By David S. Hilzenrath
Washington Post Staff Writer
Thursday, November 2, 2006

Several years after changing hands for less than $40 million, Institutional Shareholder Services Inc., the dominant firm telling big investors how to vote on questions put to shareholders, is being sold for about $550 million.

RiskMetrics Group Inc. of New York, which provides a different set of services to a similar clientele, won an auction for the Rockville firm and said yesterday that it plans to operate ISS as a wholly owned subsidiary.

ISS, created in 1985, rates the quality of corporate governance and advises investors on such questions as whether to reelect a particular director or approve a hostile takeover. The firm has capitalized on two megatrends in the stock market: the corporate scandals of recent years that have raised concerns about boardroom culture and practices, and the increasing concentration of shareholder power in the hands of mutual funds and other institutional investors.

ISS got another boost from the Securities and Exchange Commission, which spurred demand for the firm's advisory services by requiring mutual funds to disclose how they cast their corporate ballots.

"The business has experienced extraordinary growth over the last five years, and the valuation reflects that," said Mark Colodny, a member of the ISS board and a managing director of the investment firm Warburg Pincus, part of the group that bought ISS in 2001.

The new buyer helps Wall Street banks, pension funds, hedge funds and other investors assess the financial risks in their portfolios -- for example, how their holdings might be affected by movements in interest rates or foreign currency markets.

RiskMetrics chief executive Ethan Berman said he sees ISS conveying "a message of what's right and wrong" in the corporate world.

Berman said he plans to market RiskMetrics services to clients of ISS. He said he does not anticipate layoffs at ISS but has not studied the question in depth.

ISS has been faulted for marketing consulting services to the publicly traded companies it evaluates -- in effect, advising them on how to improve their ISS ratings. Critics such as corporate lawyer Ira Millstein have called that arrangement a conflict of interest.

"Certainly my view is, perception is reality in many things, so we're going to have to find a way to change the perception of the conflict associated with that business," Berman said.

Both RiskMetrics and ISS are privately held. Each generates just over $100 million of revenue annually, and combined, they are expected to generate more than $60 million this year in earnings before interest, taxes, depreciation, and amortization, Berman said. The deal will make ISS, already "the 800-pound gorilla" in the so-called proxy advisory business, "an even fatter gorilla," said former SEC commissioner Steven Wallman, founder of rival Proxy Governance Inc. That could make it harder for other voices to compete, Wallman said.

The expanding influence of proxy advisers has prompted government scrutiny. At the request of a member of Congress, the Government Accountability Office, the investigative arm of Congress, is reviewing whether the SEC adequately oversees proxy advisers.

Speaking on condition of anonymity about terms that were not publicly disclosed, one person familiar with the cash and stock deal said RiskMetrics agreed to pay $540 million to $550 million. Another source said the figure was $550 million. Though some news reports in 2001 said the current owners bought ISS for about $45 million, a source familiar with that deal said the price was $37 million.