The writer is a partner at Sequoia Capital
Imagine you bought an apartment for $360,000 in 2011 which is now worth $2.4mn due, in large part, to the way the manager of the building had upgraded the roof, exterior and elevators, while also installing a sparkling gym and swimming pool.
What proportion of the $2.4mn would you be prepared to share with the building manager? If you were Apple’s board of directors, you would say $4,800.
That is the rough equivalent of the $4.8bn stock owned by Apple CEO Tim Cook today if he has kept the shares granted to him by the board since he took over the reins of the business in 2011. Back then the company was worth about $360bn. Today, Apple is valued at about $2.4tn. Total shareholder returns under Cook now exceed 1,000 per cent.
The demonstrated stewardship of Apple’s board has not been enough for Institutional Shareholder Services, the largest of the firms offering advice to fund managers and investors about how to vote on issues at annual shareholder meetings. Last month, ISS objected to the size and structure of Cook’s $99mn pay and bonuses package for 2021. Its influence was shown in the vote against the board’s pay recommendation. Thirty-six per cent of votes were cast against it — but the proposal passed and Cook was paid.
This fresh tussle is evidence of the grip and influence ISS, and its smaller rivals, including Glass Lewis, have developed as they operate behind the scenes to become judge and jury for the actions of corporate America. It is hard to exaggerate their influence. Today, ISS proxy voting services allegedly cover 45,000 shareholder meetings in countries around the world. I cannot imagine how ISS’s staff of analysts has the time to master the subtleties of the numerous companies within their purview. I can barely manage eight or nine.
Along with its edicts on executive pay, ISS has salespeople hawking reports on diversity, sustainable investing and climate policy to the very companies whose shareholders it courts. In another line of business it acts as a compensation consultant for the boards of fund managers. But there’s more, ISS also operates a ballot vote counting service and provides research for class action stockholder lawsuits. A cynic might say that ISS operates a protection racket in the full light of day.
ISS’s influence has grown for several reasons. One is the explosion of exchange traded funds, many of which have managers locked into following the recommendations of the shareholder service firms since they know precious little about any of the underlying companies. Another is investor laziness. It’s just easier to outsource these decisions to a third party.
In some cases, the reason may even be cowardice. It’s simpler to meekly follow ISS than to stand up and be counted. Most compensation committee members need to be braced for public humiliation should they be bold enough to endorse an action that doesn’t conform with this “Ministry of Virtue”.
Everyone should be suspicious of these proxy voting service agencies. ISS’s opinions are about as credible as those rendered by Moody’s, Standard & Poor’s and Fitch before the 2008 subprime crisis. It was those firms and their “triple A” designations that sprinkled holy water on the mountains of debt which piled up before the music stopped.
What should companies do? They should recruit directors willing to ignore browbeating and who structure pay packages for executives that reward them handsomely for spectacular performance. Chief financial officers should seek out investors who do not subscribe to the ISS proxy voting services and, instead, rely on their own analysis. And investors and fund managers should discard their crutches and stand tall.