The Power Behind the Policy
To understand why ISS's diversity policy reversal matters, you must first understand why ISS matters.
ISS (Institutional Shareholder Services) is the dominant proxy advisory firm in America. It advises institutional investors managing over $40 trillion in assets on how to vote their shares. When ISS recommends for or against a director, significant votes follow.
For a decade, ISS used that power to advance board diversity. Its policies created accountability where none existed—companies knew that non-diverse boards would draw negative recommendations, and negative recommendations could mean directors failing to win majority support.
When ISS announced in February 2025 that it would no longer consider gender or racial diversity in voting recommendations, that accountability evaporated. The most powerful external force pushing American boards toward diversity stepped away.
This wasn't a minor policy adjustment. It was a fundamental retreat from a decade of governance activism—and understanding why it happened reveals the forces reshaping corporate governance.
The Legal Pressure
The Supreme Court Shadow
The 2023 Supreme Court decision in Students for Fair Admissions v. Harvard didn't directly address corporate boards. But it fundamentally changed the legal landscape for any race-conscious policy.
The ruling's logic:
- Race-based preferences in university admissions violate the Equal Protection Clause
- The desire for diversity doesn't justify racial classification
- Programs must treat individuals as individuals, not representatives of groups
The corporate extension:
While the ruling addressed higher education, its logic extends to any organization making race-conscious decisions. If universities can't prefer applicants based on race to achieve diversity, can corporations prefer directors based on race?
ISS's exposure:
ISS's diversity policy explicitly considered racial diversity. Under the new legal framework, this created potential liability—not for ISS as a non-employer of directors, but for the investment managers following ISS recommendations who could be seen as participating in race-conscious hiring decisions.
The Litigation Risk
Beyond constitutional concerns, ISS faced practical litigation exposure.
Potential claims:
- Investors harmed by diversity-driven voting recommendations could allege breach of fiduciary duty
- Companies whose directors received negative recommendations could challenge ISS's basis
- Directors who lost elections due to diversity factors could claim discrimination-by-proxy
The asymmetric risk:
ISS faced significant downside from diversity policies with limited upside. Success meant... continued diversity progress. Failure meant litigation, regulatory scrutiny, and client loss.
The risk calculus:
For a company whose business depends on client trust and legal defensibility, the risk-reward shifted dramatically post-Supreme Court ruling.
The Nasdaq Precedent
The Fifth Circuit's ruling against Nasdaq's diversity disclosure rules reinforced ISS's concerns.
The court's reasoning:
- The SEC exceeded its authority approving rules not tied to investor protection
- Diversity requirements weren't sufficiently connected to exchange purposes
- "Comply or explain" structure didn't save the rule
The ISS implication:
If Nasdaq's disclosure-based approach exceeded regulatory authority, ISS's voting-based approach was even more vulnerable. ISS isn't a regulator—its policies are private choices. But the legal trend was clear.
The Client Pressure
The Asset Manager Retreat
ISS's clients are institutional investors—asset managers, pension funds, endowments. As these clients faced their own pressures, they pressed ISS to adjust.
BlackRock's evolution:
BlackRock publicly modified its diversity policies in early 2025, removing numerical targets. As ISS's largest client, BlackRock's shift mattered. ISS couldn't maintain policies more aggressive than its biggest customer wanted.
State pension fund pressure:
Republican-led states withdrew funds from managers perceived as "woke." Asset managers needed cover. ISS policies that could be blamed for diversity-focused voting became liabilities.
The competitive dynamic:
Glass Lewis, ISS's main competitor, also faced pressure to moderate diversity policies. Neither wanted to be the aggressive outlier clients fled.
The Client Communication
ISS conducted extensive client consultation before its policy change.
What ISS heard:
- Legal concerns about race-conscious policies
- Political concerns about ESG backlash
- Desire for flexibility rather than rigid guidelines
- Preference for disclosure over voting consequences
The consultation outcome:
ISS framed its change as responsive to client needs, not retreat from principle. The policy shift reflected what clients wanted—whether because clients genuinely changed views or because clients faced their own pressures.
The Revenue Reality
ISS is a business. Its revenue depends on clients subscribing to its services. Client satisfaction drives retention.
The business pressure:
- Clients threatening to leave over political exposure
- New entrants offering less aggressive alternatives
- Regulatory scrutiny of proxy advisor influence creating overhead
- Growth opportunities in non-voting advisory services
The strategic calculation:
Maintaining aggressive diversity policies served governance goals but potentially undermined business goals. When values and revenue conflict, publicly-traded companies (ISS's parent, Deutsche Börse, is public) face particular pressure.
The Political Transformation
The DEI Backlash
Board diversity got swept into broader backlash against DEI (Diversity, Equity, and Inclusion) programs.
The backlash elements:
- State legislation restricting DEI training and requirements
- Corporate program cancellations and renaming
- Political attacks on diversity as "discrimination against majorities"
- Media framing of diversity as controversial rather than consensus
The guilt by association:
Board diversity—which had bipartisan support as recently as 2020—became coded as partisan position. ISS's diversity policies became symbols of "woke governance" regardless of their business justification.
The Republican State Campaign
Republican state officials waged coordinated campaign against ESG investing, including board diversity.
State actions:
- Texas restricted pension fund investments in ESG-focused managers
- Florida passed legislation against ESG considerations in state investments
- Republican attorneys general threatened legal action against diversity programs
- Coordinated letters to asset managers demanded policy changes
The pressure on ISS clients:
Asset managers needed to demonstrate they weren't imposing "woke" requirements. ISS policies became evidence used against them. Client pressure on ISS reflected client pressure from states.
The Federal Uncertainty
The federal regulatory environment shifted as well.
SEC evolution:
- SEC Chair Gary Gensler's departure created uncertainty
- Republican commissioners opposed diversity disclosure requirements
- Enforcement priorities shifted away from diversity-related rules
- Future administrations might further reverse diversity regulations
The regulatory arbitrage:
Maintaining aggressive diversity policies when regulatory support was uncertain created risks. ISS couldn't assume federal backing for diversity requirements.
What ISS Actually Changed
The Previous Policy
Understanding the change requires understanding what existed before.
ISS's diversity policy (pre-2025):
- For Russell 3000 companies: ISS would recommend against the nominating committee chair if the board had no apparent gender diversity
- For S&P 500 companies: Additional scrutiny for boards lacking racial/ethnic diversity
- Companies could avoid negative recommendations through disclosure of diversity efforts
The enforcement mechanism:
ISS recommendations influenced votes. Negative recommendations could result in directors failing to achieve majority support—embarrassing and potentially destabilizing.
The practical impact:
Companies avoided negative recommendations by adding diverse directors or demonstrating progress. ISS policy created accountability that market forces alone hadn't produced.
The New Policy
ISS's diversity policy (2025+):
- ISS will not consider board gender diversity in its voting recommendations
- ISS will not consider board racial/ethnic diversity in its voting recommendations
- Diversity disclosure expectations remain—ISS still wants companies to report composition
- Individual director qualifications still evaluated—diversity just isn't a factor
What ISS kept:
- Disclosure expectations: Companies should still report board diversity
- Qualifications assessment: Directors must be qualified regardless of demographics
- Other governance standards: ISS maintains positions on board independence, tenure, etc.
What ISS dropped:
- Voting consequences: No negative recommendations for non-diverse boards
- Numerical expectations: No targets for gender or racial representation
- Nominating committee accountability: Committee chairs not penalized for non-diverse outcomes
The Stated Rationale
ISS explained its change through several arguments:
Legal risk:
"In light of recent legal developments, we have determined that incorporating board diversity factors into voting recommendations creates unacceptable legal exposure for ISS and our clients."
Client preference:
"Our consultation revealed significant client concern about prescriptive diversity policies. Clients prefer flexibility to assess diversity within broader governance context."
Global consistency:
"Maintaining US-specific diversity policies inconsistent with our global approach creates complexity. We are moving toward principles-based rather than rules-based evaluation."
Disclosure sufficiency:
"We continue to expect and encourage diversity disclosure. Companies committed to diversity can demonstrate that commitment without voting consequences for those not yet achieving targets."
The Aftermath
Immediate Market Response
Company reactions:
- Relief among some companies facing negative recommendations
- Uncertainty about nominating committee priorities
- Questions about how to message diversity commitment (or its absence)
- Board pipeline programs continued by some, paused by others
Investor reactions:
- European investors maintained their own diversity standards
- Some US investors committed to continuing diversity focus
- Others welcomed flexibility to reduce diversity emphasis
- Market segmentation by investor values accelerated
Advisor reactions:
- Governance consultants adjusted client guidance
- Executive search firms recalibrated diversity messaging
- Law firms advised on program legal exposure
- Proxy solicitors prepared for changed voting dynamics
The Proxy Season Impact
The first proxy season under new ISS policies (2025) revealed practical impacts:
Reduced diversity focus:
- Fewer negative recommendations related to diversity
- Nominating committee chairs who would have faced opposition did not
- Diversity-related shareholder proposals received less institutional support
Continued disclosure:
- Companies largely maintained diversity disclosure
- ISS continued collecting and reporting composition data
- Transparency didn't disappear even as consequences did
Mixed board changes:
- Some companies continued diversity progress regardless
- Others reduced diversity focus in new nominations
- Too early to measure aggregate impact on board composition
The Governance Conversation
ISS's change shifted how governance participants discuss diversity:
From compliance to choice:
Diversity became matter of company values rather than external requirement. Companies must decide what they actually believe, not just what they must do.
From accountability to disclosure:
Accountability mechanisms (voting consequences) became disclosure expectations (reporting without consequences). The shift is significant—disclosure without teeth has limited impact.
From consensus to controversy:
What was becoming governance consensus (diverse boards are better) became contested (are they? should we require them?). The conversation fractured.
What It Means Going Forward
For Companies
Strategic clarity:
Companies must decide their diversity position based on values, talent, and stakeholders—not ISS guidelines. The external compass is gone; internal compass must guide.
Communication challenge:
Communicating about diversity is harder. Strong commitment invites political criticism. Reduced commitment invites stakeholder criticism. Silence creates ambiguity.
Board planning:
Nominating committees have more discretion. How they use that discretion will reveal actual priorities. Pipeline programs may continue or atrophy based on genuine commitment.
For Investors
Policy decisions:
Investors must decide whether to maintain diversity expectations independent of ISS. Those who do will swim against current. Those who don't may face different stakeholder criticism.
Voting complexity:
Without ISS diversity recommendations, investors must develop their own frameworks—or simply drop diversity from voting criteria. Capacity constraints may lead to the latter.
Manager selection:
Asset owners (pension funds, endowments) must decide whether manager diversity policies matter. The selection criterion exists even if ISS guidance doesn't.
For Directors and Candidates
Changed calculus:
Diverse candidates face reduced "compliance demand" that drove some board opportunities. Merit and networks matter more; category membership matters less—at least for ISS-influenced votes.
Continued opportunity:
Many companies and investors will maintain diversity commitment. The opportunity pool hasn't disappeared; its composition has changed.
Value proposition:
Directors must articulate value beyond diversity category. The question "what do you bring beyond being diverse?" becomes more common and more pointed.
For Governance Advisors
Guidance evolution:
Advising clients on board composition is more complex. There's no single standard to recommend—client values must drive advice.
Market segmentation:
Different clients will want different approaches. Understanding client values—not just governance best practices—becomes essential.
Opportunity and risk:
The complexity creates advisory opportunity. It also creates risk of misreading client preferences in politicized environment.
The Bigger Picture
ISS's policy change is symptom, not cause. It reflects broader transformation in how America approaches diversity, corporate governance, and the intersection of business and social goals.
What changed:
- Legal landscape shifted against race-conscious policies
- Political landscape polarized around DEI
- Market landscape prioritized risk management over social goals
- Governance landscape fragmented around values questions
What didn't change:
- Diverse perspectives still contribute to governance quality
- Talent pools remain diverse and seek inclusive environments
- Some stakeholders continue valuing diversity
- European requirements continue strengthening
The new reality:
Board diversity in America is now voluntary. Companies that pursue it do so by choice. Companies that don't face fewer consequences than before.
Whether that's progress or regress depends on your priors. What's certain is that it's different.
The Bottom Line
ISS's diversity policy reversal marks the end of an era—the period when the most powerful external force in corporate governance pushed companies toward diverse boards.
The reversal wasn't arbitrary or sudden. It reflected legal pressure from the Supreme Court's affirmative action ruling. It reflected client pressure from asset managers facing political heat. It reflected political pressure from a transformed landscape where diversity became controversial.
Understanding why ISS changed helps predict what comes next. The forces that drove this reversal—legal, political, client-driven—haven't dissipated. They'll continue shaping governance debates.
For companies, investors, and directors navigating this new landscape, the ISS reversal is data point, not endpoint. The governance conversation about diversity continues—just without ISS's influential voice pushing in one direction.
What fills that vacuum remains to be seen. The answer will be written by thousands of individual decisions—by companies choosing board composition, investors choosing voting policies, and candidates choosing where to serve.
ISS has stepped back. The stage is open. What happens next is up to everyone else.