* Morgan Stanley hired to explore options for controversial unit
* ISS accounts for about 11 percent of MSCI's revenue
* MSCI shares down 1 percent
Oct 31 (Reuters) - Stock market index provider MSCI Inc said on Thursday that it was exploring strategic options for its influential and controversial proxy advisory unit, Institutional Shareholder Services Inc.
ISS had been through a series of owners before MSCI bought it in 2010. The unit accounted for about 11 percent of MSCI's total revenue of $258.2 million in the third quarter.
ISS has more than 1,700 clients for its corporate governance services overall, well ahead of competitors like Glass, Lewis & Co of California.
But ISS's services, like recommending how big investors should vote their proxies on corporate shareholder matters, have drawn much criticism in recent years. Companies and trade groups have questioned ISS's methodologies and periodic opposition to management on various high-profile matters.
"I think every company that has owned/controlled ISS has found it a difficult proposition, especially if they also sell services/products to corporate issuers," said Edward Hauder, senior advisor of Chicago area executive-pay consulting company Exequity, via e-mail.
Another Exequity executive drew attention last year with a memo noting how MSCI's own executive pay practices might not meet the standards by which ISS judges other companies.
An ISS representative said executives would not comment. An MSCI spokesman said executives were not immediately available for comment.
MSCI Chief Executive Officer Henry Fernandez said in a statement that the time was right to explore alternatives for the business. "Over the past three years, MSCI has worked hard to return that business to a growth track," he said.
John Coates, a Harvard Law School professor and former mergers and acquisitions specialist, said a sale might solve a strategic problem for MSCI. Its market index business has plenty of room to grow, while ISS is more mature, he said.
But ISS may have few obvious buyers, Coates said, "partly because of conflicts, partly because it's an unusual business, with few obvious synergies (that don't generate serious conflicts)."
Morgan Stanley is MSCI's financial adviser, and Davis Polk is the company's legal adviser.
In a separate statement, ISS said it expected its current management team to remain in place.
Also on Thursday, MSCI reported a 14.6 percent rise in third-quarter net income to $55.3 million, or 46 cents per share.
Shares of MSCI fell 1 percent at $40.85 in morning trading. At Wednesday's close, the stock had risen 33 percent since the beginning of the year.