A risk-analysis business with strong ties to Wall Street has scooped up proxy advisory giant Institutional Shareholder Services for roughly $550 million, a deal that may further embed corporate governance into the decision-making processes of global institutional investors.
Just more than a month after rumors that ISS was on the auction block, financial risk-management firm RiskMetrics Group announced plans to acquire it. While financial terms were not disclosed, published reports estimate the cash-and-stock deal at $540 million to $550 million.
Spun out of JP Morgan in September 1998, RiskMetrics Group, led by Chief Executive Officer Ethan Berman, provides financial-risk research and analytics to banks, central banks, hedge funds, asset managers, pension funds, and corporations.
Davis
Compliance Week columnist Stephen Davis, the global shareholder expert who originally broke the ISS story in his Global Proxy Watch newsletter, says he does not expect the sale to make a major difference to ISS’ current clients. However, he says, “It represents a mainstreaming of governance into the Wall Street environment that hasn’t happened before … For [RiskMetrics] to buy ISS is kind of affirmation that governance is central part of the investment culture.”
The deal, backed by all members of the RiskMetrics board and its three investors—Spectrum Equity Investors, General Atlantic, and Technology Crossover Ventures—is expected to close by year-end or soon after. ISS will operate as a separate, wholly owned subsidiary of RiskMetrics Group. ISS’ John Connolly will remain as CEO, and he will join the RiskMetrics board.
A press release announcing the deal says it reflects “the broader vision of both companies to expand beyond their core businesses of financial risk management and corporate governance to offer a broad range of data, analytics and advice to investors.”
The combined entity will generate over $200 million in revenue annually with some 800 employees in 23 offices serving over 2,400 clients worldwide, according to the companies.
“By bringing together our industry leading solutions, our respective areas of expertise and our acute understanding of institutional investors’ needs, we will be in a position to serve an even broader range of fiduciary and risk management requirements,” Connolly said in a statement.
While RiskMetrics may not be well known in the governance world, Davis says it’s a “compatible match” since governance relates to risk and performance. “I think it’s a clever fit, but it’s also another step forward in the mainstreaming of corporate governance,” he says.
When rumors of an ISS sale surfaced in September, the Rockville, Md.-based advisory firm was said to be seeking a purchase price of $400 million to $500 million, with share-registry business Computershare, proxy-delivery giant Automatic Data Processing, and credit-rating agencies Standard & Poor’s and Moody’s Investors Service all cited as potential buyers.
The sale was of particular interest to the governance world, since ISS’ recommendations to institutional investors on how to vote at annual shareholder meetings often carry considerable weight. In the past, ISS has been criticized as having conflicts of interest because it sells some services to public companies while simultaneously advising investors on how to vote on issues at those companies. ISS has repeatedly countered that criticism by saying it has put firewalls, policies and procedures in place to safeguard against any potential conflict.
Faulk
“I can’t think of any transaction in the entire 20 years the corporate governance industry has been in existence that has been more acutely watched than this one,” says Anne Faulk, CEO Swingvote, which provides proxy-related software to institutional investors. “The ISS board clearly had to be careful not to sell themselves to anyone who might even marginally be perceived to have an agenda.”
Faulk also praises ISS’ looming new owner. “RiskMetrics has a great reputation and if Ethan Berman’s intent was to expand and deepen the services they provide for their clients and to prepare for an IPO, he made a thoughtful acquisition,” she says. “I’d be very surprised if ISS’ clients weren’t all celebrating this decision.”
ISS last changed hands in 2001 when Thomson Financial sold it for a reported $45 million to a collection of investors, including Warburg Pincus and Hermes Investment Management. ISS solidified its position as the industry’s dominant proxy-advisory firm with several acquisitions in recent years, including rival Investor Responsibility Research Center in the United States, Deminor Rating in Europe, and Proxy Australia.
White: Remember Principles For Related-Party Disclosures
Companies may need to rethink their disclosure of related-party transactions to meet the standard for principles-based disclosure set forth under the Securities and Exchange Commission’s amended rules; so warns the agency’s Division of Corporation Finance chief.
In a speech to the Society of Corporate Secretaries and Governance Professionals earlier this month, John White stressed the need to return to the principle behind revised Item 404 of Regulation S-K, which sets forth the standards for when a transaction with a related person must be disclosed.
While the SEC set forth a few narrow, specific rules and provided narrative discussion and guidance to help with the application of the principle, White said that “mostly … you must be ready to return to the basic principle. It is the principle that matters.”
He gave an example of how charitable contributions, which aren’t mentioned specifically in the SEC’s rulemaking, might fit the analysis. “I have heard very intelligent people assert, quite emphatically, that a charitable donation cannot trigger required disclosure, allegedly because it cannot be a transaction—‘it’s only a gift’—for these purposes,” he said. “I respectfully disagree.”
Rather, he said, he believes nothing in the rule “forecloses the possibility” that a charitable contribution may indeed be a related-party transaction subject to disclosure. For example, a contribution could be made to a charity where the board member’s son-in-law works, and the contribution might keep the charity (and the in-law’s job) afloat.
“Remember the broad definition the Commission uses for ‘transaction’ as well as the rest of the key objective behind related person transaction disclosure,” White said.
The emphasis on principles-based disclosure in White’s speech “reflects a regulatory trend against reliance on bright-line rules and toward a more demanding, fact-based analysis of related person transactions and other disclosure issues,” says Tobias Knapp, a partner at the law firm Jenner & Block.
Public companies should put in place a process to prepare 10-K and proxy statements “that ensures they can live up to the challenges of principles-based disclosure,” Knapp says. Some related-person transactions “will need to be reconsidered this year in light of the SEC’s new rules and to ensure the underlying facts of the relationship are collected and analyzed appropriately from the perspective of principles-based disclosure.”
White’s speech illustrates that related-person transactions “can begin to look very different, and appear more or less material to the company, with each additional layer of factual context,” Knapp continues. Officers and directors should be “sensitized to the importance of the facts they provide to the company’s disclosure process.”
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