BETHESDA, Md. - Corporate consultants, shareholder advisers and institutional investors agree Institutional Shareholder Services is doing the right thing in rethinking its corporate consulting services.
"I'm glad they're evaluating it. The problems are implicit in a business that tries to straddle the fence between (corporate) issuers and shareholders," said John C. Wilcox, chairman of Georgeson & Co., the New York proxy firm.
And Bart Naylor, a spokesman for the International Brotherhood of Teamsters in Washington, said he applauds ISS for attempting to correct the problem.
Said Jude Rich, chairman of Sibson & Co. Inc., a Princeton, N.J., compensation consulting firm: "That's a good thing for everybody involved if (the consulting service) is shortlived."
ISS, Bethesda, decided to evaluate the future of its fledgling service reviewing corporate compensation plans after coming under repeated fire from corporations, compensation consultants, large investors and others in the corporate governance community for attempting to serve both investors and corporations.
Just recently, the firm fired Gary Lyons, the head of its corporate consulting division, after complaints about the aggressive and threatening tone of letters promoting that service.
ISS advises some of the country's largest pension funds on how to vote shares of companies in their investment portfolios. The corporate consulting division told companies whether their executive pay plans and other matters would pass muster with shareholders.
The brouhaha that culminated in Mr. Lyons' recent departure started late last year. At that time, ISS sent letters inviting companies to take advantage of "a free evaluation" of their proposed executive stock plans; ISS would run the plans through its computerized evaluation system and "eliminate any risk of your proxy proposals being voted down by your shareholders or receiving 'against' vote recommendations from Institutional Shareholder Services."
In addition, the letters offered to provide companies with "suggestions for bringing your proposals into compliance with the voting policies of your specified shareholders."
The letter did not say how much ISS would charge corporations, following the free evaluation, to redo their proposals to make them acceptable to shareholders. But sources said companies were quoted anywhere from $10,000 to $30,000.
One letter was signed by Stephan Costa, senior research analyst in the ISS corporate consulting services division; another was signed by Mr. Lyons. Mr. Costa still works at ISS.
ISS President Jamie Heard declined to discuss the circumstances leading to Mr. Lyons' departure. Mr. Heard suggested the marketing efforts were a rogue operation not sanctioned by the firm. He said he had never seen or approved the letters. "That was clearly a mistake and should never have happened, and had I seen those letters, they would not have gone out," he said.
Mr. Lyons said ISS' top management was aware of all of the marketing materials, and a "conflicts committee" approved the letters before they were sent out.
Mr. Heard denied the letters had been approved by a conflicts committee.
As a result of the brouhaha, Mr. Heard said ISS is evaluating whether to continue the corporate consulting business and has not decided its fate.
Mr. Heard noted ISS took care to build firewalls between its shareholder advisory service and its corporate consulting service to prevent any conflict of interests.
But clearly, ISS' efforts weren't enough to prevent questions being raised about ISS' corporate consulting service.
One official of a company that accepted the free review of its executive pay plan but rejected the consulting job characterized a subsequent telephone call by Mr. Lyons as "nasty." The official wouldn't allow his name or that of his company to be used for this story.
Mr. Wilcox said several of his clients received the ISS letters.
"I thought it went too far," Mr. Wilcox said. Mr. Wilcox said he advised Georgeson clients to reject ISS' offer.
Mr. Rich called it "one of the worst instances I have ever seen of conflict of interest."