ISS chief on his battle with corporate America and the SEC

For a man in battle with Corporate America and the US financial regulator, Gary Retelny is in fine form.

In a two-hour video interview, the chief executive of Institutional Shareholder Services talks about everything from his childhood in Nicaragua to stamp collecting. He also cheerfully but methodically rebuts the many denunciations of the company he has led since 2011.

ISS is the world’s largest proxy adviser, an insipid phrase that belies its importance in global financial markets.

The governance division of ISS makes recommendations on how shareholders should vote at more than 40,000 company meetings a year, advising investors on whether to support a chairman’s re-election, reject a chief executive’s pay package or approve a merger.

Depending on who you speak to, ISS is far too powerful, rife with conflicts of interest and error-prone, or it plays a vital role in helping investors to navigate complex corporate governance matters across their portfolio of stocks.

“We get all kinds of criticism,” says Mr Retelny. “But the criticisms you hear now are incredibly dated.”

Mr Retelny, 61, is well versed in batting off attacks. First, he has spent the past three years defending ISS from an intense and sometimes unbelievable campaign from Corporate America and its lobbyists.

More recently the Securities and Exchange Commission proposed controversial new rules governing proxy advisers last November. The SEC’s consultation period for the rules ends on Monday.

ISS has argued strongly against the proposals, which include forcing proxy advisers to reveal their voting recommendations to a company’s management before they are sent to clients. 

Speaking from New York, Mr Retelny is lively, engaging and unfailingly polite, but he does not back down from an argument — something the SEC discovered last year, when ISS decided to sue the regulator. The move drew gasps from the corporate and investment worlds. “That’s punchy,” says an executive at one of the world’s largest asset managers.

The lawsuit is currently paused while the SEC finalises the rules. “But we expect to re-engage, depending on what the final rules are,” says Mr Retelny.

Although ISS has been in business for more than three decades, scrutiny of it and its rival Glass Lewis has intensified in recent years, as big investors increasingly started to pay attention to corporate governance.

At the same time, many large shareholders globally became more willing to vote against management, including at oil majors ExxonMobil and Occidental in 2017, when shareholders backed climate-change resolutions to the frustration of management. 

As Mr Retelny sees it, rather than pick a fight with their shareholders, disgruntled companies — annoyed that investors are voting against pay packages or all-male boards have singled out proxy advisers. “We have become a convenient point of attack,” he says. 

Then he rattles off a range of facts and figures to counter the complaints about ISS. While the proxy adviser has been accused of publishing error-ridden reports, Mr Retelny says of the 6,498 reports it issued last year in the US, it made 48 material mistakes that led to a correction in its recommendation — an error rate of 0.7 per cent.

“We do make mistakes, but we correct them,” he said. 

Another regularly touted criticism is that investors blindly follow ISS’s voting recommendations. But Mr Retelny says 88 per cent of its top clients receive tailored recommendations that are based on the investor’s voting policy rather than ISS’s default report.

He is also quick to defend ISS’s position as the largest proxy adviser, even if he says the company never set out to be the dominant provider.

Mr Retelny says scale matters in the proxy advice business, as asset managers are often invested in thousands of companies around the world.

“We do 40-odd thousand of these [reports] a year. It is quite a logistical undertaking and scale matters very, very much in order to provide the services on a timely basis that clients demand.”

Then there are complaints that ISS has become a de facto governance standard setter, unnecessarily wading into debates around environmental and social topics and taking too prescriptive a view on issues such as executive pay and board competition.

Mr Retelny says ISS only opines on the resolutions for the meeting in its proxy report. “If there is an environmental or social item, we certainly will provide a recommendation because that is what our clients expect of us.”

He also bats off criticism about a conflict of interest at ISS, which has a division that provides advisory services to companies on how to improve governance, while also issuing voting recommendations advice to shareholders in those companies.

Many companies provide different services to different clients, he says, adding that he would not consider selling either part.

In recent weeks, ISS relaunched an initiative called Protect the Voice of Shareholders, its own lobbying effort aimed at “correcting misinformation and educating visitors about the threats posed by proposals under consideration by the SEC”.

The scale of the lobbying against proxy advisers from parts of Corporate America, however, has surprised Mr Retelny. Notably, there was a group called Main Street Investors Coalition that purported to represent ordinary savers, but was financed by big trade organisations.

There was also a series of fake letters to the SEC supporting tough proxy adviser rules. According to a Bloomberg investigation, the letters were signed by so-called main street investors, but were actually penned by an advocacy group.

“It’s something we didn’t expect,” Mr Retelny says. “It’s underhanded, they’re dirty . . . It’s a very concerted effort by a very small group of people backed by a very small group of companies that are fabricating things.”

The SEC is under pressure to finalise the rules in the next few months, ahead of the US presidential election.

Mr Retelny, however, is hopeful there might be a watering down of the proposals. “There are a number of very smart people and thoughtful people at the SEC,” he says.

“I’m optimistic . . . that whatever rules they do issue, they are constructive and helpful to shareholders in essentially doing their job.”

Still, the whole process has been distracting for the chief executive. If the business lobby is hoping for a small, quieter ISS, however, that looks unlikely.

Although ISS is best known for its proxy advice business, this is just one of five different divisions and accounts for about 30 per cent of its revenues.

Mr Retelny says he is always on the hunt for new ways to grow the company, which is owned by management and private equity.

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“We continue to look for growth opportunities, whether they’re organic or by acquisition, and we expect that to continue certainly in the future,” he says.

He is also on the hunt for stamps, especially relating to Nicaragua. Mr Retelny’s family left the country for the US during Nicaragua’s 1978 socialist revolution.

He has not been back since, but he seeks out envelops bearing the stamps and seals of the co-called Nicaragua route.

The envelopes date from the California gold rush of the 1850s, when Cornelius Vanderbilt set up a transport company to take passengers from the east coast of the US to the west coast, via Nicaragua.

“I specialise in very strange things,” he jokes.