The management team at ISS Australia has resigned prior to the start of the main Australian proxy season and the 1^st year of the 2 strikes rule.

 

The team was comprised of Martin Lawrence, Simon Connel and Marty Chang.  Their departure follows the departure of Dean Paatsch at almost the same time last year. 

 

Australia is served, in effect, by three proxy advisers.  The two “official” proxy advisers are ISS Australia and CGI Glass Lewis.  The third “force” in this space is the Australian Council of Superannuation Investors (ACSI).  ACSI receives the ISS research for ASX listed companies, applies its own judgement on the basis of the research, and recommends to its industry superannuation fund constituents whether to support a listed company resolution.  There have been indications that that ACSI will now rely more on their own research (for example see HERE)

 

We have written before that the role of the proxy firms, despite the misgivings of many board directors, is an essential one (see HERE).  Nevertheless, concerns continue to be raised about the vulnerability of proxy advisers to conflicts of interest.  While ISS Australia has to date been careful not to compromise its independence, this cannot be said of its US counterpart.  In the US, ISS continues to generate most of its cash from governance services to corporations, while also providing proxy advice services to institutional investors.  On top on this, it was acquired by MCSI, which ISS itself (just prior to the acquisition) rated among the poorest in governance practices.

 

This is not the only US governance company with conflicts of interest (see HERE).  In addition, Glass Lewis, for a time, was owned by Xinhua Finance, which became known for questionable governance.  The Ontario Teachers Pension Plan now owns Glass Lewis.  But while pension funds may seem the natural owners of proxy advisory firms, there is potential for conflicts of interest when the pension fund itself is an active investor.

 

Given ISS’ influence, the departure of so much accumulated knowledge has created a high level of anxiety and uncertainty among company directors (and, we expect, ISS clients).  Many company directors have worked hard on engagement, particularly in view of the 2 strikes law ramifications.

 

To cover for the departure of the local management, ISS is swinging in David Smith during the proxy season.  He arrives on 8 August.  David is usually based in ISS’ Singapore office, with coverage of Asia ex Japan and Australia.  But he has helped out in the past on Australian proxies.  He will also be supported by other ISS personnel in various offices, mainly in the US.  ISS will continue to undertake the basic underlying research on Australian companies from their Manila office.

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