October 29, 2010

The Debate Over ISS’s Role: Imagine a World Without

When it comes to ISS and the other proxy advisory firms, there certainly are many strong opinions and views. And the SEC’s proxy plumbing project has brought those to the fore. But even before a back-and-forth debate arose over this CNBC article, I recognized the article for what it is – a mass media piece written by someone without a background in the topic – and I tweeted as such.

For starters, I question the veracity of nearly every other premise in the article. There are an increasing number of proxy contests? I don’t think so. Mutual funds began using proxy advisory services in earnest only after the SEC’s 2003 rule that required disclosure of their voting records? Nope. The author mistakenly thinks the demand for proxy advisory services relates to regulations adopted this decade – but the reality is that institutions have been heavily relying on them ever since the first advisory firm was founded after the DOL’s 1988 Avon letter. I would even go as far as to challenge this tenet of the article – that investors are relying more on proxy advisory firms than ever before. I have no hard facts to support this – but anecdotal evidence indicates that the opposite is true: institutions increasingly are choosing to vote their shares relying more on their own analysis.

I do agree with the article’s last words: “We should at least worry that their advice might fail just like the advice of the credit ratings agencies failed.” But my concerns are probably different than those harbored by the article’s author. So far, ISS has wielded its influence remarkably responsibly – unlike the failings of the credit rating agencies, whose blind-eye actions were a major factor in facilitating the recent financial crisis. Regardless of whether you agree with ISS’s views, it is hard to dispute that ISS has done more to effectuate change in corporate governance practices over the past decade than all other movers and shakers combined. Year after year, ISS raises the bar on what it believes are governance best practices. Again, this is something hard to dispute even if you don’t agree with their view on what are best practices.

My big concern these days is that ISS was sold – yet again – earlier this year, and is rumored to be on the block once more. I worry about ISS being capable of being fully supported by a parent and it’s ability to retain good people (Chris Young already has departed as head of ISS’s M&A advisory unit). I worry that ISS won’t have the resources to do a good job and that their reports will be filled with many errors – and that they will be too short-staffed to take corrections on a timely basis. I worry that a new acquiror might change ISS policies in ways that we can’t imagine. That is what CNBC should be writing about.

But the bigger issue perhaps is what type of world would we have without ISS? Does the corporate community really want to navigate a proxy season in which it must keep track of a set of diverse voting policies from all of their numerous holders? Will companies provide the additional resources to the corporate secretary’s office necessary to conduct this important task? Remember that so few companies have failed to earn majority support for say-on-pay in the United Kingdom because the proxy advisors there drive the process in a way that companies know what likely will pass – and what won’t. Without ISS, we may be looking at the Wild West here and companies could well be operating in the dark heading into their annual meeting as to what the outcome will be.

On the other side of the coin, do beneficial holders want to bear the costs of institutions beefing up their woefully understaffed proxy committees? This is the real reason why many institutions rely on ISS – cost savings. They don’t want to spend the money it takes to analyze proxy materials and make the decision about how to vote. Unlike what CNBC wrote, this is why institutions look to proxy advisory firms – and this is why the DOL wrote the Avon letter in the first place (before that letter, very few institutions bothered to vote).

Note that challenges to the CNBC article have been mounted by Andrew Clearfield in the comments to this blog – also see these thoughts from Nell Minow, one of the original leaders of ISS (you might also want to read Nell’s proxy plumbing comment letter).

CNBC’s John Carney then tries to rebut this criticism in this follow-up piece. He bizarrely claims – by citing an academic paper – that ISS’s influence is overstated. Not sure how this supports his original thesis? Anyways, I disagree with that paper’s conclusion that ISS controls 6-10% of the average vote. In practice, I believe most proxy solicitors – and companies – would opine that percentage should be doubled or even tripled.

For what it’s worth, I provided a clear description of how the ISS process works in our July-August 2010 issue of The Corporate Counsel. I wrote that piece because I had never seen anyone explain in detail what is involved – and knowing that is more important than ever now that we have mandatory say-on-pay.

Time to Comment on ISS’s Policies: Time to Speak Up

On Wednesday, as noted in this press release, ISS opened the comment period for it’s 2011 policies, as it has for the past several years. Here is their policy gateway where you can input your views.

The comment period is short – ending on November 11th. Given the importance of this proxy season, this would be a good time to get involved if you haven’t before. ISS expects to release its 2011 policy updates in late November. Pat McGurn will discuss those during his annual webcast with us on January 27th.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Analysis: Whether to Regularly Distribute Board Materials to Independent Auditors?
– Why Blogs Ought Not Drive Traffic to Your Law Firm’s Website
– Florida Pension System Calls for Majority Voting
– Film Review: “Wall Street – Money Never Sleeps”
– Delaware Chancery on Privilege Logs and How to Avoid Waiver by Insufficient Detail in a Privilege Log

– Broc Romanek