* Morgan Stanley hired to explore options for controversial unit
* 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 serious conflicts)."
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 share.
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.