Corporate America’s top shareholder referee gets tougher on activists

[March 30, 2017]  By Michael Flaherty

NEW YORK (Reuters) - Institutional Shareholder Services Inc, the world's top proxy advisory firm, is making activist investors work harder than ever to earn its backing in corporate control battles in a shift being led by the new man in charge of its recommendations.

Since Cristiano Guerra formally took over in January as the head of ISS's special situations research team, the firm's support for activists in proxy fights has fallen to 50 percent of the cases, compared with 60 percent last year, according to data from FactSet and Proxy Insight. (Graphic: http://tmsnrt.rs/2nhYXei)Guerra became acting head on Sept. 1 of last year.

While it is still early in his tenure, Guerra has indicated a greater willingness to challenge activist funds pushing for changes in corporate boards and strategies, according interviews with advisors, investors, and current and former colleagues.

"I think (Guerra) is fair and has no obvious sympathy for one side or the other," said Bruce Goldfarb, CEO of proxy solicitation firm Okapi Partners.

"There will be a more significant burden, more so than in the past, for activists to explain why ISS should support them."

Bought by private equity firm Vestar Capital Partners in 2014, ISS has a staff of 900 covering each year 40,000 meetings of publicly traded companies worldwide, offering recommendations on everything from CEO pay to a board's bylaws. Guerra's team - which also issues recommendations on mergers and acquisitions - wields significant influence over the outcome of proxy fights and contested transactions.

Signs that ISS's stance is evolving from one perceived as more sympathetic towards activist shareholders comes at a time when activist targets are thinning out and smaller in size after a six-year surge in campaigns against corporate boards.

Guerra's most telling decision so far came on March 16, when ISS recommended shareholders for Cypress Semiconductor Corp <CY.O>, which was facing a proxy fight, vote for management's proposal to eliminate cumulative voting. The structure favors minority shareholders because it gives them more power when deciding the fate of individual board members. ISS had rarely recommended to eliminate such a shareholder right in the face of a contested election. Guerra played a key role in ISS adopting the position that by eliminating the cumulative voting bylaw, and adopting other measures, it would the playing field for all shareholders, according to people familiar with the matter. "I don't think ISS would have made that kind of decision five years ago," said one of Guerra's former colleagues, who offered to be interviewed only on condition of anonymity.

A commuter passes by the New York Stock Exchange (NYSE) in the financial district in New York City, U.S., February 7, 2017. REUTERS/Brendan McDermid/File Photo

Guerra, 44, was an executive at an aviation security company before he joined ISS in 2009. Quiet and deliberate, sources say, he has kept a low profile since his appointment and declined to be interviewed. ISS spokesman Subodh Mishra also declined to comment on the company's behalf for the story.

One of the biggest challenges facing ISS and Guerra's team is defending its position as the go to source for shareholder recommendations. Big asset managers, such as BlackRock Inc <BLK.N> and Vanguard Group Inc, are building up their in-house proxy voting arms. Advisory firms such as Camberview Partners LLC and Sard Verbinnen & Co are hiring former ISS staffers and corporate governance experts to expand into proxy advisory work.

The Maryland-based company is under constant pressure to demonstrate its impartiality given it gets paid by institutional funds for its research and recommendations. ISS has increased its reach to companies as well in recent years, which use its consulting arm for corporate governance advisory services.

The U.S. Chamber of Commerce has criticized ISS for siding with shareholders at the expense of CEOs and company directors, and has called for more regulatory oversight, which resulted in a Congressional bill last year that never made it to a vote.

ISS's special situations research team has yet to be tested by a major, high-profile proxy contest under Guerra's leadership. That will come later in this year's proxy season, when it rules on activist hedge fund Elliott Management LP's attempt to overthrow board directors and the CEO of Arconic Inc, the $10 billion specialty metals company.

(Reporting by Michael Flaherty; Editing by Greg Roumeliotis and Tomasz Janowski)

[© 2017 Thomson Reuters. All rights reserved.]

Copyright 2017 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.