The wildly inflammatory headline is belied by the actual text, which is sloppily sourced, vague, and internally inconsistent. Michelle Celarier of Institutional Investor calls ISS “The Mysterious Private Company Controlling Corporate America” but then admits that it has produced a “premium research product” that makes recommendations on proxy contests based on the “least invasive solution.”
It truly is appalling when those very people who are always rhapsodizing about the beauty of the free market get so squeamish when they see it in operation. A few key points:
1. Even if ISS determined the outcome of proxy contests, they affect only a fraction of one percent of public companies, so it seems hyperbolic to extrapolate that they “control corporate America.”
2. To suggest that ISS determines the outcome of proxy contests is to conclude that the sophisticated institutional investors who actually determine the outcome of proxy contests are somehow so in thrall to ISS that they do not think for themselves. This would not only be a violation of their obligation as fiduciaries; it would make no sense for people whose entire profession involves making buy/sell/hold decisions based on extensive analysis to outsource these critical decisions.
3. The data show the more complex and controversial the proxy issue, the less likely that clients of ISS will vote as a block. The clients appreciate the analysis of the ISS reports and make their own decisions. We note that the article is quite sloppy about data, citing “several” anonymous sources for what should be easy to document, a claim that ISS is more likely to recommend against activists now than they have been in the past.
4. To the extent that the clients do follow the advice of ISS, that is because they like it. This is why ISS, which has competition, has done so well. They don’t vote because ISS tells them to; they subscribe to ISS because they like their approach.
5. Celarier concedes that managements have become more responsive to shareholders to protect themselves from activists and yet concludes that it is ISS who is acting as “kingmaker” in determining the outcome of proxy contests. The very example she uses, Marcato Capital Management, shows exactly the opposite of her claim — ISS recommended a vote for and shareholders voted against.
According to the article, “You’re told that your future and your legacy depend on this tiny little office in Rockville, Maryland, and that you’ll sit there for 90 minutes while they pass judgment on you,” says one corporate adviser. Let us be very clear: your future and your legacy depend on your performance. All ISS can do is help its clients, your shareholders, evaluate it more accurately.
NOTE: ValueEdge Chair Robert A.G. Monks founded ISS and he and Vice Chair Nell Minow worked there until 1990. We have not had any affiliation with the company in decades and often disagree with their positions.