Institutional Shareholder Services, the most powerful proxy vote adviser in North America and Europe, appears to be for sale, according to published reports.

The Rockville, Md.-based advisory firm did not respond to requests for comment, but the governance newsletter Global Proxy Watch, published by Stephen Davis—who also writes a monthly column for Compliance Week—reports that ISS is seeking a purchase price of $400 million to $500 million—more than 13 times projected operating cash flow. Credit Suisse First Boston is said to be managing the process.

Another source familiar with the matter confirmed that ISS is for sale at about $400 million and speculated that a financial organization, such as a debt ratings agency or an information services company, could be a potential buyer.

Davis expects news of the sale “to draw immediate and intense attention from institutional investors, corporations and regulators, since control of ISS is a gateway to influence over director elections, stock option plans, mergers and other transactions.” Davis also says a possible sale will “spark some client apprehension” over future ISS ownership.

Indeed, ISS is a kingpin in the world of proxy advice, and its recommendations to institutional investors on how to vote at annual shareholder meetings often carry considerable weight. Who ultimately owns such a powerful voice in the shareholder community is of great interest to corporate governance executives, although many declined to comment for this article.

Fenn

“An apparent sale might well illustrate the danger of having one entity in a small industry that’s largely unregulated that dominates the market,” says Scott Fenn, former president and CEO of the Investor Responsibility Research Center and now managing director of policy at Proxy Governance, one of ISS’ smaller rivals. “There are interesting public policy implications to have an entity with so much influence in the corporate governance market go up for sale to the highest bidder.”

Fenn gives the example of a potential corporate buyer that might want a “kinder, gentler ISS,” or (in what he admits was an “extreme” example) a hedge fund could buy ISS “and use it as an activist tool.”

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.

In recent years ISS solidified its position as the industry’s dominant proxy advisory firm with several acquisitions, including rival Investor Responsibility Research Center in the United States, Deminor Rating in Europe, and Proxy Australia. With 569 employees in 12 locations, ISS says it advises more than 1,680 clients, including investment managers, mutual funds, hedge funds, public pension funds, custodian banks and corporations, and follows developments at more than 35,000 companies.

“I can’t believe ISS is on the auction block, and if it is, I can’t believe it would be for sale to someone like ADP or Computer-share, where they would be back in the position they used to be in where people were concerned about conflicts of interest.”

— Swingvote CEO Anne Faulk

Rumored possible buyers include share registry business Computershare, or Automatic Data Processing, which controls more than 95 percent of the U.S. proxy delivery business. Credit rating agencies Standard & Poor’s and Moody’s Investors Service, which have units that analyze governance as part of credit risk, are other names circulating on the rumor mill.

ADP did not respond to requests for comment. A spokeswoman for Computershare said the company “cannot comment on rumors or speculation.”

Still, Fenn says ADP is “highly interested in the outcome, whether or not they’re a potential buyer,” since it has competed with ISS in certain markets for years. Owning some or all of ISS would make ADP, which has a strong foothold in the proxy distribution arena, a key player in proxy advisory services as well.

Ratings agencies also could be seen as logical strategic buyers since they already have a role in the corporate governance and rating business, according to Davis. Even large institutional investors might consider grabbing ISS “to ensure shareowner control,” although ISS’ high asking price narrows the range of potential bidders, he says.

Easing Conflicts Of Interest

Baladi

Andre Baladi, a corporate governance guru in Geneva and co-founder of the International Corporate Governance Network, says he “wonders whether ISS should not be acquired by a group of prominent global institutional investors, like CALPERS, TIAA-CREF and or Hermes, which is already a shareholder, rather than by ADP, Moody’s or S&P.” Baladi added that Geneva-based inspection group SGS “could also be considered as a possible synergetic buyer.”

Gregory Taxin, CEO of ISS rival Glass, Lewis & Co. in San Francisco, declined to comment, except to say, “I wish them luck at finding a suitable partner.”

Still, Anne Faulk, CEO of Atlanta-based proxy advisory firm Swingvote, is skeptical that the possible sale is anything more than a rumor. “I haven’t heard that ISS is for sale,” she says. “I’ve been in this industry for 20 years and these rumors that ISS is for sale come up every few months.”

Faulk

As for ADP or Computershare as potential acquirers, Faulk tartly dismisses the idea of them making an offer. “I can’t believe ISS is on the auction block, and if it is, I can’t believe it would be for sale to someone like ADP or Computershare, where they would be back in the position they used to be in where people were concerned about conflicts of interest,” she says.

ISS has been criticized in the past as having conflicts of interest because it markets some services to public companies, while simultaneously providing institutional investors with advice on how to vote on issues at those companies. The company has repeatedly countered that criticism by saying it has put firewalls, policies and procedures in place to safeguard against any potential perceived conflict.

“[ISS CEO] John Connolly has done some amazing things to give comfort to institutions and the issuer community, and I don’t think he would do anything that would endanger the dramatic progress they’ve made as far as transparency or reducing the appearance of conflicts of interest,” Faulk says. “It would make more sense that they were trying to raise capital to grow and enhance their services.”

Another source familiar with the matter noted that the timing of the reported sale “puts a big question mark in clients’ minds about what’s going to happen and whether there will be any disruption during proxy season,” since the bulk of proxy firm renewals come in the third and fourth quarters.

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