Unveiling the Ownership of Institutional Shareholder Services: A Deep Dive

Institutional Shareholder Services (ISS), a name synonymous with corporate governance and proxy advisory services, is currently owned by Deutsche Börse Group, the German stock exchange operator. Deutsche Börse finalized the acquisition in 2021, adding ISS to its already impressive portfolio of financial market infrastructure businesses.

The Evolution of ISS Ownership: A Historical Perspective

Before Deutsche Börse took the reins, ISS traversed a fascinating ownership journey. Understanding this history is crucial to appreciating the company’s present-day operations and potential future trajectory.

From Early Beginnings to Private Equity Control

Founded in 1985, ISS initially carved its niche by providing research and recommendations to institutional investors on how to vote their proxies. This service became increasingly valuable as institutional ownership of public companies grew exponentially. Before becoming part of the Deutsche Börse empire, ISS was under the ownership of Genstar Capital, a private equity firm. Genstar acquired ISS in 2017 from Vestar Capital Partners, highlighting the company’s attractiveness to private equity firms seeking stable returns and growth in the governance space.

Deutsche Börse’s Acquisition: A Strategic Move

The acquisition by Deutsche Börse represents a significant shift for ISS. The move aligned ISS with a major player in the global financial infrastructure, providing access to deeper resources, broader networks, and enhanced credibility. Deutsche Börse views ISS as a crucial component in its efforts to offer a full suite of services encompassing pre-trade analytics, trading, and post-trade solutions. This strategic decision underscores the importance of environmental, social, and governance (ESG) factors in modern investment strategies.

Understanding the Impact of Ownership on ISS Operations

The ownership structure of ISS directly influences its operations, research methodologies, and recommendations. It’s important to explore how these changes impact the companies and investors that rely on ISS’s insights.

Maintaining Independence and Objectivity

One of the most critical concerns following the acquisition was whether Deutsche Börse’s ownership would compromise the independence and objectivity of ISS’s research and recommendations. Deutsche Börse has repeatedly emphasized its commitment to maintaining ISS’s operational independence, implementing firewalls and governance structures designed to prevent undue influence. However, this remains a topic of ongoing scrutiny and debate within the corporate governance community.

Expanding Service Offerings and Global Reach

With the backing of Deutsche Börse, ISS has been able to expand its service offerings and further extend its global reach. The company has invested in enhanced data analytics, technology platforms, and ESG-focused research products, catering to the evolving needs of institutional investors worldwide. This expansion reinforces ISS’s position as a leading player in the proxy advisory industry.

Frequently Asked Questions (FAQs) about ISS Ownership and Operations

Here are some frequently asked questions to shed further light on the complexities surrounding ISS and its role in the financial ecosystem.

1. What is a proxy advisory firm, and what role does ISS play?

A proxy advisory firm provides research and recommendations to institutional investors on how to vote their proxies in shareholder meetings. ISS is the largest and most influential proxy advisory firm globally, shaping corporate governance practices and influencing voting outcomes on critical issues such as executive compensation, board elections, and mergers and acquisitions.

2. How does ISS make its voting recommendations?

ISS employs a team of analysts who evaluate company performance, governance structures, and proposed resolutions against established guidelines. These guidelines are regularly updated to reflect evolving best practices and investor preferences. ISS’s recommendations are based on a combination of quantitative data and qualitative assessments.

3. Are ISS recommendations binding?

No, ISS recommendations are not binding. Institutional investors retain the ultimate decision-making authority on how to vote their shares. However, ISS recommendations often carry significant weight, influencing the voting behavior of many institutional investors.

4. Has Deutsche Börse’s ownership affected ISS’s research methodology?

Deutsche Börse has stated that it maintains ISS’s operational independence, meaning the research methodology remains consistent with pre-acquisition practices. However, the company’s ability to invest in enhanced technology and expanded data sets might indirectly impact the granularity and scope of its research.

5. What are the potential conflicts of interest for ISS?

Like all organizations in the financial industry, ISS faces potential conflicts of interest. These can include providing consulting services to companies that it also rates, or having its parent company (Deutsche Börse) potentially benefit from its recommendations. ISS strives to manage these conflicts through disclosure, internal controls, and independent oversight.

6. What are the criticisms of ISS?

ISS has faced criticism for its perceived influence over corporate governance practices, its standardized approach to evaluating companies across different industries and geographies, and its potential bias towards specific viewpoints. Some critics argue that ISS’s recommendations can lead to “one-size-fits-all” governance structures that are not always appropriate for individual companies.

7. How do companies respond to ISS recommendations?

Companies often engage with ISS to understand its concerns and address any issues raised in its reports. They may also lobby against unfavorable recommendations or seek to influence the voting decisions of their shareholders directly. Companies understand the impact that ISS recommendations can have on investor sentiment and voting outcomes.

8. What are the alternative proxy advisory firms to ISS?

While ISS is the dominant player, other proxy advisory firms include Glass Lewis & Co. and smaller, more specialized firms that focus on specific industries or governance issues.

9. How do investors use ISS recommendations?

Investors use ISS recommendations as a starting point for their own analysis and due diligence. They consider ISS’s views alongside their own research, company interactions, and investment objectives. Ultimately, investors make their own informed voting decisions based on a comprehensive assessment of all available information.

10. What impact does ISS have on ESG investing?

ISS plays a significant role in promoting ESG investing by providing research and ratings on companies’ environmental, social, and governance performance. Its ESG ratings and reports help investors identify companies that align with their values and sustainability goals. The rise of ESG investing has amplified the influence of ISS’s ESG-related recommendations.

11. How is ISS regulated?

The proxy advisory industry is subject to regulatory oversight, primarily from the Securities and Exchange Commission (SEC) in the United States. The SEC has issued guidance on the responsibilities of proxy advisory firms and the need for transparency and conflict management.

12. What is the future of ISS under Deutsche Börse’s ownership?

The future of ISS under Deutsche Börse’s ownership appears bright, with continued investment in technology, data analytics, and ESG-focused research. The company is expected to remain a dominant force in the proxy advisory industry, shaping corporate governance practices and influencing voting outcomes globally. However, ongoing scrutiny of its independence and potential conflicts of interest will remain paramount. The company is also likely to continue its expansion into new areas, leveraging Deutsche Börse’s global platform and resources to serve the evolving needs of institutional investors. The partnership will likely drive innovation and expand the reach of ISS, ultimately shaping the future of corporate governance.