Proxy Schadenfreude: ISS parent gets failing grade on governance

File this one under the “turnabout is fair play” column. Reuters is reporting that the parent company of influential proxy adviser International Shareholder Services (ISS) has itself received a poor grade from another proxy adviser for its compensation policies.

In an April 18 report obtained by Reuters, the British proxy adviser Manifest gave MSCI Inc., which owns ISS, a letter grade of “D” — the fourth-lowest it can assign — for a compensation plan that Manifest says is vague on details and makes it too easy for executives to win performance awards.

Company directors (and the lawyers who work for them) are loving this. ISS has been a bane for many boards attempting to “incent” management or follow a strategy that is not in the short-term interest of shareholders.

Most recently, ISS managed to convince Citigroup shareholders to exercise their “say on pay” and vote down compensation for top executives there, including a $15-million package for CEO Vikram Pandit. (I blogged about it in this space not so long ago.)

While the irony is certainly palpable, Lexpert‘s corporate governance columnist, Carol Hansell — who is also a partner at Davies Ward Phillips & Vineberg LLP — doesn’t think the Manifest report undermines ISS’s credibililty.

“I don’t think that the quality of the governance at the parent-company level  affects the quality of the analysis produced by ISS. That said, when an organization puts itself in a position of leading others in a particular area, such as governance, it’s reasonable to expect that organization to operate at the highest standards itself.”

Also, while ISS has not reviewed the policies of its parent company for fear of perceived conflict, it did, in its defence, refer MSCI’s shareholders to the report by Manifest.

Former Lexpert columnist Barry Reiter, a governance expert and partner at Bennett Jones LLP, says it’s “a bit embarrassing for MSCI and ISS. Their critics will enjoy it.”

In addition, he points out that MSCI’s failure to meet the standards of a proxy adviser demonstrates how complicated executive compensation can be. Reiter likens it an art rather than science — and more effectively managed by knowledgeable directors than algorithm-wielding proxy advisers:

“The focus should be on who those directors are and what they are doing, rather than on mechanistic analysis of their outputs.  Unfortunately, it is difficult to quantitatively measure integrity, common sense and courage … and so the shareholder advisory agencies ignore those factors.

“Perhaps tripping on their own wire will help MSCI and ISS advance their thinking on better ways to serve their clients.”

Or at the very least, it can offer up a little Schadenfreude for those directors who are always dealing with ISS’s criticisms (whether justifiable or not). Read the full story here.

– David Dias

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