6.5 Institutional Shareholder Services (ISS) and Glass Lewis

As stated previously, Institutional Shareholder Services, Inc. (ISS) and Glass Lewis are by far the two largest proxy advisory funds. Hedge funds, mutual funds and similar organizations that own shares of multiple companies pay ISS and Glass Lewis to advise (and often vote their shares) regarding shareholder votes. ISS is the largest proxy advisory firm, with over 61 percent of the U.S. proxy advisory business. It is owned by MSCI. ISS advertises that it is the leading provider of corporate governance solutions to the global financial community. As of 2014, they had more than 1,700 clients that relied on their expertise to help them make informed investment decisions on behalf of the owners of companies. ISS' services include governance research and analysis, end-to-end proxy voting and distribution solutions, turnkey securities class-action claims management, and reliable governance data and modeling tools. ISS has a team of more than 500 research, technology and client service professionals who are located in financial centers worldwide

Glass, Lewis & Co. is the other prominent proxy advisory services firm. Like ISS, Glass Lewis provides governance research, proxy analysis and vote management services to institutional investors globally. According to their website, their over 300 professionals advise institutional shareholders that collectively manage more than $15 trillion in assets, including Putnam Funds, Wellington Management Company and the Australian Council for Superannuation Investors ("ACSI"). Glass Lewis is currently owned by the Ontario Teachers' Pension Plan.

Both of these companies are extremely powerful. While they own no shares in public corporations themselves, they are basically given the authority by institutional investors to vote the equivalent of nearly $4 trillion in shares every year.

To illustrate the influence and power that these proxy advisory firms have, consider the following two news items that were taken from financial newspapers in 2013.

• "ISS and Glass, Lewis & Co. urged Walt Disney Co shareholders to vote in favor of a proposal to split the chairman and chief executive roles now both held by Robert Iger," reports the Chicago Tribune (Feb. 27, Kerber, Richwine). In addition, the two proxy advisers called on shareholders to cast advisory ballots "against" the pay of Iger and others at Disney. Their recommendations could sway undecided shareholders ahead of Disney's annual meeting in Phoenix. The Tribune states, "A controversial issue at the media and theme park company has been the dual roles of Iger, Disney's CEO since 2005. The board added the chairman's title to Iger's role at last year's annual meeting, despite similar objections from ISS and public pension funds at that time that the combination gave him too much power."

• Business Week (March 29, Moritz, Kharif) is reporting that Institutional Shareholder Services Inc. (ISS) "recommended against T-Mobile USA Inc.'s merger with MetroPCS Communications Inc. (PCS), dealing a blow to a transaction that lacks the support of MetroPCS's biggest owner." The investor advisory firm states that it is against the deal because of unfavorable terms and the potential for MetroPCS to thrive as an independent company. Paulson & Co. -- MetroPCS's biggest investor, with nearly 10 percent of shares outstanding -- indeed opposes the deal. The second-largest owner, Madison Dearborn Partners LLC, supports the proposed combination. "Critics suggest the merger will load up the new company with too much debt," the publication notes, "while supporters say it's the best way for MetroPCS to compete with larger carriers." In a related article, Reuters (March 29, Carew) has now learned that "proxy advisor Glass Lewis became the second [proxy advisory] firm to tell MetroPCS Communications Inc. shareholders to vote against its proposed merger with T-Mobile USA, adding pressure on Deutsche Telekom AG to offer a sweeter deal." Glass Lewis said the proposed transaction undervalues MetroPCS's contribution to the combined company, adding that MetroPCS shareholders could likely realize additional value in the short term if it stayed independent. A third advisory firm, Egan Jones, previously recommended its clients vote in favor of the transaction.

Because ISS is currently the largest proxy advisory firm and publishes an annual governance score for each public company, we will discuss how their governance QuickScore is calculated and used. Essentially, ISS's QuickScore summarizes the strength of a company's corporate governance into one number.