Institutional Shareholder Services Research Paper

The firm researches proxy issues, makes voting recommendations to 1,635 investor institutions and electronically transmits their votes — and in some cases casts those votes according to its guidelines unless the client tells it otherwise. Another 700 clients are corporations.

"People always ask," said Patrick S. McGurn, executive vice president, "why did this become the center of the universe?"

That is how many regard I.S.S., which leads a close-knit industry while pressure is building on institutions to make full use of the corporate ballot. I.S.S. decisions, for example, can affect whether directors serving on, say, Pfizer's compensation committee should be re-elected. (I.S.S. recommended withholding votes for two of four.) It also advises on major corporate acquisitions, like Hewlett-Packard's merger with Compaq Computer. (It favored the deal.)

I.S.S.'s chief competitor in this business is Glass, Lewis & Company of San Francisco. A third is Proxy Governance in Vienna, Va., another Washington suburb. Both proclaim themselves free of conflicts of interest, because, they say, they do not advise corporations on governance issues.

This month, the combined, growing influence on the proxy system of all of the advisory firms led a New York Stock Exchange working group, citing "potential for possible conflicts," to call for a study of the advisers' role by the Securities and Exchange Commission. I.S.S. said that while the recommendation seemed to be based on a "lack of understanding, " it would be pleased to participate. The other firms said that they would welcome S.E.C. scrutiny.

From its start in 1985, I.S.S. now has more than 500 employees and a dozen offices around the world. Its clients range from mutual fund giants like Fidelity to smaller groups like Mennonite Mutual Aid. Glass Lewis, founded in 2003, has about 200 clients, according to Gregory P. Taxin, its chief executive. Some clients use both services.

I.S.S. says that it was the first to advise institutions on votes, offering broad research now covering 35,000 companies in 15 countries. It calls itself the only provider of "soup to nuts" service, which includes researching and making recommendations on issues like mergers, poison pills, boards with staggered tenures and the fitness of directors. It also collects and transmits ballots.

The logistical part of the business "has become equally, if not more, important than the actual research part," said Cheryl Gustitus, a senior vice president. "What clients have outsourced is the back office."

Critics complain that governance thinking has become overly concentrated and that institutions shirk their fiduciary duty by farming out the job. "I question the qualifications of all these firms in making recommendations," said Gary Lutin, a New York investment banker who is an adviser in corporate control contests. "It's like having a bunch of ivory-tower political theorists decide how to run the government."

Broader research by I.S.S., he said, would likely have uncovered more facts during the spring about National Presto Industries, a Wisconsin maker of small appliances. I.S.S. favored management in ballot issues involving the election of a director and the company's status as an operating company. But the S.E.C. had found that the company should be considered an investment company. I.S.S. defended its recommendations by saying that the company would better serve shareholders as an operating company.

What's more, according to other critics, including competitors, the I.S.S. approach tends to be one-size-fits-all. Most clients do subscribe to a standard I.S.S. policy, a core of guidelines intended to allow consistent application in all proxy reviews. But the firm rejects criticism of this, saying that about 340 clients develop their own policies and then mesh them with the I.S.S. guidelines. There are special policies for labor unions and clients that follow what they call faith-based or socially conscious principles.

The client "always has the final word," said Jamie Heard, vice chairman and part owner of I.S.S., a privately held firm whose majority owners are the British investment firms Warburg Pincus and Hermes. "The idea that institutions are just blindly following I.S.S." is false, he said. Some 75 percent of the votes it transmits require a signoff by the client or are cast by specific instruction.

About 25 percent, added Ms. Gustitus, are on a policy of implied consent under which votes are cast according to I.S.S.'s annually updated guidelines unless otherwise instructed.

Glass Lewis, which has 105 employees in five offices, says its emphasis is on identifying hidden risks in accounting, regulation, litigation or governance. The goal, Mr. Taxin said, is to enable its clients to avoid disasters like the Enron collapse. Mr. Taxin says that while clients include short-selling hedge funds, more than 90 percent of clients maintain only long positions.

I.S.S. points to what it calls "robust" procedures to avoid possible conflicts arising from its practice of serving both investors and publicly traded companies. One, it says, is a firewall that separates corporate services from the rest of the company. Another is the disclosure to investor clients of detailed information about corporate relationships, including dollar amounts of fees.

I.S.S. says clients would shy away if its structure made them uncomfortable. "We have a 95 percent renewal rate across our client base," Ms. Gustitus said.

One largely satisfied customer is Mennonite Mutual Aid, based in Goshen, Ind. It has about $1 billion in stock funds and other portfolios. "They help us shape and sustain our faith-based voting policy," said Mark A. Regier, the investment manager. Mennonite Mutual Aid pays I.S.S. between $40,000 and $50,000 a year for advice, without which, Mr. Regier said, he would have to increase staffing.

Mr. Regier says he mostly goes along with I.S.S. recommendations. He called it "troubling" that I.S.S. has corporate clients because this might make for easy acquiescence to corporate assertions that a governance problem was being properly addressed. In addition, Mr. Regier said he was displeased when I.S.S. last year bought the Investor Responsibility Research Center, a Washington research group on governance issues. "It took another voice out of the marketplace," he said.

Proxy Governance, which declines to specify its number of clients, runs a highly automated service from a single office. The company, a start-up aided by money from the Business Roundtable, a group of corporate executives, issued its first report in January 2005.

Steven. M. H. Wallman, founder and chief executive and a former member of the S.E.C., says his competitors' services are not refined enough. Their advice does not provide context, he said, for "ideas such as that poison pills are always bad or all chairman and C.E.O. jobs should be split."

"What I saw in I.S.S. was an institution that had become quite insular in its thinking," he added.

JOHN M. CONNOLLY, the chief executive of I.S.S., said last week at the new Yale Center for Corporate Governance and Performance that he would favor establishment of an industry database on governance to be available to academics and the public, a project long advocated by Mr. Lutin. Mr. Taxin said he would support such an effort; Mr. Wallman reserved judgment.

At the moment, the firms do not provide advice for individuals. Those investors who want to take the trouble must wade through weighty, often baffling, proxies on their own. If you don't vote shares held by your broker, you are by default siding with management, though the stock exchange study recommends that brokers no longer vote such shares for election of directors.

Online transmission of votes is an option for clients of Foliofn, a brokerage firm and the parent of Proxy Governance. I.S.S. officials smiled when asked whether their own firm might develop a retail business.

"We've looked at it from time to time," said Mr. Heard, but he does not see much chance of a groundswell of interest that would make it profitable.

"It's more likely," added Mr. McGurn, that another electronic broker "would be willing to pay for it in bulk and provide it to people as part of the service."

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Application

I applied through an employee referral. I interviewed at Institutional Shareholder Services (Norman, OK) in July 2017.

Interview

Be prepared for a full morning of meeting with people who shouldn't be allowed to interview people. You will meet with 6 people, two at a time, three rounds. They do not coordinate questions, so you will be repeating yourself for three hours. 4 of the 6 people will not be supervisors or managers, but your peers. It's somewhat obvious that they have never worked in another office after they graduated college.

The job description is not near clear enough on what they are looking for in a candidate. It states that "Information technology skills (SQL, VB, programming, etc.) a plus". Half of my questions were in regards to IT and programming. The other half will be financial questions. In my phone interview I was told that the finance side of the job was something that could be picked up as you went along. You definitely need a financial background to be able to apply for this role.

A majority of the interviewers will be under the age of 27; they dress and act their age (Professionalism is not a strong suit of ISS from what I could gather). A lot of my questions from the younger individuals had nothing to do with the job or if I was qualified to fill the position, but rather were questions to gauge if they liked me as an individual.

If you have any post collegiate work experience, or have an advanced degree, the questions will focus on parts of the job in which you would have no clue how to answer without the company first training you. 2/3 of the interview was basically the interviewer trying to prove to you that they are smarter than you are.

Major takeaways from this interview - you NEED to have a financial background with some programming ability. Most of the difficult (non-personal) questions are in relation to those two fields.

Interview Questions

  • If an ex-coworker was here right now, what is something they would say nice about you, and something they would say poorly about you.   Answer Question
  • Are proficient are you in Excel? What is your favorite algorithm to use in Excel?   Answer Question
  • What makes you think you would be an asset to the SCAS team?   Answer Question
  • I don't recall the financial terms, but I was asked to explain the difference between a ___ account and a ___ account.   Answer Question
Institutional Shareholder Services 2017-08-04 11:12 PDT

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