July 19, 2005
The Lowdown from Corporate Governance and Proxy Advisory Experts on ISS-IRRC Merger
by William Baue
Implications of the buyout of the Investor Responsibility Research Center by Institutional
Shareholder Services on social research and competition in proxy advisory services.
Critically analyzing mergers (among many other corporate actions) is the bread and butter of
Institutional Shareholder Services (ISS), the giant proxy advisory firm. Now, ISS is the
subject of such analysis in its own industry after it bought the commercial business of
the Investor Responsibility Research Center (IRRC). IRRC has been analyzing social, environmental, and
corporate governance issues since its founding in 1972 and recently entered the proxy advisory
field. Responses to the merger read like a series of ISS proxy voting recommendations, with
opinions ranging from enthusiastic approval to cautionary warnings to bald opposition.
"It is a great deal for everything that I believe in," said ISS founder Bob Monks, who is no longer with the firm though
his son, who shares his name, currently chairs the ISS board. "It brings better and more varied
service for the customers of both ISS and IRRC."
"ISS has gone beyond my original vision
in terms of global capacity," Mr. Monks told SocialFunds.com. ISS recently acquired leading proxy
services firms Deminor Rating in Europe and Proxy Australia. "I am really proud of ISS's record of
'calling 'em the way they see them' (notwithstanding that on two occasions they called them against
me!)--this unbroken record of integrity stands in marked contrast to the record of traditional
professional firms over the last decade."
Rivals, as might be expected, are taking a more
"This transaction will have a major impact on the competitive landscape
and choices that are available to the market--we believe too much power is going to be concentrated
in ISS' hands after this deal," said Greg Taxin, CEO of Glass Lewis, a leading competitor in the proxy advisory
field. "It is important to remember that ISS has a point of view: it is a partisan."
"ISS' viewpoint, right or wrong, will now carry significantly more sway with actors in the
capital markets, including with institutions that did not choose ISS' research and viewpoint," Mr.
Taxin told SocialFunds.com. "And we know that ISS has used even its prior position of (relatively
weaker) power to cajole corporate issuers to pay it 'consulting' fees."
Mr. Taxin points
out that Glass Lewis does not sell consulting services to issuers.
provides proxy voting services to Glass Lewis, and ISS intends to honor all existing contracts,
meaning that ISS will now administer the actual vote casting (according to Glass Lewis
recommendations) for some Glass Lewis clients.
Corporate Governance expert James
McRitchie, publisher of CorpGov.net, shares some of these concerns, but
takes a much more measured view.
"In the last few years, even with the rise of several
other proxy advisory services, it has become apparent that ISS is dominant in the US and is quickly
becoming so worldwide--its opinion can make or break proposed mergers and other corporate
governance decisions involving the votes of institutional investors," Mr. McRitchie told
SocialFunds.com. "The absorption of IRRC will further solidify that dominance."
analysts increasingly take on the role of a corporate governance priesthood, weighing an ever
increasing multitude of factors to render advice on how to vote, but who holds them accountable?"
he asks. "However, since I agree with ISS more often than not, it is difficult for me to view the
Mr. McRitchie speaks favorably about the outcome for IRRC.
"For IRRC, the merger appears like a real win--they get an honorable exit from the day-to-day
proxy advice business and $10 million to fund a return to their original roots," said Mr.
The sale of IRRC's commercial business funds the endowment of a new independent
nonprofit corporate governance and social/environmental issues think tank called the IRRC Institute
for Corporate Responsibility (IICR). ISS will make a one-time financial infusion and ongoing
in-kind contributions to IICR, which will be formed by a sub-committee of the IRRC board but will
eventually have its own board and executive director.
For the socially responsible
investment (SRI) community, the fate of IRRC's social and environmental research is of particular
interest. IRRC's SRI research capabilities will be folded into ISS' Social Investment Research
IdealsWork, a corporate social and
environmental analysis technology provider that receives SRI data from IRRC, welcomes the move,
according to IW President and CEO Sam Pierce.
"With the addition of IRRC, ISS has
substantial opportunities for delivering
increasingly sophisticated, investment-grade social
research data," Mr. Pierce told SocialFunds.com. "We look forward to working with ISS, as we have
for years with IRRC, to develop and deliver cutting edge tools and applications to the investment
ISS promises to maintain the integrity of IRRC's SRI research, according to
Cheryl Gustitus, senior vice president of communications at ISS.
"IRRC has done a great
job in the area of SRI research and we intend to continue that," Ms. Gustitus told SocialFunds.com.
"We think we'll be able to enhance the research and make it more accessible to the market through
the investment ISS has made in technology platforms and data procurement."
"We are not
planning layoffs as a result of this merger, so research continuity should be assured," she added.
The newly-merged company will employ a staff of 500 in 11 global offices, with analysts
covering 33,000 companies in 115 markets.