ISS Likely to Be Acquired by Venture Capital Firm, Raising Further Questions About Conflicts of Interest

March 14, 2014

This week, it was reported that proxy advisory firm Insight Venture Capital Partners is nearing a deal to purchase Institutional Shareholder Services from MSCI, Inc., potentially creating more incentive for the proxy advisory firm to push its consulting business and blurring the lines further between its consulting and supposedly independent proxy voting research businesses.  A primary conflict of interest inherent in ISS's two main businesses—providing supposedly unbiased research to institutional investors and providing consulting services to investors and issuers—has led to calls for reform of the SEC's regulation of proxy advisory firms by Republican SEC Commissioners Daniel Gallagher and Mike Piwowar, as well as the Association's Center On Executive Compensation.  There have been recent examples where the putative "Chinese Wall" between the research and consulting sides of the business have been called into question, including one involving Motorola Solutions in which representatives of ISS Consulting Services hinted that, by retaining it, an issuer would gain unique insight into how the research side of the business would analyze a company's say on pay vote.  Being acquired by a venture capital firm could increase pressure on ISS to raise revenue, which would likely have to be done through the consulting business.  If the transaction is completed, it would mark the third time in seven years that ISS has changed hands.  According to the Wall Street Journal, the acquisition price would be around $300 million, a significantly reduced price from prior transactions.  Insight Venture Capital Partners focuses on full or partial ownership companies in the technology space and was an early investor in Twitter.  It has an in-house consulting team dedicated to helping hone the operations and growth of its portfolio companies.