In an April 30 report to clients, Institutional Shareholder Services Inc. recommended that investors vote yes on a nonbinding “say-on-pay” proposal included in the New York-based bank’s proxy statement. But ISS said it remained concerned that Goldman’s executive-compensation policies gave directors too much discretion over what Goldman’s top officers are paid.

Goldman paid Lloyd Blankfein, its chairman and chief executive, $19.9 million in 2013, up 50% from the previous year, ISS said.

“It is difficult to determine whether recent advances in CEO pay are warranted without a formal incentive structure,” the proxy adviser wrote.

Of course, things could be worse, and are at the House of Gorman.

Morgan Stanley drew another harsh report card from one of the major proxy-advisory firms, which handed the investment bank a “D” grade for linking its executive-pay practices to its performance and recommended shareholders vote against the re-election of a board member….

In an April 27 note to clients, Glass, Lewis & Co. said its “analysis indicates that the company has been deficient in aligning pay with performance,” and recommended investors vote no on a nonbinding “say on pay” measure on Morgan Stanley’s executive compensation plans.

The firm found that Morgan Stanley paid its top officers more than its peers over the past three years, even though it trailed the same group in certain key measures, including per-share earnings and return on equity. Glass, Lewis’s analysis also showed that Morgan Stanley awarded James Gorman, the bank’s chief executive, a smaller pay package than rivals doled out to his counterparts.

ISS Gives Goldman’s Executive Pay Plan a Passing Grade [WSJ MoneyBeat blog]
Morgan Stanley Earns a ‘D’ From Glass, Lewis on Executive Pay Practices [WSJ MoneyBeat blog]

While we are disappointed that last night ISS recommended against our proposal, we do not altogether disagree with their assessment and recommendation in light of recent actions taken by the company to aggressively repurchase shares in the market….

We also agree with ISS’s observation, taking into account that the company recently repurchased in “two weeks alone” $14 billion worth in shares, that “for fiscal 2014, it appears on track to repurchase at least $32 billion in shares.” Our proposal, as ISS points out, “thus effectively only asks the board to spend another $18 billion on repurchases in the current year.”

As Tim Cook describes them, these recent actions taken by the company to repurchase shares have been both “opportunistic” and “aggressive” and we are supportive. In light of these actions, and ISS’s recommendation, we see no reason to persist with our non-binding proposal, especially when the company is already so close to fulfilling our requested repurchase target.

Our Letter to Apple Shareholders [Shareholders' Square Table]
Icahn's Proposal for $50 Billion Apple Buyback Opposed by ISS [Bloomberg]
New York City Comptroller Resists Investor's Calls for Apple Buyback [DealBook]

Is $12mm or so a lot for Icahn to lose? No obviously not. Now, separately, there is the issue of his devoting a lot of time and energy to what so far seems to have been a dismally failed battle3 - his various alternative proposals went nowhere, he's lost the fight for ISS, and the market now seems to think the Silver Lake deal will go through - but how would you value that? One reasonable characterization would be "Carl Icahn has gotten months of very high quality entertainment out of this situation, and given his financial situation and desire for entertainment, that's pretty cheap at $12 million."4 That's like one Steve Schwarzman birthday party, and Icahn had to have had more fun doing this.

You know who probably had less fun? One, Silver Lake, and two, whoever wrote the presentation that Dell filed on Fridayin connection with its pitch to ISS. Like, oh, sure, there's some gleeful sarcastic Icahn-bashing - check out slide 7, which asks of Icahn's math, "How can Dell be worth 12.0x EBITDA when its closest peer, HP, trades at 4.6x EBITDA?" - but most of it has a grim air of "we've made a huge mistake." Silver Lake: are you excited for your sub-20% IRR?

Then there's slide 11, which shows the alternate universe where Dell isn't acquired. It goes like this:

• The median Street price target, pre-deal talk, was $12.50.
• That was based on a median 2014 EPS estimate of $1.67.
• At current median EPS estimate of $1.03, you get a price target of something like $7.71.

Eep! As ISS puts it in their report:

Shareholders might consider that the company’s value lies closer to the current offer of $13.65 than the dissidents’ $23 per share value, particularly if the PC business is deteriorating more rapidly than expected. With further, more detailed consideration of the valuation assumptions, moreover, the indicative value may be more likely to go down than up. The fact that Blackstone in particular – aided by having Dell's former head of M&A on its due diligence team – withdrew from bidding after evaluating the progress of and outlook for the transformation – would appear to lend credence to this view.

So, good, vote for the deal, take the $13.65, whatever. But Icahn makes a good point in his salvo today:

The Special Committee keeps telling us how bad Dell is, and despite our $14 proposal for a Dell self tender offer, the Special Committee keeps recommending the $13.65 Michael Dell/Silver Lake transaction, and in our opinion, keeps using scare tactics about what will happen if the Michael Dell/Silver Lake transaction does not close. The entire situation reminds me of the story of the visitor who overstays their welcome at your house. They keep threatening to leave, but when you say goodbye...they just don't go.5

I can't but help ask myself why, if Dell is so awful, do Michael Dell and Silver Lake, both very astute investors, want to buy it. And, how have they amassed billions in financing from astute financial institutions to finance that acquisition if everything is so bad? I suggest we all ask ourselves that question.

Do you get the slightest sense that Silver Lake is doing exactly that?

I.S.S. Backs Dell Buyout Offer [DealBook]
An estimate of Icahn's Dell P&L [Google Docs]

1.Most notably 72mm shares at $13.52 to Icahn a few weeks ago, but also frittering away shares in market transactions at below the deal price since the deal was announced. Those, though, were presumably non-discretionary sales by Southeastern clients. The Icahn thing is on them.

2.Here you can read a claim that Icahn's basis in Dell is under $13.65 but that seems to be based on nothing. My sources are listed here - all EDGAR filings by Icahn - though there's some approximation as he doesn't list the prices for all of his February/March purchases. He does list the days; I just use the low consolidated price for those days so this should be the minimum that he paid. But the large majority of his shares were bought in April and June at disclosed prices - April at $13.89 (via call options with $5.39 premium / $8.50 strike) and June from Southeastern at $13.52.

2A.Corrected numbers:

3.Also time value of money but, whatever, it's all his cash and he's loaded.

4.Other possible characterizations, like "how frustrating it must be to put in all this work and come away with nothing," seem to me to misunderstand Carl Icahn, but what do I know.

5.Questions:

• Does that constitute a story?
• If so, it is a terrible story.
• If not, is there some well-known story that he's alluding to and we're supposed to fill in the story?
• What is it?
• Etc.

Like I keep saying, the man knows how to entertain himself.

Dimon has also been a fierce critic of President Obama’s economic policies, including parts of the Dodd-Frank banking reform bill. Many union pension funds as well as public officials running large pension funds have vocally supported the president’s economic and regulatory policies, and the recent shareholder vote was designed to quash Dimon’s public criticism of these policies, people inside JP Morgan say.

That's from Charlie Gasparino's report today that the House Financial Services Subcommittee is going to hold a hearing "into whether proxy advisory firms are pushing political agendas rather than serving shareholder interests," which I guess is no sillier a hearing than most other hearings. More things:

Executives at many companies have complained to Congress that such battles are fraught with politics, with advisory firms often pushing the political agendas of some of their biggest shareholder clients at union and public pension funds.

There's much to unpack there1 but the basic questions are:

• do you think proxy advisory firms are mostly interested in (a) politics or (b) good corporate governance in its received technocratic Standard Governance Model codification, and
• if you picked (b), do you think the Standard Governance Model is mostly lefty or mostly righty or mostly orthogonal to politics?

The first question strikes me as an easy one: a few bad apples aside, I've always assumed that ISS and Glass Lewis, and their customers, really mostly believe in the Standard Governance Model, which involves plenty of shareholder democracy, lots of director independence, robust capital return policies, and few or no takeover defenses. The second question is maybe more interesting2 but I guess the short answer is that you don't hear a lot of politicians talking about classified boards one way or the other.

Part of why the first question seems easy to me - that "corporate governance" is obviously its own codified thing unrelated to your political, etc., views - has to do with a weird fact that a reader pointed out to me recently, which is that even politically engaged shareholders like labor unions support the Standard Governance Model, even when it seems sort of against their political and union interests. Here, for instance, is a press release issued last week by UNITE HERE, the hotel workers' union, that on its face is a little bonkers:

Yesterday, a second hotel company adopted provisions of shareholder proposals filed by UNITE HERE seeking to improve corporate governance policies, according to the hospitality union. Strategic Hotels & Resorts [NYSE: BEE] agreed to terminate its shareholder rights plan known as a “poison pill” and submit any future pill to a shareholder vote within 12 months. UNITE HERE has withdrawn its proposal in advance of Thursday’s annual stockholder meeting. ... Strong corporate governance structures are correlated with better returns, and shareholders are voting for changes in the hotel industry after a long awaited rebound.

Umm surely "strong corporate governance structures are correlated with better returns,"3 but not having a poison pill is probably correlated with being taken over. Which ... I mean, if the 2012 election taught us anything, it's that takeovers always lead to massive layoffs.

Strategic Hotels is maybe a bad example because it has only 39 employees, none unionized, but there does seem to be a general pattern. According to FactSet SharkRepellent, unions have submitted 47 poison-pill redemption shareholder proposals since 2001. And public pensions are near the top of the league table for submitting all shareholder proposals, behind only crackpots, I mean, individuals,4 and their proposals tend to fall within the mainstream of the Standard Governance Model. Which tends to favor easier takeovers and returning cash to shareholders rather than workers.

Doesn't that seem a little weird? I don't have a great explanation; here's a 1998 paper that tries to explain it through some combination of "laws like ERISA require unions to act as fiduciaries for their shareholder-beneficiaries, not for their unions' workers" and "actually shareholders and workers tend to have a common interest in not being screwed by management that outweighs workers' interest in not being screwed by shareholders." (Also: takeovers tend not to be that bad for workers.) So, I guess.5

Still it suggests to me - redundantly, perhaps - that this House Committee is barking up the wrong tree. The intellectual and emotional power of the Standard Governance Model is strong among people who concern themselves with shareholder voting. And those people tend not to mix their politics with their corporate governance - even when they maybe should.

Lawmakers to Probe Agendas of Proxy Advisory Firms [FBN]

1.Like: Are unions really among ISS's biggest clients? Again the whole proxy ecosystem baffles me but like wouldn't you use ISS if you didn't know how to vote? Like, if I ran a cynical index fund I'd want to outsource my shareholder voting because what do I care.a But if I ran a union pension I'd probably spend like half my time getting angry at things and then voting on them, right? Also aren't there no more unions, or pensions, by now? 401k world don'tcha know.

a.Obvs I would do this via stock lending, not relying on ISS/Glass Lewis, but we're getting ahead of ourselves.

2.Until this House hearing most of the criticisms I'd seen of the Standard Governance Model came from, more or less, the left: that "good governance" promotes a focus on short-term shareholder returns that strips all of the surplus out of enterprises to give it to owners of capital rather than to workers. (E.g.) Lynn Stout is probably the most important critic of the Standard Governance Model and her critique is mostly technocratic rather than political but you do get the sense that it's lefty-ish.

3.Using "surely" in its technical sense of "I don't want to actually look for any evidence." I suspect you can find studies either way.

4."Interestingly, just six individuals, Chevedden, father and son William and Kenneth Steiner, Gerald Armstrong, Evelyn Davis, and James McRitchie were responsible for 64% of the proposals sponsored or co-sponsored by individual investors (212 out of 332 proposals)," says SharkRepellent. That seems like a good gig.

5.If you believe the lefty critique of the modern corporation in which "[t]he boundary between high-ranking managers and the capitalist classes is blurred" then I guess you'd be like "meh, I'm gonna be screwed by entrenched management or by empowered shareholders, either way it's just as bad, might as well annoy the managers since at least I can see the look on their smug faces when they get voted out" or whatever. That's as good a theory as any.

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.

Glass, Lewis & Co. recommended that shareholders vote against the securities firm's executive-pay plan, saying the company was "deficient in linking pay with performance" last year.

In its proxy analysis published ahead of the firm's annual meeting on May 14, Glass Lewis said Morgan Stanley paid its named executive officers more than peers based on a study by executive-compensation firm Equilar….

The firm cited concerns over the structure of Morgan Stanley's compensation program, saying it believes the company has "unchallenging performance targets" and executives receive pay awards "even if the company underperforms peers."

But…

In a competing report, Institutional Shareholder Services Inc. told investors a "yes" vote was warranted for Morgan Stanley's pay because "the CEO pay decrease is aligned with the company's decline in financials."

While ISS recommended approval of the company's compensation plan, the firm said it had "concerns" about a base salary increase for Mr. Gorman to $1.5 million from $800,000. It plans to evaluate that part of the pay further in 2014.

Glass, Lewis and ISS can't even get together on matters more binding.

Separately, while ISS recommended that shareholders vote in favor of 14 director nominees for Morgan Stanley's board, Glass Lewis urged them to vote against James Owens.

The firm said it was concerned about the company's "failure to provide sufficient disclosure regarding transactions with entities affiliated with its directors." Glass Lewis said Mr. Owens, a former CEO of Caterpillar Inc., as chairman of Morgan Stanley's nominating and governance committee "bears the responsibility for ensuring that the company is providing reasonably clear and transparent disclosure to investors."

Magnanimously, Owens' head is the only one Glass, Lewis is seeking—for now.

"At this time, Glass Lewis refrains from recommending to vote against any members of the compensation committee...However, if the company continues to receive a deficient grade in our pay-for-performance model, indicating an ongoing failure to align pay with performance, we will consider holding the committee responsible," Glass Lewis stated in its report.

Morgan Stanley Holders Get Conflicting Advice on Executive-Pay Question [WSJ]