How Can Boards Coexist with ISS and Glass Lewis?
By Jim Woodrum
If you ask experienced directors about their biggest complaint about the changes in the boardroom over the last 20 years, I think many would grumble and then say something about Institutional Shareholder Services (ISS) and Glass Lewis. To some, these entities have taken the fun out of being a director, as creativity has been replaced by an increased focus on compliance. But as the ubiquitous bumper sticker proclaims, it is probably better to find ways to coexist than it is to just complain.
What are ISS and Glass Lewis?
ISS and Glass Lewis are the two most prominent proxy advisory services, at least in North America. Because institutional investors sometimes hold hundreds or thousands of different stocks at a point in time, they tend to need assistance in voting their shares come annual meeting time. This is where ISS and Glass Lewis come in.
Both firms have created models of what they think good governance looks like. And both use various algorithms to determine whether a given company is deserving of a “yes” vote on Say on Pay, and whether individual board members should be supported. Many institutions follow their recommendations, while others subscribe to the services yet also employ their own staff to determine how they should vote their shares. The most interesting thing about these firms is that their business model requires them to change their guidelines on a regular basis. After all, if they had a straightforward set of rules and all companies adopted them, there would then be no need for ISS or Glass Lewis to exist.
As a result, both firms tend to move the goalposts on a regular basis, and this results in that most popular boardroom conversation: “What does ISS think about that?” This has also led to a homogenization of boardroom practices, as more and more companies come into compliance with the latest edict from ISS and/or Glass Lewis.
A Framework for Coexisting
In thinking about how and whether to adapt to the latest thoughts from either firm, it is worth considering the following:
- Do they have a point? Whether board members want to admit it or not, both firms have presided over many positive changes to governance practices — majority versus plurality voting and the elimination of gross-ups on executive-severance arrangements come to mind. So, before leaping to defend a particular practice, it is worth simply asking the question: “Do they have a point?” If the answer is yes, then the path forward is pretty easy to determine.
- Does it matter? The next question revolves around determining whether making a change will really make a difference to the company. As an example, let’s imagine you are on a board where the level of executive stock ownership is very high. Now let’s imagine that ISS or Glass Lewis criticize the company because there are no stock-ownership guidelines. Is there any harm in implementing guidelines, given that the executives easily reach market-competitive levels of ownership? If the answer to the question is no (and in this example, it probably is), then it is probably best to go ahead and implement the guidelines.
- The third point is, of course, the hard one, and the one in which it is much more likely that the board should be firm in its resolve. This is the category where a given way of doing things is part of the DNA of the company. And it is also an area where you have a hard time making the case that ISS or Glass Lewis have a legitimate reason to be critical. In this case, presuming there are not too many of them, the board should probably hold firm, and use the various compensation disclosures to make their case.
For years, corporate governance experts were in the habit of saying that the power of ISS and Glass Lewis might fade in the future. At this point, it is much more prudent to think they are here to stay — and it is time to figure out how to coexist.
||Jim Woodrum is a clinical professor at the Kellogg School of Management. As Managing Director of Executive Education, his focus is on designing and teaching in courses for senior executives and board members.