Financial Accounting Blog

Thursday, June 17, 2004

Conflicts of Interest? Can shareholders trust the Institutional Shareholder Services (ISS), or are there potential conflicts of interest? The ISS provides proxy voting and corporate governance services. Its core business is analyzing proxies and issuing informed research and objective vote recommendations to more than 20,000 shareholders each year.

However, the SEC has questioned whether there exists conflicts of interest between ISS and the shareholders who use their service. ISS's business is reporting to big shareholders on how to vote their proxies. Yet, ISS accepts payments for these services from the very companies whose business it is reviewing and ranking.
A recent opinion letter from the Securities and Exchange Commission has encouraged institutional investors, who often follow ISS advice on company referendums, to take a closer look at ISS' relationship with its corporate clients.

According to Gustitus [spokeswoman for ISS], about 15% of ISS' revenue comes from its 400 corporate clients, with the remaining 85% coming from institutional investors. Considering that the firm analyzes some 8,600 proxies, reflecting virtually all U.S. public companies, during the regular proxy season, ISS likely issues investor reports on the proxies of nearly all its corporate clients, she said.