“SEC Charges Institutional Shareholder Services …” is the sort of start to a headline that might make you think, ha ha ha SEC, always going after the bit players who keep big companies honest rather than the dishonest companies themselves. How’s Egan-Jones doing? But that wouldn’t be fair, for one thing because ISS – which tells lazy shareholders how to vote on proxy proposals and mergers and stuff – is kind of a Goliath itself these days, though not as much as it was last week. And also because this is really quite intensely bad:
From approximately 2007 through early 2012, an ISS employee (“the ISS Employee”) provided information to a proxy solicitor concerning how more than 100 of ISS’ institutional shareholder advisory clients (i.e., institutional investment managers) were voting their proxy ballots. In exchange for vote information, the proxy solicitor gave the ISS Employee meals, expensive tickets to concerts and sporting events, and an airline ticket. The ISS Employee, who had access to all of ISS’ clients’ proxy voting information, gathered the information by logging into ISS’ voting website from home or work and used his personal email account to communicate voting information to the proxy solicitor.
I mean! It’s not that bad for, like, the world, in the sense that institutional shareholders’ voting plans aren’t really nuclear launch codes or anything. I guess you could get up to some nefarious things with them – insider trading on close votes, etc. – but it sounds like they were mostly used for typical proxy-solicitor purposes.1 Which are mostly (1) calling up the shareholders and being all “hey why don’t you vote for us rather than for the other side?” and (2) impressing their clients with the extent of their knowledge about who’s voting how. I mean, why hire proxy solicitors if not for their knowledge of how investors are voting? You could call the shareholders yourself. One hopes.
Nor is it that bad for its scale; I always feel a little sorry for people who embark on multi-year courses of corrupt and possibly illegal activity in exchange for, like, lunch.2 These are not criminal masterminds that we’re talking about here.
Nonetheless you have to be impressed by the purity of the corruption. Interdealer brokers take traders to meals, sporting events, and strip clubs for the purpose of persuading them to do legitimate business with the brokers; the path from “I’ll buy you lunch to talk about the services we provide” through “I’ll buy you lunch to make you feel you owe us some business” and “I’ll take you to a strip club to make you feel you owe us some business and also that if you don’t throw us some business I might have some embarrassing photos” to “ah, fuck it, I’ll manipulate Libor for you if you just throw us some wash trades” is an easily understandable one. Here, though:
The proxy solicitor worked to cultivate relationships with employees in ISS’ account management group, but ISS did not provide training for its account managers concerning how to interact appropriately with a proxy solicitor even though: (a) one of the most important roles of a proxy solicitor is to inform their clients how shareholders are voting their proxies, (b) during the relevant time period, there was virtually no legitimate business reason for ISS’ account managers to have relationships with proxy solicitors, and (c) all of ISS’ account managers had access to voting information that would be very helpful to proxy solicitors.
Right? Maybe someone at ISS should be communicating with proxy solicitors but it’s surely not the account managers whose job seems to be “assisting [shareholder] clients in their use of ProxyExchange [ISS's voting tool].” ISS and the SEC settled, with ISS paying a $300,000 fine, adopting “a Policy on Interactions and Communications with Proxy Solicitors and other Advisory Firms,” training its employees on that policy, and hiring a consultant to, um, consult. It seems reasonable to assume, based on the SEC’s order, that:
- that “Policy on Interactions and Communications with Proxy Solicitors and other Advisory Firms” could have just been “don’t have any interactions with them!,” and
- it isn’t.
Mostly this case just fills me with a certain cynical glee. Opinions differ on the substantive goodness or perniciousness of ISS’s recommendations, and of its outsized influence over shareholder voting, but in any case it certainly sets itself up as a disinterested advocate for good governance and overall corporate morality. Even its conflicts of interest are of the moralizing self-improvement kind:
The firm has long been criticized for selling corporate governance consulting services to some of the same companies that are the subject of its voting recommendations. ISS said it has adopted policies to guard against possible conflicts of interest.
Nice board you’ve got here, shame if anything was to happen to it, etc., perhaps, but also like “we just want to make your board better, for everyone’s good!”
But this case is just stupid garden-variety corruption, screwing over clients in exchange for Knicks tickets or whatever. It’s a nice reminder that sometimes dressing up corporate governance fights as debates over morality is sort of silly. Mostly, everyone’s just in it for the money. And some people are in it for the free lunches.
SEC Charges Institutional Shareholder Services in Breach of Clients’ Confidential Proxy Voting Information [SEC, and complaint (pdf)]
For Proxy Advisers, Influence Wanes [WSJ]
1. By, I guess, activists and insurgents and hostile bidders and such? The ecosystem of shareholder-vote hangers-arounders is one that I’ve always found strangely difficult to understand, but from last week’s Broadridge kerfuffle my understanding is that companies – and, thus, their proxy solicitors – can get voting tallies any time they want without bothering with ISS. So that leaves non-companies. And shareholder-governance-proposal sponsors rarely hire proxy solicitors, which leaves you with activist hedge funds, hostile takeovers, and other proxy fight situations.
2. TBF the proxy solicitor expensed like $30,000 of meals, tickets, etc., for the ISS guy, though I guess it’s possible he inflated that too.