Debunking Myths About ISS

Together with my frequent collaborator Stephen Davis, Executive Director of the Millstein Center at Yale, I write a monthly column for Compliance Week. The most recent debunked some myths about ISS and Glass Lewis, the leading American proxy advisory services. (Quotes indicate a direct excerpt from the Compliance Week column, available at .)

 Myth 1: Shareowners Blindly Follow ISS’s Recommendations.

“People… generally cite two facts to support the all-powerful ISS theory, one substantive and one related to timing and process.

“The substantive fact is that all companies failing to receive a majority on their say-on-pay resolutions had negative recommendations from ISS. That is true. As of this writing, ISS has recommended against 279 say-on-pay resolutions at companies in the Russell 3000 universe, according to Patrick McGurn, special counsel at ISS. Of those, 37 have failed to achieve majorities. What type of super-villain is ISS when it can only get its way about 13 percent of the time?

“More damning, almost as many companies (30) received support from more than 90 percent of the shares cast. In other words, a company that received a “no” recommendation from ISS was almost equally likely to get a positive vote (of 90 percent or more) as it was to get a negative vote….

“The timing and process explanation also confuses correlation with causation. More than one CFO has told us he “knows” investors are blindly following ISS because it was immediately after ISS issued its negative recommendation that negative votes were cast. This shows two basic misunderstandings of how institutional investors vote. First, about 75 percent of ISS’s clients use ISS as a voting platform. This is a ministerial function where ISS provides an electronic voting mechanism… ISS is hired to analyze the proxy proposal, but the decision on how to vote depends on the investor’s own guidelines. They cannot cast the votes until ISS’s analysis is released. Even for those “research only” clients of ISS… wait until after ISS (and other proxy advisers, if they have subscriptions) release their analyses to vote, because they use those analyses as inputs to their own analysis.”

That’s not to say that all institutional investors are careful proxy voters. About 700 of ISS’s 1200 clients do not customize their votes (though they tend to be the smaller clients by assets under management). Those lemming-like proxy voters are doing no one any favor. They are the kernel of truth in the web of conspiracy-theory falsehoods about ISS controlling corporate governance in the United States. But the best academic studies we have seen suggest that they amount to less than 15% of the votes cast in most cases. To be sure, that’s far too many. But don’t elevate them to a threat to American capitalism.

The second major myth exploded by the column concerns ISS’s supposed role as the de facto corporate governance standard setter in the United States. As we point out, ISS is as much standard taker as setter, serving as a vessel for receiving and amalgamating market views from its clients. It starts reviewing its proxy voting guidelines for the next year in the summer and solicits responses to a proxy voting survey. It hosts roundtables and even has an open comment period, open to the public, every fall. That comment period is announced on the ISS website, and is usually in September or October.

Finally, we examined whether or not ISS listens to companies, and noted that it held more than 200 in person meetings with companies last year, as well as thousands of telephone conversations and e-mail communications. ISS even staffs a dedicated help line for companies seeking to understand or challenge its recommendations, and has an entire sector of its web site explaining how companies can communicate with ISS.

On a personal basis, it feels strange being cast as a defender of ISS. As we wrote in the column: “We know that debunking these myths makes us sound like unabashed apologists for ISS. We’re not. We have continuously criticized ISS for maintaining a consulting service to issuers even while rating and recommending votes for them on the other side. In fact, our public criticism resulted in a former CEO of ISS threatening one of us in writing with a libel suit. We still maintain that having both practices is unseemly, despite the “wall” ISS has created and the independent counsel opinion it has received. We have also crossed swords with ISS professionally. We were two of the four original founders of GovernanceMetrics International. Though we have no affiliation with GMI today, the firms were, and are, rivals.

“So we have reasons to be critical of ISS. But criticism does not ignore reality. We are in the midst of difficult changes to America’s corporate governance system, changes that affect power relationships, changes some people believe to be destructive. Let’s discuss them with one another, engage with one another, and even disagree with one another. In other words, let’s argue about the real issues. But let’s not demonize one market participant to the point that we lose sight of what’s important. It’s time to stop mythologizing, stop blaming ISS, and just get on with the hard business of governing our companies.”


Sinclair Capital wishes to thank Compliance Week for allowing extensive excerpts from “Three Myths About ISS”.

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