* Corporate pay consultant zeros in on MSCI's own proxy
* MSCI's Fernandez criticized for dual CEO/chairman role
* ISS, which rates corporate proxies, does not rate parent MSCI
By Ross Kerber
BOSTON, April 13MSCI Inc, whose proxy advisory unit ISS has riled CEOs for years with criticism of their pay, now faces accusations from a high-profile consultant that its own compensation fails to meet the standards it sets for others.
In a memo making the rounds among corporate governance officers, Chicago-area pay specialist Ross Zimmerman last month wrote that MSCI's proxy "contains an assortment of pay practices that ISS routinely pillories."
The claims that MSCI is hypocritical come in the wake of U.S. financial reforms allowing shareholders to vote on top executive compensation. While the so-called Say on Pay votes are not binding, about 200 companies in the Russell 3000 Index got less than 70 percent approval last year - the first time such votes were widely held.
As shareholders become bolder, corporations could face even tougher scrutiny this spring, the season in which major U.S. corporations hold annual meetings at which proxy contests are decided.
Zimmerman listed seven problem areas at MSCI, including pay at the "higher end of market practices" for top executives like Chairman and Chief Executive Henry Fernandez. ISS has also criticized such dual roles in other companies, noted Zimmerman, a partner at Chicago executive pay consulting firm Exequity.
The memo has struck a nerve in corporate America and quickly made it to governance blogs. Some of Exequity's 300 clients - which include about 50 of the Fortune 500 - have sent Zimmerman supportive emails, he said.
"The reason you see the traction on the apparent hypocrisy of what MSCI has done is that companies have been beaten up on these practices by ISS and are feeling a sense of unfairness," Zimmerman said.
Zimmerman declined to name Exequity's clients. But SEC filings show the firm has consulted for a wide range of companies like Tyco International Inc, Ross Stores Inc , McClatchy Co, and Franklin Resources Inc .
MSCI, a Morgan Stanley spinoff known for market indexes, acquired ISS of Rockville, Maryland as part of its $1.5 billion purchase of RiskMetrics Group in 2010.
MSCI declined to comment. ISS spokeswoman Cheryl Gustitus said her division does not analyze MSCI's proxy to avoid a possible conflict of interest.
But ISS executives defend their overall methods.
"When we pillory things, it's because we believe that shareholders have suffered as a result of what we find," said Carol Bowie, head of Americas Research for ISS.
DE FACTO REGULATORS
The exchange taps into a broader discussion of whether ISS and rival proxy advisor Glass, Lewis & Co - which recommend how institutional shareholders should vote on corporate issues - have gained too much influence under reforms such as Say on Pay votes on top executive compensation.
Companies sometimes meet with ISS to explain pay plans and other governance matters, before they issue proxies.
A recent study found ISS recommended votes "against" pay plans at 11 percent of companies in the Standard & Poor's composite 1500 index last year, and Glass, Lewis did so 22 percent of the time. The S&P 1500 index combines the S&P 500, S&P MidCap 400 and S&P SmallCap 600 composites.
Last October a U.S. Chamber of Commerce leader urged more oversight of ISS and other firms that he called "the de facto regulators of corporate governance."
How to watch the watchdogs has been a growing theme in financial oversight, especially with more calls this year to separate chairmen and CEO roles.
Bowie, the ISS research head, said only MSCI could discuss questions specific to the parent company. But she noted that while ISS considers splitting the CEO and chairman role to be a "best practice," it is not an ISS requirement.
Bowie said ISS is often misunderstood, calling one of Zimmerman's comments "a great example of someone misconstruing our policy."
Zimmerman's memo also noted that MSCI picked only nine other companies against which to judge leaders' pay. In a recent policy paper, however, ISS urged companies to use a minimum peer group of 14 companies, he noted.
Most of the peers MSCI picked are bigger companies, making the evaluation of its own pay scale easier, Zimmerman said.
MSCI's annual meeting is scheduled for May 2 in New York. For that event ISS rival Glass, Lewis prepared its own report excoriating MSCI's pay structure as "poor."
Glass, Lewis, owned by the Ontario Teachers' Pension Plan, raised criticisms similar to Zimmerman's, including MSCI's lack of formulas in setting bonuses and the lack of share ownership guidelines to foster a culture of ownership among top leaders.
Yet, Glass, Lewis still recommended votes in favor of MSCI's pay such as the $9.7 million Fernandez received as CEO and president in the 13 months ended Dec. 31, 2011. Other companies have a greater gap on pay for performance, said Glass, Lewis Chief Policy Officer Robert McCormick.
The vote recommendation "sure sounds like professional courtesy to me," Zimmerman said.