Business Opinion: Institutional Shareholder Services (ISS), the US proxy voting and corporate governance consultancy, is starting to make its presence felt in Ireland.
Last week they turned up at the annual general meeting of DCC and voted against the re-election of a number of the great and good of Irish business life to the services company's board. ISS voted some 12.5 million shares against the re-election of Alex Spain as chairman and Tony Barry as a non-executive. Both have served more than nine years on the DCC board which - in the view of ISS - is too long to ensure that they are truly independent. They also voted against the re-election of two executive directors, Tony Breen and Fergal O'Dwyer, as they believe only the chief executive should be on the board of a plc. All four were elected by a majority, with something in the region of 75 per cent of the vote. ISS was acting for a number of unnamed institutional investors who it advises on corporate governance issues.
The Washington DC-based group audits companies against its own corporate governance criteria and then advises institution investors from a corporate governance perspective on how they should vote the shares they hold on behalf of investors at annual general meetings etc.
DCC is just the latest in a series of Irish plcs that have had the pleasure of ISS attending their annual general meetings. Others include CRH and AIB.
There a several reasons why investment institutions use proxy services like ISS. Some genuinely believe that pressurising companies they invest in to comply with corporate governance best practice may drive higher returns in the longer term. Others might just feel the need - or be legally required - to pay some sort of lip-service to the whole corporate governance issue in the post-Enron world.
Regardless of the reason, ISS and its counterparts are set to be a fixture of Irish corporate life for the foreseeable future and already there are grumbles a plenty coming from the plc community.
In particular some concern has been expressed about what is seen as a toughening up of the criteria by which ISS is judging Irish plcs, although this is anecdotal. When contacted about this on Friday ISS didn't respond, but the company's website ISSproxy.com devotes a considerable amount of space to explaining their criteria - which are constantly being updated via feedback from industry participants - and the philosophy behind their business.
The second more serious grumble is that ISS faces a very significant conflict of interest because it also offers corporate governance compliance consultancy to plcs. Thus, the higher the corporate governance bar that ISS sets for companies to jump over, the greater the pool of work available for its consultancy division.
ISS would argue that it has various measures in place to avoid such a conflict and again goes into the issue in some depth on its website.
The whole issue of conflicts faced by ISS and competitors arose several years ago in the US where the proxy voting industry is well established.
In 2004 the Securities and Exchange Commission addressed the issue in a published letter to one of ISS's competitors called Egan Jones. In the letter the SEC held that there was a risk that institutional investors could be in breach of their fiduciary duties if they followed the advice of a proxy adviser in respect of a plc because the proxy adviser could advise them to vote in a way that favoured the proxy adviser. The most obvious way the adviser could do this would be to create a climate in which the plc felt obliged to seek advice from it about corporate governance.
The SEC concluded that institutions should take steps to ensure that this didn't happen, including asking the proxy firm to disclose any relationship with the plc in question before taking their advice on how to vote.
ISS subsequently sought clarification from the SEC, who in another published letter accepted their contention that an investment firm could also rely on the proxy advisers own conflict avoidance procedures in deciding whether its advice was impartial
Ultimately the SEC appears to have left it up to the institutions themselves to decide how best they want to discharge their fiduciary duty to ensure that proxy advice was free from conflict.
And there the issue appears to rest. Unsurprisingly the Irish regulators have had little to say on the matter, but hopefully institutions using proxy advisers to vote their shares in Irish plcs have taken the SEC's advice on board.
Anything that promotes higher corporate governance standards in Irish plcs is to be welcomed and it would be a shame if any of the mud currently being thrown at proxy advisers was to stick.
