For-profit

Institutional Shareholder Services (ISS)

ISS logo (link)
Formation:

1985

Type:

Asset Management Advisory Firm

Founder:

Robert Monks

CEO:

Gary Retelny

Institutional Shareholder Services (ISS) is a shareholder advisory firm that assists shareholders with research in asset management, proxy voting, and corporate governance. In recent years, the firm has gained a reputation in the business sector for supporting the appointment of board members with activist agendas and for advocating in favor of left-leaning corporate governance resolutions. The company has many clients that are activist shareholders engaging in Environmental, Social, and Corporate Governance (ESG) investing. [1] The firm’s clients include many notable, labor-connected pension funds, such as the California State Teachers’ Retirement Plan, and hedge funds that engage in shareholder activism, such as BlackRock, the world’s largest asset management company. [2]

Background

Institutional Shareholder Services was originally founded in 1985 by Robert Monks, an Environmental, Social, and Corporate Governance (ESG) advocate. The company was also supported by the Investor Responsibility Research Center Institute, a nonprofit organization that provides research supportive of ESG investing. Over the years, the company has been held by several parent companies, while also acquiring several smaller competitors. ISS was first owned by Thomson Financial, followed by Warburg Pincus, which sold ISS to MSCI. In 2014, MSCI sold ISS to Vestar Capital for $364 million. In 2017, ISS was again sold to Genstar Capital, a San Francisco-based private equity group, for $720 million. [3]

Since its founding in 1985, ISS has expanded to over 1,000 employees and 1,700 clients. ISS clients include institutional investors such as hedge funds, brokerage firms, and labor union and government employee pension funds that own billions of dollars of stock in the world’s largest corporations. ISS’s main area of focus is publishing recommendations for its clients as to how they should vote on shareholder resolutions and which slates of corporate board members they should support. [4]

The company also has an arm that advises the corporations about which ISS is making decisions and remains relatively independent from the rest of ISS. To avoid conflicts between shareholder clients and corporate clients, ISS is said to have a policy that prohibits its researchers from knowing if their proxy vote recommendations will be going to corporate clients or shareholders. [5]

Institutional Shareholder Services proxy vote recommendations for its institutional investors have become more controversial and contentious. Since ISS was founded, its main business operations have centered around casting proxy ballots for its clients on noncontroversial issues, such as bylaws and executive compensation. The vast majority of the estimated 8.5 million proxy ballots that ISS casts for clients annually are considered noncontroversial and do not concern contested shareholder votes. [6]

During the early 2000s merger of Compaq and Hewlett-Packard, ISS acted for one of the first times as a deciding force on a contested shareholder vote. ISS supported the merger, which was narrowly approved by shareholders. The merger ended up garnering bad publicity for ISS when ISS was forced to fire its head of research after it was discovered that he had lied about having a law degree. [7] The contentious merger marked a shift for ISS, at which point it began conducting more in-depth research into its recommendations for highly contentious shareholder issues, such as mergers and acquisitions. [8]

ESG Research Group

In 2004, Institutional Shareholder Services formed its smallest but most notable branch, which is now known as the Special Situations Research Group. Consisting of eight employees, the group conducts research and influences the outcomes of contested corporate boardroom seats and makes determinations over a host of other activist-backed shareholder resolutions. The group was formed in 2004 with the hire of Christopher Young, a former mergers and acquisitions attorney and technology banker. With little direction from superiors, the group instituted a framework where it would interview both the activist group, which was often an ISS client, and the corporation before making a recommendation. [9]

ISS’s Special Situations Research Group was originally called M&A Edge. The group first had an effect on corporate structure in 2006 when a client, Trian Partners, waged a proxy battle at H.J. Heinz and ended up securing two of the company’s board seats. Between 2006 and 2018, ISS has made over 250 recommendations on proxy battles and is estimated to dominate the market of proxy recommendations, with an estimated 61% market share as of 2018. [10]

ISS proxy recommendation work has drawn criticism from businesses that have argued that the private company has an outsized influence on corporate governance. Many businesses have appealed to Republicans in Congress to reign in the influence of ISS and its competitors on their companies. Members of Congress have previously introduced legislation to increase corporate oversight of the reports that ISS creates for its investors. [11]

Following the rise of the ISS’s work in recommending Environmental, Social, and Corporate Governance (ESG)-based resolutions, several consulting firms, many of which were founded by former ISS employees, formed to prepare corporate clients to argue against ISS for contested board seats and other activist shareholder resolutions. [12] These consulting firms help businesses to prepare for the 90-minute presentation that each business must give to ISS in order to oppose an activist-backed resolution. Consultants have insisted that the presentation is essential to opposing activist resolutions. The consulting firms have been compared to prosecutors going into private practice to assist criminal defendants that they once helped to convict. [13]

ISS is credited with promoting the agendas of activist shareholders by supporting many activist-backed resolutions while also acting as a “quasi-judge” that can solve a shareholder collective action problem. Activist shareholder organizations often note that ISS’s rise in the proxy recommendation business is directly attributable to the success of such proxy battles in recent years. [14]

Because ISS is the leader in the proxy advising industry, the recommendation of the company’s Special Situations Research Group is often very likely to be adopted by shareholders. [15] Most of ISS’s clients are smaller and mid-sized shareholding organizations and do not have an internal ability to analyze ISS recommendations, choosing instead to automatically cast their proxy ballots to align with ISS’s recommendation. While ISS is often derided by businesses as providing activist shareholder groups with outsized influence in business proceedings, other activist groups such as the California State Teachers’ Retirement System (CALSTRs) have stated that they do not always automatically vote with the ISS recommendation. Other larger clients of ISS, such as BlackRock and Vanguard, also have internal research capabilities, but most institutions that are clients automatically follow ISS’s recommendation. Even individual investors with accounts at large brokerage firms, such as Merrill Lynch and Morgan Stanley, frequently automatically vote with the ISS recommendation, even when it is in favor of a contentious activist shareholder proposal. [16]

Criticism

Critics of Institutional Shareholder Services say that the organization has an outsized influence on the business operations of through the advice it gives to institutional shareholders and retail investors with accounts at lake brokerage firms. Reports from the organization state that they side with corporate management only 40% of the time, compared to siding with activist clients 60% of the time. [17]

ISS’s status in proxy battles has often angered hedge fund executives who have lost battles due to the ISS recommendation. Bill Ackman, who runs the activist hedge fund Pershing Square Capital Management, lambasted ISS over a proxy battle to secure himself a board seat at the human resources software company ADP. Ackman accused ISS with failing to follow up to allow him to provide more context to his request and to counter arguments from ADP management. Ackman also accused ISS of using non-public information in making its determination. ISS vehemently denied Ackman’s assertion, stating that they never consider private company information when making a recommendation. [18]

A report from research group Proxy Monitor illustrated the outsized include held by ISS over shareholder resolutions. The 2012 report pointed to the Occupy Wall Street and ESG movements as inflection points for the rapid growth in shareholder proposals offered by activist investors in recent years. The report also noted that the majority of these shareholder proposals come from only a handful of institutional investors, mostly consisting of public and labor union-affiliated pension funds. The report also noted that other large shareholding organizations, such as Catholic orders of nuns, accounted for a small percentage of all shareholder proposals, with over 50% of shareholder proposals coming from labor union and public pension funds, along with Environmental, Social, and Corporate Governance (ESG) advocacy groups. [19]

Proxy Monitor also found that an endorsement from ISS, which controls 61% of the proxy advisory market, leads to a 15% boost in support for a proposal. The report also found a wide discrepancy between ISS, which sided with shareholder proposals 63% of the time, and other shareholders, which did so only 8% of the time. [20]

Critics have further argued that ISS has a systematic tendency to side with shareholder proposals because it financially benefits from more proposals being offered. Other clients of ISS reportedly put little value in their proxy votes and follow the ISS recommendation because they value their relationship with ISS for its other data and processing services. [21]

In 2013, the Securities and Exchange Commission (SEC) charged ISS over a breach of its clients’ confidential proxy voting information. The SEC’s investigation alleged that from 2007 to 2012, an employee at ISS provided confidential information to a proxy solicitor as to how more than 100 ISS clients were planning on voting. In exchange for the information, the proxy solicitor provided the employee with meals and expensive concert, sporting event, and airline tickets. The SEC charged that ISS did not have sufficient data security protocols in place, as the employee was easily able to log into the ISS database from his office and home and use his personal email to leak the voting information. ISS agreed to pay a $300,000 fine for the violation. [22]

In 2012, ISS criticized the Walt Disney Company’s board of directors for allowing Disney CEO Bob Iger to simultaneously serve as chairman of the board. ISS alleged that the combined title violated a commitment that the company made to keep the positions separate. Disney countered that it had made no such commitment and that it had always retained authority to recombine the positions. ISS also took issue with Iger’s compensation, which rose to $31.4 million, up from $17.25 million in 2005, stating that his compensation increase far outpaced the performance of company stock. [23]

Connected Organizations

ISS is a private company, and as such receives revenue from its clients, with the largest being the investment management companies BlackRock and Vanguard Group and the financial services company State Street Corp. Other organizations and companies mentioned as ISS clients include Pershing Square Capital Management, Marcato Capital Management, Trian Partners, Morgan Stanley, and Merrill Lynch.

Leadership

Gary Retelny is the president and CEO of ISS and previously worked at ISS’s former parent company, MSCI Inc, as head of strategy and business development. Retelny has led acquisitions of competitor companies including Incentive Lab, Ethix SRI Advisors, iiWisdom, IW Financial, the Investment Climate Data Division of South Pole Group, EVA Dimensions, oekom research AG, Strategic Insight, and CAER. [24]

Cristiano Guerra is the head of ISS’s Special Situations Research Team, the eight-person unit that is most prominent for its outsized role in recommending votes in proxy battles. Guerra previously led the ISS U.S. research team and the Latin America research team. Guerra has been a featured speaker at various investment conferences, including the Council of Institutional Investors’ annual spring meeting, Tulane University’s Corporate Law Institute M&A Conference, and 13D Monitor’s Active/Passive Investor Summit. Before joining ISS, Guerra worked for TranSecur, a private intelligence firm in Washington, D.C. [25]

References

  1. “ESG.” ISS. Accessed February 12, 2021. https://www.issgovernance.com/esg/ ^
  2. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  3. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  4. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  5. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  6. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  7. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  8. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  9. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  10. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  11. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  12. “Three Practical Steps to Stay Ahead of Shareholder Activism.” Latham and Watkins LLP. Accessed February 12, 2021. https://www.lw.com/thoughtLeadership/BoardroomPerspectives-ThreePracticalStepstoStayAheadofShareholderActivism  ^
  13. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  14. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  15. Copland, James. “A Report on Corporate Governance and Shareholder Activism.”  Proxy Monitor. Fall 2012. Accessed February 12, 2021. https://www.proxymonitor.org/Forms/pmr_04.aspx#notes ^
  16. “A dialogue with Gary Retelny, president and CEO of Institutional Shareholder Services.” Tapestry Networks. March 2016. Accessed February 12, 2021. https://www.tapestrynetworks.com/publications/a-dialogue-with-gary-retelny-president-and-ceo-institutional-shareholder-services ^
  17. Copland, James. “A Report on Corporate Governance and Shareholder Activism.”  Proxy Monitor. Fall 2012. Accessed February 12, 2021. https://www.proxymonitor.org/Forms/pmr_04.aspx#notes ^
  18. Celarier, Michelle. “The Mysterious Private Company Controlling Corporate America.” Institutional Investor. February 01, 2018. Accessed February 11, 2021. https://www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america ^
  19. Copland, James. “A Report on Corporate Governance and Shareholder Activism.”  Proxy Monitor. Fall 2012. Accessed February 12, 2021. https://www.proxymonitor.org/Forms/pmr_04.aspx#notes ^
  20. Copland, James. “A Report on Corporate Governance and Shareholder Activism.”  Proxy Monitor. Fall 2012. Accessed February 12, 2021. https://www.proxymonitor.org/Forms/pmr_04.aspx#notes ^
  21. Copland, James. “A Report on Corporate Governance and Shareholder Activism.”  Proxy Monitor. Fall 2012. Accessed February 12, 2021. https://www.proxymonitor.org/Forms/pmr_04.aspx#notes ^
  22. “SEC Charges Institutional Shareholder Services in Breach of Clients’ Confidential Proxy Voting Information.” US Securities and Exchange Commission. May 23, 2013. Accessed February 12, 2021. https://www.sec.gov/news/press-release/2013-2013-92htm ^
  23. Chmielewski, Dawn. “Proxy advisor criticizes Disney CEO Iger’s new chairman title.” Los Angeles Times. March 2, 2012. Accessed February 12, 2021. https://www.latimes.com/entertainment/la-xpm-2012-mar-02-la-fi-ct-disney-iss-20120302-story.html ^
  24. “Gary Retelny.” ISS. Accessed February 12, 2021. https://www.issgovernance.com/gary-retelny/ ^
  25. “Cristiano Guerra.” ISS. Accessed February 12, 2021.  https://www.issgovernance.com/policy-gateway/cristiano-guerra/ ^
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