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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 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 jaundiced view.

"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 "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.

Interestingly, IRRC 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, 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 "The absorption of IRRC will further solidify that dominance."

"ISS 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 merger negatively."

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. McRitchie.

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 Services (SIRS).

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 "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 market."

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 "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.


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