Is ISS Too Powerful? And Whose Interests Does It Serve?

Most people have probably never heard of Institutional Shareholder Services (ISS), but it is one of the most powerful players in the battle for control of the American corporation. It is the 800-pound gorilla in the room. The vast majority of directors, executives and other experts involved in running America's companies are afraid to criticize ISS because of its power to lower the ratings that their companies receive. But in private, a lot of people are grousing about ISS.

ISS may control 30 percent of the vote in any proxy battle. That's because it takes stands on each issue and major institutional money managers , who actually own shares but don't want to bother with research, simply go along with the ISS proposal. Because of the pattern of ownership of shares in most companies, that means ISS usually carries the day. Whatever ISS wants, ISS gets.

One major criticism of ISS is that it bases its ratings of companies only on written materials such as annual reports and proxy statements. It doesn't meet with company representatives. It doesn't assess real business outcomes. It has a "check the box" mentality, meaning it's formulaic and not real-world.

A second valid line of questioning is, whose interests does ISS serve? It is now owned by Risk Metrics Group, which just went public on the New York Stock Exchange. It says it sold 14 million sales at an average price of $17.50. That's a market value of more than $24 billion. Someone is making a lot of money. What are their motivations?

It's time for a healthy debate about ISS. Do you agree?