A Proxy Adviser's Two Sides
Some Question Work of ISS for Companies It Scrutinizes
Monday, January 23, 2006; Page D01
From a nondescript office park near the Shady Grove Metro stop, Institutional Shareholder Services Inc. runs a global operation with offices as far-flung as London and Manila.
ISS, the world's leading adviser to big shareholders on corporate elections, has a client roster of 1,600 institutions that together own $23 trillion worth of stocks -- about half the world's stock-market value. Nearly all pay for ISS's views on corporate elections, known as proxy votes.
  In a long conference call, News Corp. chief executive Rupert Murdoch took his case for an anti-takeover policy to ISS. (By Nick Ut -- Associated Press) |
Corporate chieftains routinely travel to Rockville to lobby for ISS support on controversial ballot proposals -- as did Hewlett-Packard Co. chief executive Carly Fiorina and dissident shareholder Walter B. Hewlett in 2002 when they faced off over the company's deal to buy Compaq Computer Corp. Last fall, News Corp. chairman and chief executive Rupert Murdoch took part in a lengthy conference call with ISS executives to explain why his company's new anti-takeover device was good for shareholders.
As an important shareholder watchdog of corporate behavior, ISS has long been criticized by corporate managers who take issue when ISS recommendations do not go their way. Many executives chafe at ISS's close scrutiny of their company's corporate governance.
But these days, ISS is taking criticism from all sides.
Academics, shareholder advocates and, lately, some clients are complaining that ISS compromised its role as chief arbiter of corporate behavior by tolerating its own conflict of interest.
The questions center on ISS's growing business of selling services to the same corporations it scrutinizes. For example, ISS ranks corporations according to how well they score on its corporate-governance test. But it also sells services that corporations use to improve those scores.
"If your governance is not getting a good grade, you go see them and they tell you how to get a good grade," said Ira M. Millstein, a securities lawyer and partner at New York's Weil, Gotshal & Manges LLP. "If that's not a conflict, I don't know what is."
In 2004, the head of Missouri's $8 billion public pension fund dropped ISS over concerns about corporate consulting fees, according to a series of letters exchanged in 2004 and obtained by The Washington Post. In the letters, Gary Findlay, executive director of the Missouri State Employees' Retirement System, said ISS couldn't provide enough assurance that its loyalty was solely with shareholders.
"I see no merit in further wasting your time or mine regarding this issue," Findlay wrote. "From this point forward, we will . . . engage an organization that at least has the appearance of undivided loyalty to . . . clients."
ISS spokeswoman Cheryl Gustitus said Findlay never spoke to ISS to learn about the company's safeguards against potential conflicts. Findlay declined to comment.
Other pension funds have come forward with concerns. Last year, the $69 billion Ohio Public Employees Retirement System chose a new rival, San Francisco-based Glass, Lewis & Co., over ISS and cited the Rockville company's corporate business as a key reason. "The thing that tipped us was [ISS's] actual or perceived conflicts due to the corporate consulting," said Cynthia Richson, the Ohio system's corporate governance officer.
