- The Washington Times - Monday, May 16, 2005

SAN FRANCISCO - Fed up with his job as an investment banker, Greg Taxin was contemplating his next career move in late 2002 when corporate America’s accounting scandals inspired an epiphany.

He decided to build an early warning system for investors, an independent research firm that would challenge boards of directors before problems caused a financial meltdown. Mr. Taxin’s brainchild, Glass, Lewis & Co., positions itself as an analytical pit bull.

“I don’t know that we can catch everything wrong, but even if we find just a few things, we can warn investors and help save the pensions of millions of people,” said Mr. Taxin, chief executive officer of the firm.

The San Francisco-based firm’s crusade has pitted it against Rockville-based Institutional Shareholder Services (ISS), a 20-year-old firm that held a virtual monopoly on proxy advisory services — the practice of offering shareholders recommendations on proxy votes and other governance issues. The rivalry has provoked some hard feelings and produced different perspectives on the issues that arise during the annual shareholder meetings.

“The competition has been good,” said Brad Pacheco, a spokesman for the California Public Employees’ Retirement System, one of the nation’s largest institutional investors and a subscriber to both Glass Lewis and ISS. “It’s nice to have a different opinion after having only one adviser around for so many years.”

Proxy advisory services are in greater demand now as institutional investors seek out corporate chicanery and ineffectual executives. Although the proxy advisers don’t serve individual investors directly, their guidance carries weight because most managers at the nation’s largest mutual funds and public pension funds subscribe to the services.

The field became even more crowded late last year when former Securities and Exchange Commissioner Steve Wallman started a service called Proxy Governance. The Vienna, Va.-based firm’s biggest customer is the Business Roundtable, a group that represents the interests of corporate chief executives.

With 130 research analysts who follow 28,000 companies worldwide, ISS is far larger than Glass Lewis, which has 70 analysts tracking about 8,000 companies. ISS says 1,200 institutional investors, with $23 trillion in assets, subscribe to its services. Glass Lewis clients control about $8 trillion in assets.

The recommendations of ISS and Glass Lewis often mirror each other, but when they take opposite views, it can prod money managers to make bold moves.

For instance, Glass Lewis smelled something rotten at Fannie Mae six months before securities regulators cracked down on the nation’s largest buyer of home mortgages last year. The firm advised major shareholders to oppose the re-election of six company directors and the company’s auditor, KPMG. ISS sided with Fannie Mae’s leadership and endorsed the re-election of all 13 company directors, as well as KPMG.

More than 90 percent of Fannie Mae’s shareholders followed ISS’s recommendations, but Glass Lewis’ principals felt vindicated late last year when the Securities and Exchange Commission ordered Fannie Mae to correct $9 billion in financial misstatements dating to 2001.

“We dig deeper than anyone else out there,” Mr. Taxin said. “We do all the mundane and arcane analysis that no one else wants to do.”

ISS, formed in 1985 by corporate governance pioneer Robert Monks, thinks its 95 percent customer renewal rate demonstrates its continued value to shareholders.

“We don’t take a willy-nilly approach to any of the issues we analyze,” said Patrick McGurn, an ISS executive vice president.

Mr. Taxin sneers at his larger rival, describing ISS as a deeply conflicted firm that has grown “weak and shabby” in its analysis.

The strident criticism bothers ISS, but the firm’s principals have held their tongues, other than to suggest that Glass Lewis is hungry for headlines.

“We like competition,” Mr. McGurn said. “It forces you to perform at the top of your game.”

ISS has been criticized by some of the companies it monitors for a perceived conflict of interest.

As part of its analysis, ISS grades how well a company is set up to protect shareholder interests. The firm shares this “Corporate Governance Quotient” with investors, but also sells a service that informs companies how to improve their scores.

The consulting arrangements have aroused suspicions that companies paying ISS tend to get better scores, but the firm says it has set up strong firewalls to avoid conflicts.

“There is no pay for play here,” Mr. McGurn said.

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