• A World Without ISS?
  • February 10, 2012 | Authors: W. Brinkley Dickerson; Eric A. Koontz; David I. Meyers; Vincent J. Pisano; Candice L. Priest
  • Law Firms: Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - New York Office ; Troutman Sanders LLP - Atlanta Office
  • Bear with us for a minute . . . Imagine a scenario where every public company decides to follow the gospel of ISS - whole-hog, 100% of the way. They all elect independent chairmen, do away with poison pills, implement majority voting and proxy access, have only super-independent directors and even reincorporate in the most shareholder favorable state in the country, whichever one that might be. Moreover, each company adopts a compensations system that is entirely TSR-based and fully-compliant with the new ISS pay-for-performance analysis, and there would be no signs of any perquisites. Would ISS cease to exist?

    Of course not.  ISS is a for-profit company, not an eleemosynary institution, and presumably it would adapt by setting new governance and compensation standards, and then rating companies upon their achievement, or non-achievement, of those new standards. If this sounds like a bit of a shell game, it should.

    It is our hope that directors and, more critically, investors internalize this reality. The governance and compensation attributes that ISS requires as a prerequisite to a favorable recommendation are, first and foremost, designed to create a successful business model for ISS. While there is no argument that many of these attributes represent good corporate governance practices, there is little substantive evidence that supports the importance or validity of most of them to the creation of shareholder value. In fact, among the 20 companies in the current S&P 100 whose market value increased the most over the past 20 years, few of them complied at a meaningful level with ISS’ most ambitious practices.

    As directors make critical governance and compensation decisions this proxy season, and as management provides input to those decisions, we believe that the best decisions are made by bringing their collective experience and wisdom to the process and applying their business judgment to the facts before them. Their understanding of the business, of the skills and personalities of the management team, of the general economy, and of the other factors that influence the business' performance, are much better at yielding good decisions for shareholders than any rating model imposed by ISS. Indeed, it may be that in order to best serve shareholders, directors should accept lower favorable votes for reelection or for the advisory votes on compensation. We believe this would be a small price to pay for making the best decisions under the circumstances and putting shareholders first.