Institutional Shareholder Services Inc. of Rockville increased its dominance in the business of advising institutional shareholders on corporate proxy fights by agreeing to buy a rival, Investor Responsibility Research Center, for more than $10 million.
As part of the cash deal, District-based IRRC said it will use proceeds of the sale to endow an independent think tank. The companies said the new IRRC Institute for Corporate Responsibility would be the only independent institution devoted to pure research on social and corporate issues.
The deal, announced yesterday, puts a spotlight on the growing market in providing pension funds, mutual funds and other institutional investors with advice on leadership questions, mergers and other issues that make their way onto corporate proxy ballots. The business has been given a boost by corporate scandals and by the Sarbanes-Oxley Act and other laws and regulations intended to combat them.
Previously, big shareholders might have ignored proxy ballots that came in the mail. "Today, it's the exception that an institutional investor would not pay attention to these things," said John M. Connolly, ISS president and chief executive. "Anyone with equity holdings has a fiduciary responsibility to vote their shares and understand the issues."
Sarbanes-Oxley increased the amount of information corporations are required to disclose, giving fund managers more information to sift through. The Securities and Exchange Commission's new vote disclosure rule, which took effect in August, requires mutual funds to disclose their proxy voting policies and voting records.
ISS is a for-profit company best known for its corporate governance rankings and its recommendations to shareholders on hotly contested proxy issues. When Walt Disney Co. clashed last year with former board members Roy E. Disney and Stanley P. Gold, ISS sided with the dissidents. Michael D. Eisner left his post as chairman after 45 percent of shareholders voted against his reelection to the Disney board.
Top executives embroiled in proxy wars travel to ISS's headquarters to campaign for their positions. For instance, when shareholders of Hewlett-Packard Co. split in 2002 over whether the computer giant should buy Compaq Computer Corp., HP president and chief executive Carly Fiorina and dissident leader Walter Hewlett both visited to lay out their cases. ISS recommended a vote in favor of the merger, which passed.
On the other hand, critics have questioned the usefulness of ISS's quantitative corporate governance scores, which rank companies numerically according to whether they have, for instance, anti-takeover devices such as staggered boards.
New York private equity firm Warburg Pincus LLC owns about 50 percent of ISS, and British hedge fund Hermes Pensions Management Ltd. owns about 20 percent.
Aout 1,300 of the nation's roughly 8,000 institutional investors are among ISS's clients. The company also has a unit that provides advice on governance and other services to corporations. Connolly said the institutional and corporate operations are divided to prevent conflicts of interest.
The proxy advisory business has expanded well beyond research and now includes distributing proxy ballots, actually voting the shares held by institutional clients and providing data bases on corporate governance and other topics.
IRRC's decision to sell came after a strategic review by Chessiecap Inc., a Bethesda-based investment bank.
Founded in 1972, IRRC was created as a research operation to serve charitable foundations seeking guidance on investing in companies doing business in apartheid-ruled South Africa, then expanded to advise investors on environmental concerns and on other politically sensitive areas, including Northern Ireland. It ventured into proxy voting only in recent years and converted to for-profit status in 2001.
Linda Crompton, IRRC's president and chief executive, said the company decided on a sale rather than making a major capital investment. She said IRRC's board will act as interim board for the think tank and recruit new directors and staff.