How effective are ISS recommendations?
Embattled News Corp is set to endure more pressure from investors at this year’s annual meeting after corporate governance watchdog Institutional Shareholder Services (ISS) urged shareholders to vote against the re-election of Rupert Murdoch and his sons James and Lachlan along with 10 other directors. Shareholders will vote to retain or replace board members on October 21st.
ISS, which advises more than 1700 clients on corporate governance issues, says news Corp’s phone hacking scandal proves there is a lack of stewardship and absence of board independence at the media giant. ISS holds significant influence over the millions of votes cast each year by its clients. In many cases, this influence is felt by companies in all industries almost immediately upon release of ISS reports on each company's proxy statement.
In its recently released report, ISS says 13 out of 15 incumbent directors were responsible for the mosaic of failures at News Corp. It called for votes against executives on the board including chief operating officer Chase Carey, chief financial officer David Devoe and former general counsel Arthur Siskind as well as independent directors including former British Airways CEO Rod Eddington and former assistant attorney general Viet Dinh.
The report also points out that according to the News Corp proxy, the Murdochs control around 40 percent of the voting shares and the company has adopted a majority-voting rule.
‘In order for the vote to follow the ISS /Glass Lewis recommendations, they would need to either be correct in their recommendations or, if the proxy advisors are not correct, they [proxy advisors] could still change the vote outcome if the number of shares that are simply voted in lock-step [100 percent in accordance] with ISS recommendations is sufficient,’ says Allan McCall, a member of the accounting department at Stanford Graduate School of Business. ‘In my estimation, the most likely outcome is that the proxy advisors swing a small number of votes against the management proposed slate, but it is unclear that they will be able to change the voting outcome.’
McCall notes that ISS recommendations over the years have supported News Corp’s board and calls into question the role of the proxy advisory firm. ‘In 2010, ISS recommended voting for the entire slate of directors [but] if there was a problem with the board oversight (as other reports suggest) then why was this not recognized earlier?’
To further his point, McCall points out other scenarios where News Corp failed to change its governance structure after ISS recommendations. In 2010, News Corp did not change their governance practice and the ISS 2011 recommendation wound up wrong.
‘They recommended voting for the complete slate of management proposals to shareholders in 2010, then followed with the recommendations we are examining in 2011.’
The media conglomerate has been facing much criticism since July when Murdoch’s 168-year-old British newspaper News of the World collapsed after allegations surfaced that its reporters illegally hacked into phone messages of crime victims, victims of the 9/11 terrorist attacks, celebrities and politicians.
News Corp says it ‘strongly disagrees’ with the ISS voting recommendations in the current report. On Tuesday, it filed an amended proxy statement, which explains actions that have been taken to respond to allegations of widespread phone hacking at the company's now defunct News of the World newspaper.
‘While next week's vote will be closely watched and does have significance, what will likely be more closely watched will be the company's subsequent statements and actions,’ says Ron Schneider, senior vice president at corporate governance and proxy solicitation firm Phoenix Advisory Partners. ‘The progress and resolution of litigation and company performance in the months to come, and then the inevitable next annual meeting.’
