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In re Lear: Its Tough to Be a Proxy Advisory Service In VC Strine's Court (Part 4)

By J. Robert Brown

VC Strine doesn't like proxy advisory services, with ISS at the forefront.  ISS of course provides recommendations on matters voted upon by shareholders.  That he views the influence of ISS in negative terms has been clear from his extra curricular activities.  In a talk that became an article, he noted: 

• With power dynamics changing toward activist institutional investors, independent directors who wish to remain in the game will seek to avoid the ire of Institutional Shareholder Services (ISS), the business op-ed commentators at the New York Times, and so forth.

He continues in that vein in the Lear decision.  Apparently ISS doesn't make the decision based upon the best interests of shareholders but out of a need to garner additional business.  As VC Strine described:  "And the incentives of a firm like ISS also give it reason to play coy.  In order to demonstrate its value and clout to its customers, ISS has an incentive to act as a quasi-negotiator, using the proxy solcitiaton process as a way to encourage a higher bid, and using its recommendation tool to extract value." 

ISS is an organization that largely assists shareholders in making decisions when they vote.  In fact, while there is no doubt that proxy advisors are influential, large shareholders make their own decisions.  Studies have noted this.  A recent article on the election of directors at JC Penney indicated that most of the proxy advisory services (including ISS) had recommended a vote against the Penney board.  Nonetheless, it seems that the institutional investors made up their own mind.  As the article reported:

• But many of the fund managers that make up a big chunk of J.C. Penney shareholders -- 94% of the company is owned by institutional investors -- had other ideas.

• A review of regulatory filings made during the past two weeks shows that some of Penney's largest shareholders, including Legg Mason Value Trust, Bill Miller's mutual fund (which has around a $200 million stake in Penney), and Vanguard 500 Index Fund ($83 million), voted for the directors.

But VC Strine doesn't want anyone aiding shareholders.  In the pro-management environment of Delaware, this is an anathema. 

Full post as published by The Race to the Bottom on October 08, 2008 (boomark / email).