Outgoing ISS head struck a balance in proxy fights
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Institutional Shareholder Services' (ISS) sided with companies nearly as much as shareholders during Cristiano Guerra's eight-year run at the helm of its special situations team, an Axios analysis shows.
Why it matters: The findings, as ISS prepares for Guerra to step aside, run counter to the narrative that the proxy adviser largely favors the investors that make up its client base.
Catch up quick: ISS is the world's biggest proxy adviser, pumping out thousands of reports and recommendations on how investors should vote at annual meetings.
- The U.S. special situations team, which issues recommendations on proxy fights and hostile takeovers, is the highest profile arm of ISS.
- Guerra's departure from that unit has handed the leadership reins to long-time team member, Andrew Borek.
Zoom in: Axios obtained internal ISS reports on the proxy contests Guerra's team covered, dating back to 2017. Using those reports and checking the data through FactSet, Axios analyzed all of ISS' recommendations and their outcomes over Guerra's leadership stretch.
By the numbers: Axios' analysis identified 187 U.S. contests that ISS handled during those years, involving companies as small as $6 million in market value and as big as $250 billion.
- Contests where a recommendation could not be verified or ended in a settlement or split vote were stripped out of the analysis. Almost all contests were activist investors seeking board seats, with just a few hostile takeovers.
- Of 146 contests going back to 2017, ISS supported the dissident in 69 proxy fights, while supporting management in 68 of them, according to the Axios analysis (split recommendations were excluded).
Between the lines: Axios discovered only 9 contests of the 146 where ISS supported management and yet the dissident won, with nearly all of those comprised of small companies.
- The data backs up a common line from advisers: A company does not necessarily need ISS' nod to win a proxy fight but a hedge fund almost always does.
- "ISS is one path for a company to win the support of its key shareholders in a board contest, but even against a formidable activist, companies can overcome an adverse recommendation with effective shareholder engagement," says Duncan Herrington, a managing partner at Jasper Street Partners.
The ISS internal reports show that according to ISS' own calculations, the dissident investor success rate fell in the second half of Guerra's tenure. The data show that in 2020, the win rate spiked to 84% — a huge anomaly in the pandemic year.
- Stripping out 2020, and measuring Guerra's first four years compared to the last four, dissidents fell to an average win rate of 33.5% in the second half of that tenure compared to 40% in the first, the data show.
- Even adding in 2020, the average dissident success rate is still just shy of 50% over the eight years.
Yes, but: In some of the largest proxy fights of the last few years, ISS backed the activist hedge fund, to the frustration of company executives and advisers who felt the proxy adviser buckled to the dissident pressure.
The bottom line: ISS remains an influential force in Corporate America, though it's sway and tendencies are not as clear cut as commonly perceived.
- Stay tuned on whether ISS' new special sits leader follows a similar or different path than his predecessor.
Go deeper: ISS' new leader brings legal eye to corporate battles
