Cahill Gordon identifies ISS new voting policies, two of which caught my eye:
Say on Climate. ISS has adopted two frameworks for analyzing Say on Climate proposals, one for proposals submitted by shareholders and another for those submitted by management. These new policies list the main, non- exhaustive criteria that will be considered in ISS’s analysis. Vote recommendations by ISS on such proposals will be made on a case-by-case basis, taking into account the completeness and rigor of the plan and disclosures and other relevant criteria, including with respect to shareholder proposals whether the request is unduly burdensome or overly prescriptive.
Climate Accountability. ISS has adopted a new policy applicable to companies that are significant greenhouse gas (GHG) emitters, defined for 2022 as those on the current Climate Action 100+ Focus Group list. Under the new policy, ISS generally will recommend voting against or withholding votes from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in situations where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks to the company and the larger economy relating to climate change. For 2022, ISS considers such “minimum steps” to be: detailed disclosure of climate-related risks (such as those published by the Task Force on Climate-Related Financial Disclosures (TCFD) framework), and appropriate GHG emissions reduction targets.
ISS is the largest proxy advisor, with over 1700 institutional investor clients that buy its advice on how to vote shares they hold. A substantial number of those clients robo-vote in lockstep with ISS recommendations.
This gives ISS "a bully pulpit from which to harangue corporate management and boards of directors on all matters of governance and compensation ...." Yet, as the Institute for Governance reports, there are some serious concerns about ISS:
- Lack of transparency as to the process by which they arrive at formulating their recommendations; • Inaccuracies in their analysis and unresponsiveness to corporate demands for corrections;
- Conflicts of interest, in particular for ISS, by their offering of several services to the same corporations which are the subject of their proxy recommendations;
- More subtle criticisms focus on their definition of «good» governance and the lack of (or very weak) empirical evidence that their kind of governance has any influence on the performance of companies;
- Proxy advisors have a vested interest in raising the bar of «good» governance from year to year to justify their continued employment;
- The influence of proxy advisers on corporate governance makes some, many, boards of directors overly preoccupied with ensuring favorable recommendations from proxy advisers, by taking pre-emptive steps to ensure that their policies on governance and executive pay will not trigger a negative score when fed into the proxy advisers’ standardized algorithm;
- Their business model is problematic. Because their clients, institutional investors, collectively own shares in all publicly listed companies, they have to provide «advice» for all these corporations. In Canada, some 1570 companies are listed on the TSX and another 2,200 are listed on the TSX Venture. The financial year of roughly 84% of companies listed on the TSX ends on December 31st. For some 80% of TSX listed companies, there were less than 50 days between the date the Management Information Circular is received by shareholders and the ultimate date for proxy voting. (IGOPP research, 2012). These statistics create a fundamental issue for these service providers and raise basic questions about their business model. How can they cope with this mass of data and come up with fair and thoughtful recommendations for thousands of corporations in a matter of a few weeks in the spring of each year;
- Surprising and puzzling is the role these proxy advisors are now playing in all cases of mergers, acquisitions, proxy contests and all other litigious matters. Proxy advisers offer their opinion on almost all litigious, contentious issues. As these issues often come about as a result of the actions of some activist hedge funds, a proxy advisor’s favourable opinion, from ISS particularly, is a highly prized input to the argumentation of activist funds. The potential for conflicts of interest is decupled in these highly charged confrontations with huge sums of money at stakes.
The Trump-era SEC tried to put some minimal restrictions on ISS and its fellow oligopolist Glass Lewis. Under woke SEC Chairman Gary Gensler, however, the Biden-era SEC is giving ISS a free pass.
It was bad enough when ISS confined its advice to legitimate issues of corporate governance, but it is increasingly injecting itself into controverted social and economic issues.
The Democrats in Congress and the White House have embraced ISS as part of their progressive a[[roach to business, so it's hard to expect them to take action. If the Republicans win back the Congress, however, they should use their influence to pressure ISS into sticking to its knitting.
