Cachet of I.S.S. Questioned with M&A Departure
General Assignment Reporter
Institutional Shareholder Services, the biggest proxy advisor firm, may be losing its expert grip. One of its key executives just left the firm: Qin Tuminelli, who spearheaded the mergers and acquisitions research.
Tuminelli’s leaving comes just a year after the exit of Chris Young, who, as head of M&A and proxy contest research, held the signature slot on most I.S.S. opinions.
Update: Tuminelli is not the only departure from the M&A team at I.S.S., with a source confirming that Waheed Hassan has left as well. Hassan is a chartered financial analyst whose previous position was manager of M&A and proxy contest research at the firm. According to Hassan’s LinkedIn profile, he worked at ISS until February 2011.
Proxy advisors make recommendations to institutional shareholders on how to vote on various corporate governance issues from the composition of the board, to executive pay, to merger proposals. During high-profile, or “contentious,” merger contests, I.S.S. and its competitors jockey for influence, issuing recommendations that used to be taken at face value by investors using their services.
It seems now they’re taken with a grain of salt. The latest evidence that I.S.S. is losing touch with shareholders: HP's nomination of a new board. I.S.S. says the new slate of directors has too many ties to CEO Leo Apotheker, according to a report obtained by CNBC on Wednesday. The news came out last night, but, judging by the fact that the stock is beating the market today, shareholders just don't care.
In recent deals, investors’ actions have spoken louder than the words. They clashed with I.S.S.’s opinions on the buyout of J. Crew, the reincorporation of Pure Bioscience, and the acquisition of a distressed Dynegy—to name a few.
In December, I.S.S. supported three of five nominees to the board of Lions Gate by shareholder and potential acquirer Carl Icahn, with I.S.S. competitor Egan-Jones supporting all five. Shareholders instead blocked those nominees in favor of a full slate chosen by Lions Gate.
Looking at the data, Glass Lewis emerges more unscathed, with its successful recommendations often aligning with shareholders—even while opposite I.S.S.
There's no doubt I.S.S. has seen a lot of changes in the past couple of years. MSCI Barra, the former indices arm of Morgan Stanley, purchased I.S.S. parent RiskMetrics for $1.55 billion in 2010 after approaching the company in late 2009. When the deal closed, a question mark still hung over the fate of I.S.S., according to people familiar with the transaction. Young's departure for Credit Suisse occurred around this time, leaving the M&A research team under Chris Cernich. The team still has five members, which firm spokesperson Gary Hewitt called “a pretty deep bench.” Tuminelli could not be reached at home for comment.
Even though its M&A advisory may need some recovery, the bread and butter of a firm like I.S.S. remains casting proxy votes in non-contentious situations for institutional clients like BlackRock, whose portfolios span so wide it makes individual voting difficult. While this unit experiences higher turnover, Tuminelli’s is the only recent departure on the M&A side.
When the company was acquired at a valuation of 35 times forward earnings, MSCI chief Henry Fernandez said owning RiskMetrics would generate $750 million in sales and would reduce the entire group’s earnings volatility.
On the fourth-quarter earnings call, Fernandez said the governance business remains a “turnaround” story.
Follow Kayla Tausche on Twitter: @kaylatausche
*This post has been updated.