How Proxy Advisory Firms Decide Their Recommendations
— What to Check Before Your AGM

Before proxy advisory firms ever weigh the substance of a board proposal, they run it through a mechanical quantitative screen — independent outside director ratios, cross-shareholding disclosure levels, and similar thresholds. The starting point for any company preparing for its AGM is to check its own numbers against these screens well ahead of time.

What Do Proxy Advisory Firms Actually Do?

Proxy advisory firms provide institutional investors with for/against voting recommendations on individual AGM proposals. ISS (Institutional Shareholder Services), the largest player globally, was founded in 1985 and now supplies governance data, analysis, and advice to roughly 3,400 clients out of 29 offices worldwide (ISS, *Japan Proxy Voting Guidelines*, Japanese-language edition, 2026, https://www.issgovernance.com/file/policy/active/asiapacific/Japan-Voting-Guidelines-Japanese.pdf). The other major player, Glass Lewis, publishes its own benchmark policy guidelines for Japanese companies each year, setting out advisory standards that cover the main categories of AGM proposals — director elections, Audit & Supervisory Board member elections, articles of incorporation amendments, share buybacks, takeover defenses, M&A, and shareholder proposals (Glass Lewis, *Japan Benchmark Policy Guidelines*, Japanese-language edition, 2024, https://www.glasslewis.com/wp-content/uploads/2024/01/2024-Japan-Benchmark-Policy-Guidelines-in-Japanese.pdf). Institutional investors holding large numbers of portfolio companies, with limited capacity to scrutinize every single proposal themselves, rely on these recommendations as reference input for their voting decisions.

What Criteria Determine Their Recommendations?

Both firms run a quantitative screen on financial and governance metrics before they ever evaluate the substantive merits of individual proposals. Under ISS's standard for companies with an Audit & Supervisory Board, a recommendation to vote against the top executive director follows if any of the following applies: (1) five-year average ROE below 5% with no improving trend; (2) cross-shareholdings valued at 20% or more of net assets; (3) outside directors making up less than one-third of the board, or fewer than two in absolute terms; (4) no female directors at all (from AGMs held on or after February 1, 2027, this tightens to less than 10%); or (5) board attendance below 75% in the prior fiscal year (ISS, *Japan Proxy Voting Guidelines*, 2026 edition). The same criteria extend to companies with a Nomination Committee, etc. and companies with an Audit and Supervisory Committee.

How Do Independent Outside Director Ratios and Cross-Shareholding Disclosure Levels Affect Recommendations?

These two metrics sit at the core of both firms' recommendation logic. ISS's cross-shareholding test is purely mechanical: it checks whether the combined balance-sheet value of "investment shares held for purposes other than pure investment" and "deemed holdings" reaches 20% or more of net assets (same guidelines). Glass Lewis applies a similar concept but sets a stricter entry threshold — if cross-shareholdings disclosed in the prior year's Annual Securities Report reach 10% or more of consolidated net assets, the board chair becomes a candidate for an against recommendation (Glass Lewis, *Japan Benchmark Policy Guidelines*, 2024 edition). Because both firms base their judgment on figures already disclosed as of the prior fiscal year, what a company disclosed in its most recent Annual Securities Report — together with its current board composition — directly determines where it lands.

What Can Companies Do Before the AGM If They Receive an Against Recommendation?

In the interest of transparency, ISS provides companies under review with a free analysis report on their own AGM (same guidelines). This gives companies a window to confirm, ahead of the meeting, whether an against recommendation exists and why — and to factor that into additional disclosure or investor engagement. Glass Lewis's cross-shareholding standard also carries an exception clause: even at a holding ratio between 10% and 20% of consolidated net assets, a company can avoid an against recommendation if either (1) five-year average ROE is 8% or higher (or, from 2025, ROE of 8% or higher in the most recent fiscal year alone), or (2) it has disclosed a reduction plan with a clear numerical target of 20% or below and a deadline within five years (same guidelines). In practical terms, what a company can do before the AGM is check whether its disclosed independent outside director ratio, cross-shareholding value, and ROE run afoul of these thresholds — and where they do, consider whether disclosing a reduction plan or similar measure could satisfy an exception.

How Do ISS and Glass Lewis Criteria Differ?

ISS applies a single uniform threshold to the top executive director regardless of board structure — outside directors below one-third, or fewer than two in absolute terms. Glass Lewis, by contrast, scales its independence standard by TSE (Tokyo Stock Exchange) Prime Market listing status and the presence or absence of a controlling shareholder: a Prime-listed company without a controlling shareholder needs at least one-third independent directors, a Prime-listed company with a controlling shareholder needs a majority, and an Audit & Supervisory Board must be majority-independent regardless of market segment (Glass Lewis, *Japan Benchmark Policy Guidelines*, 2024 edition). On cross-shareholdings, Glass Lewis's entry threshold (10%+) is lower than ISS's (20%+), but it is distinguished by the exception it offers via ROE levels or disclosed reduction plans. Gender diversity shows a similar gap: ISS treats zero female directors as an against condition, while Glass Lewis requires Prime-listed companies to have directors of diverse gender making up at least 10% of the board (rising to at least 20% from 2026) — differing from ISS in both the bar it sets and the timeline for applying it (same guidelines).

How Should Companies Respond After Receiving an Against Recommendation?

An against recommendation is only one input among several that institutional investors weigh — it does not necessarily track actual voting outcomes (see FAQ 1 for the underlying figures). The right response for a company that receives one is not a one-off disclosure fix, but improvement of the underlying metrics the criteria are built on: correcting the independent outside director ratio, disclosing a cross-shareholding reduction plan, and the like. And because, as FAQ 3 below makes clear, these criteria are revised every year, it is worth building a standing process to track each year's revisions ahead of future AGMs.

FAQ

Q1. Does an against recommendation from a proxy advisory firm guarantee that a proposal will be voted down?

No. An against recommendation is only one piece of reference information in an institutional investor's voting decision; each investor makes its final call based on its own internal voting guidelines. In 2025, ISS's against-recommendation rate on director election proposals was 9.2%, while the average against-vote ratio across 32 domestic asset managers was 10.9% — the two figures do not line up (*Junkan Shoji Homu* No. 2407, November 25, 2025 issue, cited in ISS, *Japan Proxy Voting Guidelines*, 2026 edition). Whether a proposal that received an against recommendation actually fails depends on shareholder composition and each investor's individual judgment, so there is no uniform outcome.

Q2. Can a company submit a rebuttal against an against recommendation?

In the interest of transparency, ISS provides companies under review with a free analysis report on their own AGM (ISS, *Japan Proxy Voting Guidelines*, 2026 edition). Companies can use this report to confirm the existence and rationale of an against recommendation before the meeting and to inform additional disclosure or investor dialogue. That said, the guidelines do not spell out a formal procedure for submitting a rebuttal document. Companies should confirm the specific process for raising objections directly with each advisory firm.

Q3. Do advisory firms' criteria change every year?

Yes. In its 2026 edition, effective February 1, 2026, ISS has already signaled that it will tighten the female-director-ratio threshold to "against if below 10%" starting with AGMs held on or after February 1, 2027 (ISS, *Japan Proxy Voting Guidelines*, 2026 edition). Glass Lewis, in its 2024 edition, similarly published a phased revision schedule — raising the ROE threshold used for its cross-shareholding exception to 8% or higher from 2025, and raising the gender diversity standard for Prime-listed companies to a minimum of 20% from 2026 (Glass Lewis, *Japan Benchmark Policy Guidelines*, 2024 edition). Continuing to rely on the prior year's criteria risks falling out of step with the latest thresholds.

At a Glance

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