* Morgan Stanley hired to explore options for controversial
* ISS accounts for about 11 percent of MSCI's revenue
* Despite heat, "We like the ISS business" - MSCI spokesman
By Ross Kerber and Neha Dimri
Oct 31 Stock market index provider MSCI Inc
said on Thursday that it is exploring a sale or other
options for its influential and controversial governance unit,
Institutional Shareholder Services Inc.
Any changes for ISS would come at a time of growing
attention to corporate governance issues after the financial
crisis, thrusting into the spotlight ISS recommendations on
once-arcane matters like whether to approve executive pay or
re-elect corporate directors.
ISS of Rockville Maryland had already been through a series
of owners before MSCI bought it in 2010. The unit accounted for
about 11 percent of MSCI's total revenue of $258.2 million in
the third quarter.
ISS has more than 1,700 clients for its corporate governance
services overall, well ahead of competitors like Glass, Lewis &
Co of California.
But as ISS has become better known, its work has drawn much
criticism. Companies and trade groups like the U.S. Chamber of
Commerce have questioned ISS's methodologies and periodic
opposition to management on various high-profile matters.
"I think every company that has owned/controlled ISS has
found it a difficult proposition, especially if they also sell
services/products to corporate issuers," said Edward Hauder,
senior advisor of Chicago area executive-pay consulting company
Exequity, via e-mail.
Another Exequity executive drew attention last year with a
memo noting how MSCI's own executive pay practices might not
meet the standards by which ISS judges other companies.
MSCI Chief Executive Officer Henry Fernandez said in a
statement that the time is right to explore alternatives for the
business. "Over the past three years, MSCI has worked hard to
return that business to a growth track," he said.
Asked about the criticisms, MSCI spokesman Edings Thibault
said "We like the ISS business" and that MSCI has improved ISS'
client service and technology and product lineup, leading to
growth. At the same time, investors' new focus on governance has
boosting demand for services in the area, he said.
"ISS, as the world's leading provider of corporate
governance products and services, should benefit from that
demand," Thibault said.
Various options appear to be on table for ISS. Thibault said
these include "the potential divestiture or other separation of
the business from MSCI."
An ISS representative said executives would not comment.
In separate statements both ISS and MSCI said they expect the
current ISS management team to remain in place.
John Coates, a Harvard Law School professor and former
mergers and acquisitions specialist, said a sale might solve a
strategic problem for MSCI. Its main business offering market
tools like indices and performance metrics is positioned to grow
globally, while the ISS business is more U.S.- focused and could
require more investment, he said.
But ISS may have few obvious buyers, Coates said via e-mail,
"partly because of conflicts, partly because it's an unusual
business, with few obvious synergies (that don't generate
Morgan Stanley is MSCI's financial adviser, and Davis
Polk is the company's legal adviser.
Also on Thursday, MSCI reported a 14.6 percent rise in
third-quarter net income to $55.3 million, or 46 cents per
Shares of MSCI closed at $40.77 in trading on Thursday, down
1.0 percent. At Wednesday's close, the stock had risen 33
percent since the beginning of the year.