on the target.

Legal, financial and technical experts may provide subject matter expertise. These are often 

 services that supplement internal capabilities with industry-specific knowledge, in-person investigations, modeling and benchmarking.

Types of M&A due diligence every buyer should know

Due diligence is a multi-faceted process. While the goal is always to verify the value of the deal, uncover hidden risks and smooth the integration, getting there requires a deeper look at different business functions, each critical to informed decision-making.

Below are the core types of due diligence acquirers should understand:

This involves reviewing contracts, corporate governance documents, litigation history, intellectual property rights and regulatory compliance. The goal is to identify any legal liabilities or constraints that could impact the deal.

 Led by the CFO, financial due diligence focuses on validating the target’s financial health through analysis of historical performance, revenue streams, debt, cash flow and accounting practices. It helps buyers assess valuation and uncover any red flags.

 Evaluating day-to-day operations is essential. This includes digging into the target’s organizational structure, supply chain, processes and scalability. Buyers can use this information to understand how the business runs and identify critical areas for integration or improvement.

Assess the security of digital assets, data protection practices, history of breaches and vulnerability management. This is critical for identifying potential cyber risks that could lead to financial loss or reputational damage.

 Acquirers should examine the quality, scalability and sustainability of the target’s tech stack, systems architecture, software assets and technical debt. This is especially important in tech-driven deals, as it ensures alignment with future growth plans.

A structured due diligence process can minimize risk and maximize value in any merger or acquisition. While the scope of diligence varies by deal, most buyers follow a defined sequence to surface critical insights before moving forward.

Below is a five-step M&A due diligence process that helps ensure nothing gets missed.

 Start by identifying key risk areas based on the nature of the deal — industry, size, geography and strategic goals. Assemble a cross-functional team, including legal, financial, operational and technology experts, along with external due diligence consultants as needed.

 Develop a data request list and use a secure virtual data room to centralize access. Collect materials related to financials, contracts, intellectual property, compliance, cybersecurity posture, employee records and more.

 Each team reviews its area of focus. Financial experts verify performance and liabilities, legal teams assess risks and obligations, cybersecurity teams test for vulnerabilities, and operational leads evaluate scalability and integration complexity, considering that the target could have provided inaccurate information. “What would you need to know from them that would help you in your risk model to know what to do from there? Do you need to do further screening, further investigation of them, or does that tell you what you need to know? That gives you a good foundation, but that comes from them,” said Diligent’s Director, Operations Optimization Group Stephanie Font on a 

 Surface any deal breakers, hidden liabilities or integration challenges. At the same time, identify opportunities — untapped markets, cost synergies or proprietary technology — that could enhance long-term value.

Report findings and recommend next steps:

 or executive memo. This should inform deal structure, valuation, negotiation strategy and post-close integration planning.

Learn what due diligence software is and how it powers better decisions and informed risk-taking.

Top-tier due diligence tips

Building a robust anti-bribery and anti-corruption program requires performing regular due diligence on third-party intermediaries. This protects your organization’s reputation, attracts investors and clients through transparent and ethical practices, and defends company leaders from personal liability. But how much and how often should this due diligence be conducted?

 20 items should be on all companies’ merger and acquisition due diligence checklists:

Buyers should ask for a full report of financial statements and metrics for the past, present and future when carrying out M&A due diligence. Ask for:

Historical financial statements (three to five years)

Of particular concern is whether the company has the capital to continue operating through the acquisition.

M&A IT due diligence is important. As part of the M&A due diligence process, buyers should inquire about:

The scope of the seller’s technology and intellectual property

Information on patents, trademarks, copyrights, licenses and trade secrets

Any problems, disputes, encumbrances and litigation over technology and intellectual property

Cybersecurity audits and incident history

Data privacy compliance, such as GDPR or CCPA

Buyers will want to gain a good understanding of the company’s customers and sales approach. Discussions should focus on:

Issues with risks related to product concentration, customer satisfaction and unusual product return activity

Churn rate and customer satisfaction metrics

Channel partnerships and distributor agreements

Buyers should explore whether there’s a strategic fit between them and the company they want to acquire. 

Whether the company has products, services and technology that the buyer doesn’t have

Whether key people will expect to stay on — or if the company can expect them to stay on — after the acquisition

One of the most time-consuming parts of due diligence is reviewing all of the company’s material contracts and commitments. Buyers will want to pay special attention to:

Contracts that would adversely affect the company if they were terminated

Franchise, license or distribution agreements

Due diligence in M&A situations should include an exploration of:

A comprehensive guide to M&A due diligence with a 20-point checklist

The NextGen Board Leaders program, sponsored by Wilson Sonsini and Meridian Compensation Partners, brings together experts and new public company board members under Chatham House Rule to discuss critical topics in corporate governance.

At a recent Summit, held at the New York Stock Exchange (NYSE), leading experts shared timely insights on the rapidly evolving landscape of executive compensation. Several critical themes emerged that are shaping boardroom conversations and governance practices today.

Boards are sharpening their focus on the structure and competitiveness of executive compensation, especially CEO pay. The goal: ensuring that compensation both attracts and retains top talent while maintaining a clear alignment with the company’s long-term strategy.

Executive transitions have also gained renewed importance, with robust succession planning and carefully structured separation packages rising to the top of committee agendas. These priorities reflect a growing expectation—from investors and other stakeholders alike—for transparent links between pay and performance.

The executive compensation environment is more complicated than ever—particularly for companies outside the S&P 500, including those in the Russell 3000 or recently public companies still maturing their governance frameworks.

The U.S. Securities and Exchange Commission’s (SEC) pay versus performance disclosure rules require companies to explain in detail how executive compensation ties to both financial and non-financial results. This has increased the demand for greater rigor in plan design and heightened pressure to clearly articulate the rationale behind every element of pay.

The widening gap between U.S. and international compensation practices shows little sign of narrowing. Meanwhile, periods of economic uncertainty caused by market volatility, global events like COVID, or shifting trade conditions, continue to complicate the selection and calibration of performance metrics and targets for leadership.

Boards must strike a balance: maintaining credibility with executives while guarding against potential corporate waste claims. Practical strategies include:

Maintaining consistency in financial metrics: Avoid shifting targets unless clearly warranted by changes in business conditions.

Scoping discretion tightly: Where discretion is needed, plan documents should include specific language for “extraordinary events” (e.g., leadership effectiveness during crises), paired with clear documentation of rationale.

Using relative performance metrics where appropriate: Comparing performance to peers, rather than absolute targets, can help isolate executive performance from broader market disruption.

While 'say-on-pay' voting outcomes remain largely steady, with low failure rates, scrutiny continues. Boards face ongoing pressure around:

Responsiveness to prior shareholder concerns

Transparency and discipline remain essential.

Best practices in compensation governance

Excellence in compensation governance hinges on strong processes. Boards are encouraged to maintain clear annual calendars for their compensation committees, ensuring all decisions align with committee charters and mandates.

This proactive approach enables early engagement with investors and proxy advisors, particularly on potentially controversial changes, helping to mitigate concerns before they become significant issues.

As the executive compensation landscape continues to evolve, boards that prioritize clarity, disciplined processes, and stakeholder engagement will be best positioned to navigate future challenges.

The Latest in Executive Compensation Trends: Insights from the NextGen Board Leaders East Coast Summit

This article originally appeared in our July 3rd edition of the Diligent Minute Newsletter. For more insights like these, delivered straight to your inbox, subscribe

Board members have a lot on their minds right now. They currently rank the level of risk U.S. businesses face just below 7 on a scale from 1 (lowest) to 10 (highest), according to the latest 

 by Diligent Institute and Corporate Board Member. Top issues include supply chain and inflation/currency risk, geopolitical fluctuations and changes in the regulatory environment along with widespread concern about the economic risk of tariffs.

These issues add to an already-long list of evergreen threats to a company’s business and bottom line — like a product failure, cyber attack, executive scandal or high-profile lawsuit — along with the aftermath. Too often, a negative headline triggers customer flight, investor panic or both, causing a ripple effect of legal, business and reputational challenges.

With the threat of crisis escalating and evolving by the day, Megan Baier’s session at the 

 was perfectly timed. A partner with Wilson Sonsini Goodrich & Rosati, she shared tips and best practices for crisis management.

The steps shared reflect common sense: Identify the issue, mitigate it and manage the communications. But they’re deceptively difficult to execute well under pressure — which is why boards need to be crisis-ready long before a negative incident breaks out.

Here are five top takeaways shared at the Summit on making that happen.

Key players include legal, audit, PR/IR, and bankers. But don’t get too carried away. Smaller groups typically make faster decisions.

It’s also important to equip team members with clear roles, responsibilities and lines of reporting.

A pre-built playbook should cover likely scenarios and the latest best practices, along with guidelines for reporting, disclosures and getting the word out via social media and other channels.

According to the latest Corporate Director Index, nearly half (47%) of boards are engaging in scenario planning to navigate the current crisis environment. In my opinion, this number should be much higher.

 are an excellent way for crisis team members to master their roles, share feedback and build their muscle memory for an effective response — all in a low-stress environment where mistakes are still learning experiences.

Takeaway 4: Find the line between transparency and protection

When something negative happens, investors, customers, employees and other stakeholders want to know. Competitors, activists, and regulators seek this information as well — but for very different reasons.

For boards, this means conflicting pressures to announce bad news quickly versus waiting to gather more facts.

Also note that different crises trigger different legal obligations, such as:

State notification laws and SEC disclosure requirements for cybersecurity incidents

CPSC or FDA reporting for product safety issues

Restatement requirements for financial irregularities

Whistleblower complaints, insider trading investigations and issues related to stock prices in particular require careful coordination between communication and legal teams.

Each scenario requires tailored legal strategies alongside communications planning, she emphasized.

Finally, an important reminder to directors:

 is a board fiduciary duty, requiring enterprise-wide attention.

Are boards receiving regular reports from management about the risks departments are seeing and actions they’re taking to mitigate these issues?

Do board members know enough about the issues to ask the right questions — and are discussions being captured in board minutes for future reference and guidance?

Are committees receiving regular reports as well in their specialized areas like cybersecurity and audit?

Do committee charters clearly define who’s responsible for overseeing what, to avoid overlap and gaps?

The overarching takeaway is this: Knowing what to expect — and how to respond — when the unexpected happens can keep a board in good standing with investors, customers, regulators and more, even in a year when crisis feels more like business as usual.

Curious about how U.S. boards are navigating today’s business landscape? Delve deeper into the latest 

Want regular access to original research in the field of GRC? Bookmark our 

 for the latest surveys, podcasts and reports.

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IN-DEPTH: Proxy advisors, stewardship teams face new legal challenges

A comprehensive guide to M&A due diligence with a 20-point checklist

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