(K)ISS off? Dawn of disintermediation of the arbiters.

Author:Kaback, Hoffer

TIMEs HAVE CHANGED in the governance world since fall 1998, when I participated as a panelist at a governance conference in Washington, D.C. organized by the Investor Responsibility Research Center (from which organization several of today's governance players emerged). Featured appearances at that event were made by Mario--not by Andrew--Cuomo and by Jesse--not by Janet--Jackson. Immediately following his speech at the IRRC event, Rev. Jackson left for the White House to counsel President Clinton about the Monica Lewinsky mess.


It was, after ail, still the 20th century.

A further indicium of the quaintness of those days is that, as he exited the ballroom where he had made his remarks. Rev. Jackson elegantly kissed the hand of a striking, statuesque woman standing next to me. It almost made her swoon.

Quaint, too, compared to today, is that, then, there were not too many proxy advisory firms around.

Institutional Shareholder Services (ISS), the main player, regularly put out written materials, but the physical production values thereof were not high and they arrived, weekly, by fax.

Moreover, much of ISS's commentary about pending mergers, proxy contests, etc. seemed to be written by junior analysts. The analyses were not sophisticated. The format was canned.

In subsequent years, ISS sharply elevated its game. And, there arose several new competitors (e.g., Glass Lewis and Proxy Governance).

Many money management firms became, and remain, subscribers to the services of these proxy advisory firms. Those services include ratings of the governance of public companies and recommendations about voting in contested and non-contested elections and on shareholder proposals.

These outfits are not without their sharp, and longstanding, critics. One is Ira Millstein, a senior partner at law firm Weil, Gotshal & Manges. At a Directors' Institute on Corporate Governance given by Practising Law Institute in 2006, for example, he said that he was particularly concerned that many money managers voted "in lockstep" with whatever ISS's recommendations were. (In reply, the redoubtable Pat McGurn of ISS asserted that Millstein had been "spreading that myth" for a while.)

Millstein then went on to emphasize that perhaps the time had come for more governmental scrutiny of these unregulated entities.

Martin Lipton of law firm Wachtell Lipton is another critic. The firm made these comments to the SEC in October 2010 in response to a...

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