Institutional Shareholder Services (ISS) carries significant weight in decisions made in board rooms and C-level suites in publicly traded companies. ISS reviews proxies issued by publicly traded companies for their annual meetings and makes voting recommendations. Glass-Lewis offers a competing service in the US. These recommendations are purchased by institutional shareholders, like mutual funds, which rely on the recommendations for their proxy voting decisions.
NASDAQ made a petition to the SEC on October 7th (available here) to force ISS to make public its models and methodologies for determining recommendations. The petition was publicly announced in a Wall Street Journal Op-Ed.
NASDAQ claims that ISS and Glass-Lewis have outsized influence on the voting process and includes research references and examples. A few highlights:
- Institutional ownership accounts for 75% of shares held in publicly traded companies.
- Little is known about the policies and methodologies behind the recommendations. It is a black box that is deemed proprietary by ISS.
- Negative recommendations are issued on the eve of the annual meeting, almost always without warning.
For issuers that wish to avoid a negative vote, ISS will evaluate the proposals for a substantial fee. This service is conducted separately and a number of companies have paid their money only to be stunned when ISS recommended a no vote to its institutional clients after the proxy was actually issued.
ISS grew to prominence after the SEC issued no-action advisory letters in 2003 under the Investment Advisors Act allowing fiduciary reliance on independent advisory services. If NASDAQ gets its way, such reliance would be conditioned on disclosure of the methodologies used for recommendations and of relationships that may create conflicts of interest.
There is other support for transparency. The European Securities and Markets authority has called for a proxy advisory code of conduct. This has been supported in public comments by SEC Commissioner Dan Gallagher. According to the Center on Executive Compensation, the SEC is currently considering the petition from NASDAQ. A congressional committee has held hearings on proxy advisory services where witnesses testified consistently with the information in the NASDAQ petition. The New York Stock Exchange posted an article titled “ISS’s Declining Influence in Shareholder Votes” in which the authors claim that shareholder clients like Blackrock and Vanguard are becoming skeptical of ISS’s approach.
Perhaps in response to mounting pressure, ISS and Glass Lewis have created an industry group with their European counterparts that is evaluating best practices. These firms are not about to go out of business but their one-time enormous influence may be on the wane. MSCI, the corporate parent of ISS, announced on October 31 that it is looking for buyer for ISS.