ISS swinging shareholder votes toward social issues. Institutional Shareholder Services, in a radical shift, is making a push to get corporate America thinking about the effect reputation has on the bottom line.
Institutional Shareholder Services (ISS) is hardly a household name, yet only a handful of private and government institutions rival its influence over what transpires in the American corporate boardroom.
ISS is the proxy advisor for much of the US' institutional investors - like pension funds and mutual funds - on how they should vote on proxy proposals brought before a corporation's shareholders by either management or other shareholders. Most of the time, investors take ISS advice.
Because of its reach (950 clients and opinions on proxies at over 20,000 shareholder meetings), ISS is a force that corporate management teams cannot ignore. ISS' clients can comprise a sizeable chunk of a company's shareholders, and therefore can make or break a controversial proposal.
Most recently, ISS helped Hewlett Packard CEO Carly Fiorina keep her job when it endorsed HP's merger with Compaq, despite the vocal objections of some renegade shareholders led by HP scion Walter Hewlett. There is little doubt that the controversial merger would not have survived the close shareholder vote without ISS endorsement.
"There's no way it would have passed (without ISS), one IR veteran, who was hesitant to speak on the record about ISS, told PRWeek. "ISS is now the 800-pound gorilla. Years ago, there were a few players, but now ISS is the only one left. Indeed, ISS merged with its main competitor, Proxy Monitor, in July 2001, leaving it as the sole independent proxy advisor in the US.
Good shareholders, good citizen
ISS left more than a few people scratching their heads when it endorsed two controversial so-called "social responsibility resolutions on ExxonMobil's proxy ballot. The initiatives were similar to proposals on the oil giant's ballot in 1999 and 2001; ISS recommended that clients vote against them.
One proposal asked the ExxonMobil board to outline how it would promote renewable fuel sources, while the other asked the firm to adopt a policy that explicitly prohibits discrimination against gays.
ISS has a reputation as a management gadfly because of its dogged commitment to what it calls helping clients "cast votes that will protect and enhance shareholder returns. This has, over the years, conflicted with the plans of many CEOs.
ISS has historically opposed such things as outsized management compensation packages and so-called "poison pill amendments to corporate governance charters. (Poison pills are complex resolutions designed to ward off buyout offers that are potentially unfriendly to management and the board, but can be lucrative for shareholders. Such buyouts are often called "hostile takeovers.")
While advising shareholders to vote against both big payouts for management and poison pills appears to jive with ISS' dedication to protecting and enhancing shareholder returns, at first glance, its decision to pressure ExxonMobil to support renewable fuel sources and gay rights appears much less intuitive, especially considering ISS has sided against these initiatives in the past.
The Wall Street Journal article about the ISS decision termed it "an unusual move. However, taking into consideration other recent ISS decisions, it's clear the firm has adopted something of a new approach to corporate social responsibility issues.
According to ISS, late last year the firm started taking a serious look at how being perceived as a good corporate citizen might affect shareholder value. Now that proxy season is winding down, and as most annual meetings have come to a close, corporate America is seeing the results of this new focus.
"A lot of investors are very interested in socially responsible investing, Anjuli Mangat, a spokesperson for ISS, told PRWeek. "We have been screening companies for social responsibility since 1999 for some of our investors. In some cases, ISS thinks these issues can eventually impact the bottom line - ExxonMobil was such a case."
In its report outlining its decision on the ExxonMobil proxy, ISS notes the harm the company may be doing to its reputation by holding out on the renewable energy initiative. The report also questions ExxonMobil for not considering what could happen should environmentalists continue to progress in their fight for renewable fuel alternatives.
"The company has been subject to controversy stemming from its stance on global warming and its lack of investment in the development of renewable energy sources, reads the report. "The company could be placing itself in jeopardy, and its shareholders as well, if there were to be a sudden policy change mandating increased use of renewable energy resources."
As for the anti-discrimination measure, ISS admonished ExxonMobil for not having explicit language in its Equal Employment Opportunity (EEO) statement protecting gays from discrimination, while all of its major peers do. Even though ExxonMobil says it does not tolerate discrimination, ISS said the lack of such specific language could hurt the company's recruitment efforts. What's more, Mobil had such language in its EEO statement before the merger with Exxon.
"By not referencing sexual orientation in the post-merger EEO statement, the company has created unnecessary controversy, reads the report. "This controversy could be easily mitigated by adding that language back into its EEO statement."
Neither proposal gained enough support to survive the shareholder vote.
Nonetheless, both resolutions saw significantly more support than in previous years. Support for the renewable energy proposal jumped to 20% from 9% in 2001, while the antidiscrimination initiative won over 24% of shareholders, up from 13%.
ISS and big labor
Perhaps no two groups have had a longer history of being on the opposite side of more issues than corporate America (and, by extension, its shareholders) and organized labor. Yet at least twice in the last two months, ISS has sided with big labor on issues involving worker rights.
In May, ISS joined the AFL-CIO and The Hotel Employees and Restaurant Employees International Union in pushing Marriott to adopt a workplace code of conduct based on the "Declaration of Fundamental Principles and Rights at Work, produced by the Geneva-based International Labor Organization (ILO). The initiative was proposed to call attention to Marriott's continued operation in Burma, which suffers under a regime accused of allowing forced labor and child labor.
Marriott management found the proposal so much to its disliking that it tried to exclude it from its proxy statement, but was forced to include it by the SEC. Marriott, however, agreed to sever business ties with Burma before the vote was held.
Two weeks after endorsing the Marriott proposal, ISS joined another list of labor groups, and endorsed a similar worker-rights proposal on the proxy ballot of oil giant Unocal.
ISS' support for labor-sponsored proposals is not surprising considering that many of its institutional clients are the pension funds of union workers. Nevertheless, as in its ExxonMobil decision, ISS argued that the public stance of companies on good-citizen issues could impact the bottom line if a firm's reputation suffers as a result.
"ISS recognizes the value of labor standards and formal company policies on human rights practices, particularly for companies that have operations in countries where there are fewer protections for workers," ISS' report on Unocal stated. "Ethical issues aside, there may also be very real implications for the bottom line. An increasing number of consumers and shareholders are seriously concerned about whether low wages and abusive working conditions exist in facilities patronized by US companies; firms that do not share that concern can risk damage to their corporate reputation and possible consumer backlash."