February 21, 2018

How ISS Analyzes Proxy Fights

Here’s a recent “Institutional Investor” article about ISS’s role in proxy contests.  The article sheds some light on ISS’s recommendation process & highlights its role in several recent high-profile proxy contests. It also discusses the more sophisticated approach that companies are taking in their dealings with proxy advisors – while at the same time acknowledging that most companies can’t stand ISS.

Corporate disdain for ISS is pretty much an open secret – but less well known is the fact that some activists aren’t crazy about ISS either. What’s more, this excerpt says that activists desperately need ISS’s backing in order to have a chance to win a proxy fight:

Companies may complain about the power of ISS. But it is the activists, not the companies they target, who are most dependent on its recommendations — and, not surprisingly, some are upset about perceived changes in ISS policy and past patterns that work to their detriment.

A recommendation from ISS does not guarantee an activist win, but it’s virtually impossible for an activist to win without the recommendation of ISS, say former and current ISS executives, activists, and other market participants. That said, many institutional investors like to say that the power of ISS is overstated, that it is merely reflecting the desires of its biggest clients — like BlackRock, Vanguard Group, State Street Corp., and others — who control the biggest stakes in most large corporations.

“If ISS has tended to side with activists, there’s a good reason,” says one former ISS executive. “ISS is not a public institution. It is a private, for-profit company, and they are trying to please their clients. They are issuing recommendations they wish to be well received by their clients. They are not writing this report for the good of society. They’re writing for clients who pay them money.”

Speaking of pleasing clients, the article points out that ISS’s role as proxy contest arbiter offers a variety of benefits to investors.  For activists, it helps solve the problem of shareholder collective action. By following ISS’s lead, shareholders can act together without being regarded as a “group” that might trigger a pill or a 13D filing. For institutions, ISS sometimes acts as a shield, enabling them to share views that they might not want to share directly with companies in which they invest.

John Jenkins