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August 13, 2001
Proxy Monitor Buys ISS
    by Mark Thomsen

Move gives one firm significant power in influencing the proxy votes of institutional investors.

Thomson Financial recently sold its proxy voting service subsidiary, Institutional Shareholder Services (ISS), to ISS competitor Proxy Monitor. In one purchase, Proxy Monitor more than tripled the number of institutional clients buying its proxy voting services. The number of big players in the proxy voting services market is now down to three.

"The integration of our organizations will be seamless. Both companies share a commitment to serving our institutional investor clients," said James Heard, CEO of Proxy Monitor. "By joining forces, we can provide investors with world-class research and integrated solutions for all their proxy voting and corporate governance needs."

Thomson Financial, part of Canadian information and publishing giant The Thomson Corporation (ticker: TOC.TO), had announced in the spring that it was shopping for a buyer. The Investor Responsibility Research Center (IRRC) and Automatic Data Processing (ticker: ADP), the two other big players in the U.S. proxy voting services market, reportedly had been interested in purchasing ISS.

Proxy Monitor's partners in buying ISS include Warburg Pincus and Hermes Pensions Management, a U.K.-based investment firm owned by the BT Pension Scheme. The terms of the buyout were not disclosed, although it is rumored that Thomson Financial received $45 million for the company.

Thomson sold the company as part of an ongoing effort to refocus its core business. It had been letting ISS languish for some time; for example, last year it blocked the subsidiary's effort to buy Fairvest, a Canadian firm specializing in corporate governance research and related services. Proxy Monitor bought Fairvest in December 2000.

The services that proxy voting service firms offer their clients can include analysis of proxy voting issues, ballot processing, vote recommendations based either on the proxy voting firm's guidelines or the client's guidelines, and vote execution. Of ISS, Proxy Monitor, IRRC and ADP, only ISS and Proxy Monitor offer vote recommendations based on their own guidelines.

ISS has about 500 clients that utilize ISS proxy voting services. According to Pat McGurn, Vice President of ISS, the combined assets of those clients "is in the trillions." For a bit of perspective, the total market value of the Wilshire 5000 index was between $14-15 trillion at the end of 2000.

While the firms will consolidate their proxy issue analysis functions, McGurn says Proxy Monitor and ISS will maintain their respective voting guidelines, and each will continue to make proxy vote recommendations based on those guidelines.

"We are not seeking to homogenize or blend the policies," said McGurn. "Investors that want to continue to get both sets of recommendations and determine which one they like better still can do that."

Scott Fenn, President of IRRC, believes institutional investors may be concerned that there is basically only one provider of recommendations for proxy votes now. He also raised an issue regarding the impartiality of one of ISS's new owners.

"Hermes is a prominent shareholder activist in the U.K.," noted Fenn. "People will wonder if ISS has an agenda now; Hermes files shareholder resolutions on one hand, and ISS makes recommendations to stockholders on how to vote on resolutions on the other."

It is unclear what the long-term effects will be of this buyout. What is certain is that one firm now wields enormous influence on the outcome of corporate governance and social and environmental shareowner resolutions across the country.


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