In September, the board of New York-based
financial services firm MONY Group Inc. embraced a $2.3 billion
acquisition offer from Axa SA, France's largest insurer. The decision
infuriated some MONY shareholders, who mounted a proxy campaign, blasting
the low sales price, the lack of an auction process and a $94 million
payout that MONY executives would receive. MONY responded that no other
offers had emerged and that it needed a larger partner.
The debate was strident. In the countdown to the Feb. 24 vote, many
eyes were focused not on the two sides, but on a pair of investment
advisory services that promised independent evaluation of the deal. First,
dissident shareholders made their pitch in a conference call for
institutional investors hosted by Institutional Shareholder Services,
long established in corporate governance and proxy services. Two days
later, Glass, Lewis & Co. LLC, a year-old rival, hosted a similar event.
On Feb. 11, ISS, based in Rockville, Md., issued a thumbs-down ruling.
San Francisco-based Glass Lewis weighed in six days later with a similar
recommendation against the merger. MONY, which refused to participate in
the calls, pooh-poohed the rejection. "ISS' position will sway few votes,"
said MONY in a press release. ISS, it noted, is "best known for its
opinions ... relating to corporate governance matters."
That reputation isn't in dispute. Since its founding in 1985 by
governance authority Robert A.G. Monks, ISS has made a name providing
direction on mostly routine, governance-related decisions for managers of
trillions of dollars worth of pension assets and mutual funds. But the
service, which is privately held, has also become a growing and sometimes
controversial force in the M&A arena.
Last year's entry of Glass Lewis — founded by investment bankers,
lawyers and accountants as a proxy service but with a significant M&A
orientation — has focused attention on the question of how ISS arrives at
its recommendations. The very existence of a rival indicates that the
world's biggest investors want help in assessing major corporate decisions
— including deals. "They're influential," says Richard Koppes, of counsel
at Jones Day and the former general counsel of the California Public
Employees' Retirement System, or CalPERS. "Now you've got two of them and
they're both well respected in the institutional community."
They're certainly widely used. ISS, which turned down numerous requests
to comment for this story, claims on its Web site to have 950 clients,
pretty much a who's who of pensions and mutual funds. (A cursory look at
Securities and Exchange Commission documents lists such funds as Franklin
Templeton, ING, Gartmore and AIM.) Gregory Taxin, Glass Lewis' CEO,
declined to put a number on his customer base. He would only say clients
collectively manage $3.5 trillion in assets. CalPERS and Franklin
Templeton, for example, subscribe to both services.
While the people minding all this money don't automatically follow the
services' advice, there's ample evidence that their recommendations
matter. Philip Goldstein, an activist investor who runs hedge fund
Opportunity Partners LP, recalls an unsuccessful attempt he mounted in
2001 to block the acquisition by Commercial Net Lease Realty Inc. of a
smaller REIT called Captec Net Lease Realty Inc. The day after ISS backed
the deal, several hundred thousand proxy votes registered in favor of the
acquisition, Goldstein says.
Institutional shareholders apply proxy service recommendations in
different ways. According to one proxy solicitor, the more important the
decision, the less likely institutions will rely wholly on the service.
"Many institutions look to ISS and Glass Lewis for voting recommendations
primarily on much more mundane matters like compensation," says the
solicitor, who declines to be identified. "When it gets to mergers,
there's a little more input by fund managers."
Koppes describes three degrees of reliance on the services. At one
extreme, certain index funds cede voting decisions to ISS. For more
institutional clients, the recommendations serve as a research tool;
they're informational. In between are clients "where staff or managers
have to have really good reasons to vote against" what the services
recommend, says Koppes. The recommendations resemble a seal of approval.
And what happens when ISS and Glass Lewis issue conflicting
recommendations? Koppes laughs. "Frankly, that's good for the field. It
puts that middle group in a real bind, which makes them work harder."
ISS and Glass Lewis opinions on recent deals
Axa Financial Inc.
Boise Cascade Corp.
Berkshire Hathaway Inc.
For MONY shareholders
2 For Boise shareholders
3 For Clayton shareholders
Source: The Deal
That has happened twice in the past half-year. ISS, which had rarely
nixed a merger proposal before Glass Lewis entered the field, surprised
Wall Street late last year by recommending against Boise Cascade Corp.'s
acquisition of OfficeMax Inc. Glass Lewis supported the merger.
Some of those within the proxy and institutional investor communities
believe Glass Lewis' entry has prompted ISS to assess merger proposals
more critically. ISS "was pretty soft," says the proxy solicitor. "Glass
Lewis is actually much more aggressive."
The merger bid of Hewlett-Packard Co. and Compaq Computer Corp. first
highlighted the importance of a proxy service assessment to the investor
community. Because its CEO was on the Hewlett-Packard board, Barclays
Global Investors ceded the voting of its 3% stake in Hewlett-Packard to
ISS. ISS clients represented as much as 20% of the voting shares.
After heavy lobbying by Hewlett-Packard, which included a visit to ISS
offices by Hewlett-Packard CEO Carly Fiorina, ISS recommended the merger.
By some estimates, that call was crucial to its approval. The point is
debatable, but critics of the ISS decision howled. They questioned the
ability of ISS to run a sophisticated merger assessment, especially when
its stated focus is rating a company in terms of corporate governance, not
whether it's a competent acquirer.
"Where ISS went wrong is making judgments as to business rationale.
That's a far cry from governance issues," says a governance specialist who
generally supports ISS' work. "It may have been different if [ISS] had a
team of people qualified to pass judgments, but a lot of folks had their
eyebrows raised because the [ISS] analysts didn't have know-how to do
Indeed, an ISS proxy analysis is heavily weighted on governance-related
factors such as whether independent directors have a voice and support a
Even its supporters note ISS has a tough task when it comes to M&A. ISS
may not have the built-in conflicts of investment banks or brokerage
houses. Neither, however, does it have trained Wall Street analysts, who
spend their time assessing individual companies. Because ISS monitors
thousands of companies, its research staff must be the ultimate
generalists. A profile in SmartMoney magazine after the
Hewlett-Packard-Compaq merger revealed many of its analysts started as
temporary staff, some right out of college. ISS also took some heat after
its chief analyst on the Hewlett-Packard-Compaq merger was forced to
resign after a magazine revealed he had never finished law school, as he
had claimed to his employers.
"The knock on ISS is that their analysts have to become 90-day wonders,
that they have to make sense out of highly complex matters. This is a very
difficult role for any outside service provider," says Bert Denton,
activist shareholder and head of New York-based Providence Capital Inc.
Denton, however, calls ISS' corporate governance recommendations "a very
useful tool" for both investors and boards.
Two other factors further complicate ISS' position. One is its
ownership of Proxy Voter Services, a subsidiary that advises Taft-Hartley
pension fund managers on how to vote. That has caused at least one bizarre
outcome. During Berkshire Hathaway's acquisition of Clayton Homes Inc.
last year, ISS voted for the merger, PVS voted against, but their analyses
were virtually identical. Critics have also slammed ISS for offering
governance consulting to some of the same companies it reviews on proxy
matters. (ISS has said in the past it has controls that ensure separation
of the two functions. It does disclose its consulting clients.)
Enter Glass Lewis — pulling no punches.
"It's terrifying to us and some of our clients that an organization
would have so much sway over something like the HP and Compaq merger, and
yet they don't have the expertise to evaluate that transaction on a
financial or economic basis," says Taxin, a former Banc of America
Securities LLC managing director. "We strongly believe there is room for
another set of opinions."
Taxin and co-founder Kevin Cameron, a lawyer, put together a research
team led by Lynn Turner, the high-profile former chief accountant for the
SEC. The company, with offices in San Francisco and Denver, now has more
than 40 employees. ISS has about 300 employees in New York, Chicago,
London, Manila and Tokyo as well as its Maryland headquarters.
Like ISS, Glass Lewis tracks thousands of companies. "We are obliged to
cover any M&A activity in these 4,000 companies," says Taxin. "We write on
every deal." Transactions where the board runs a good process with good
advisers require less scrutiny, he says. Always, the focus is on
shareholder value. "Our single overarching principle is whether this vote
will make shareholders richer or poorer over the medium term," he says.
"These companies are investments at the end of the day. And you've got to
look at their financial performance and understand their accounting and
the intricacies of their business models in order to have any opinion on
what they should do or whether a deal should be done."
ISS has been criticized for accepting fairness opinions issued by
investment banks to boards, a kind of innocent-until-proven-guilty
approach. Glass Lewis has seized on this in its pitch for another proxy
service. "It may work to help a board defend itself from liability, but it
doesn't go far enough to instruct or assist an institution in determining
whether a deal is in the investor's best interest," says Taxin, who adds
he once wrote fairness opinions for a living. "You'll never find one that
questions the strategic sense of a deal or its value."
Taxin says Glass Lewis' evaluations are "pretty much identical to the
process I followed when I was an investment banker, with the small
exception that we don't have any preconceived notions about the deal."
This much is clear. Many institutions, notably mutual funds, will face
more scrutiny on how they vote controversial shareholder issues than in
the past. Some will rely on proxy services. Others will use them for cover
as they try to appease customers and companies in which they invest. "The
conflicts are just going to get greater and greater," says the proxy
solicitor. "The easiest way to decide how to vote is putting the
responsibility on ISS or Glass Lewis."