MSCI Seeking Strategic Alternatives for ISS

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This morning MSCI Inc. announced that it will be seeking strategic alternatives for its Institutional Shareholder Services, Inc. (ISS) business [you can read the press release here:] . This represents the start of a process that may eventually lead to a full separation of ISS from MSCI. However, as MSCI points out, it is not certain that any transaction will occur with respect to ISS.

MSCI joins a growing list of companies that controlled ISS only to find that it might not provide the right synergies with corporate-focused sales and services (since many corporate issuers have a big issue in buying anything from a company that controls ISS).

Frankly, depending on the outcome of this process, it could lead to some significant changes to ISS policies, both current and future, as well as to the policy development process.  It might be time for ISS and MSCI to consider what transpired when Glass Lewis & Co. put itself on the block a few years back and ended up being purchased by the Ontario Teachers’ Pension Plan Board (“OTPP”) and Alberta Investment Management Corp. (“AIMCo”).  It may make sense for a consortium of large institutional shareholders to acquire ISS and effectively use it as their “outsourced” research office. The research could then continue to be sold to other institutional shareholders and corporate issuers.  We’ll have to wait and see what alternatives get explored and where things come out and if it means any change for ISS.

Proxy Advisors’ Influence Waning?

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If you read the Wall Street Journal article, For Proxy Advisers, Influence Wanes (May 22, 2013), you might think that both Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) are on the ropes. There’s even a quote from Glass Lewis’ VP of proxy research, David Eaton, that seems to buttress that conclusion:

“Our power is probably shrinking a little bit.”

The article discusses how some of the larger mutual funds and money managers, like BlackRock and Vanguard Group Inc., have teams that handle more of the leg work that used to be in the proxy advisors’ wheelhouse. But these large institutional shareholders still subscribe to the ISS and/or Glass Lewis proxy reports. In many cases the ISS and Glass Lewis proxy report are viewed as background research on the company, which then may be supplemented by the institutional shareholders’ staff (which are generally too small for them to handle all the research themselves in a cost efficient manner).

The article cites a 2002 study that found that a negative ISS vote recommendation on management proposals influenced from 13.6% to 20.6% of the vote. Additionally, with the passage of the Dodd-Frank Act with its say-on-pay requirements, the influence of proxy advisors has grown. According to a 2012 study by the Conference Board, about 70% of 110 large and midsize companies indicated that their pay practices were influenced by proxy advisory firm policies.

Glass Lewis and ISS indicated that they are recommending against fewer say-on-pay votes this year and fewer have actually failed.  According to Broc Romanek’s blog today on, there have been only 23 say on pay votes that failed so far in the 2013 proxy season.

The conclusion I reach?  A bit different than the article–proxy advisors’ influence is still going strong.

Why? Because at this point many large and midsize companies are either  incorporating the proxy advisors’ policies regarding pay practices into their pay designs up-front or at least considering them during the design phase.  Therefore, more companies are either complying with the proxy advisors’ policies or are aware of anything done outside the lines of those policies and can then do a better job of explaining the rationale for such compensation actions to their shareholders.

So while it might appear from a pure vote perspective that the influence of the proxy advisory firms is waning (which I question a bit given what I’ve seen in the context of equity plan proposals for some time, see the white paper Reid Pearson of Alliance Advisors and I published earlier this year on the topic which shows that failed equity plan proposals have stayed at about the same level over the past five years, Equity Plan Proposal Failures: 2007-2012), I believe their influence on executive compensation at public companies is actually growing.

WSJ article:

Equity Plan Propsal Failures: 2007-2012:

Institutional Investors Focus on Rule 10b5-1 Plans

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The media has been focusing on insider trading plans, i.e., so-called Rule 10b5-1 plans, in a number of recent articles. This has apparently grabbed the attention of institutional investors and lead the Council of Institutional Investors (CII) to submit a rule-making request to the SEC on December 28, 2012 regarding the use of such plans (available at:

Specifically, CII requests that:

  • Rule 10b5-1 plans only be permitted to be adopted during company-adopted trading windows;
  • The adoption of multiple, overlapping Rule 10b5-1 plans by companies and insiders be prohibited;
  • A mandatory delay of three or more months apply to the start of trading in a Rule 10b5-1 plan after its adoption; and,
  • Frequent modifications or cancellations of Rule 10b5-1 plans by companies and insiders not be allowed.

Federal Reserve Report on Incentive Compensation Practices

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The Federal Reserve just finished up its horizontal review of large banking organizations and released a report that looks at incentive compensation practices at such firms. The report is available at:

Banks in the horizontal review with the oversight of  the Federal Reserve and other banking agencies, implemented new practices to make their employees’ incentive compensation sensitive to risk. The four key areas that were addressed by banks involved in the horizontal review were:

  • Incentive Compensation Design-making the amount of incentive compensation take into account the risk an employee’s activities may pose to the organization, and deferring payout of a portion of incentive compensation.
  • Identifying Key employees-those who have a hand in risk taking.
  • Risk-Management Processes and Controls-involving risk-management and control personnel when considering and carrying out incentive compensation arrangements.
  • Corporate Governance Frameworks-changing the frameworks to become attentive to the risk-taking incentives created by the incentive compensation process for employees throughout the firm, not just to senior executives.

The report indicates that work still needs to be done in some of the above areas by the banks but that progress has been made.