Steve Bouck knows a little something about the clout of ISS. Last year, Bouck, who is CFO at Folsom, California-based Waste Connections Inc., helped devise a plan that would have tripled the company’s authorized stock shares. The increase (from 50 million to 150 million shares) would enable the company to do a stock split, thus rewarding shareholders who had stuck with Waste Connections through some lean times in the late 1990s.
But soon after managers at Waste Connections formulated the proposal, Bouck received worrisome news. ISS, apparently applying its own formula to the plan, would not support an increase beyond 127 million shares — and thus advised its clients to vote no on the proposal. Institutional investors rarely go against ISS, and this case was no different, as the proposal went down to defeat.
Waste Connections came back with a revised scheme this year, limiting the size of the increase to equal 100 million shares. ISS backed the new plan, which then received a green light from shareholders. But the initial ISS recommendation cost Waste Connections time and money, forcing management to rejigger its initial plans.
Until recently, few executives were willing to publicly criticize ISS — another indication of the firm’s newfound influence. But growing resentment over proxy-advisory firms has led some to start questioning the business model of the firms. And some say the consultancies should either advise institutional investors or public companies — not both. (For more on alleged conflicts at ISS, see “Shakedown Street?” at the end of this article) Nordlund of Agilent, for example, believes ISS shouldn’t charge a corporation for advice while acting as paid adviser to the shareholders of that corporation. “The two-way conversation between companies and investors,” he says, “ought to be accessible without a toll charge.”
Executives at ISS, however, defend the firm’s actions. McGurn believes the lion’s share of criticism should be directed at unresponsive officers and directors, not proxy-advisory firms. “The real question,” says McGurn, “is why have boards ignored supermajority no votes?” Besides, adds Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, “you’re free to take ISS’s advice or not.”
Likewise, Calpers’s Macht says officers at the giant pension fund are interested in only one thing: doing right by investors. “No one should fear what Calpers is doing,” she says. “What we have tackled has improved these companies. And it’s improved returns for all shareholders.”
The clout of powerful share-holder activists and advisers will likely increase if the SEC passes its proposed director access rule. The proposal, an amendment to Exchange Act Rule 14a-8, would allow institutional investors (under certain circumstances) to nominate their own directors the next year. The triggers? Hard to predict, although the commission has floated the idea of giving shareholders the right to nominate board members if withheld votes top 50 percent of all votes cast for directors.
Shareholder-rights advocates almost universally praise the proposal (although many would like to see the threshold lowered). They say directors and officers have protected their positions for years by staggering director elections over three-year periods (what’s known as classified boards). Given the high costs of mounting a proxy fight — and the short odds of winning one — few shareholders have taken up the challenge. Last year, for example, dissident stockowners at natural-gas utility El Paso Corp. reportedly spent nearly $6 million in a failed attempt to oust incumbent board members. Little wonder that supporters such as Ann Yerger, deputy director at the Council of Institutional Investors, believe the SEC proposal would finally give a voice to long-suffering investors. “Shareholders sitting on the board,” says Yerger, “is the ultimate in governance.”