Generally, the European left has no love for big American financial firms. But some Swiss shareholder activists have embraced the U.S.’s largest proxy-advisory service in a fight against Swiss food company Nestlé S.A.
The Swiss-based Ethos Fund, which owns Nestlé shares and promotes the vague and open-ended concept of “sustainable development,” is trying to stop Nestlé CEO Peter Brabeck-Letmathe from assuming the role of chairman. Nestlé has long been a target of left-wing activism for a variety of its stands, including its refusal to buy in to the anti-biotechnology agenda. But Ethos’s campaign got a boost when the Bethesda, Maryland-based Institutional Shareholder Services, which advises U.S. pension and mutual funds on proxy votes, sided with the Ethos proposal that Mr. Brabeck-Letmathe not hold both positions.
The firm used fancy language about good corporate governance, and claimed that having the same person be chairman and CEO “represents a step back in best practice.” ISS did not point to any data backing the claim that combining the roles was bad for shareholders, and there are many examples to contradict this. Bill Gates did pretty well for Microsoft, for instance, when he held the two positions for several years. Still, the ISS stance was pointed to by Nestlé’s critics as proof that the Ethos proposal banning Mr. Brabeck-Letmathe from serving as chairman was good for investors.
But before Nestlé’s shareholders vote tomorrow at the annual meeting, they should know there has been mounting criticism of ISS in the U.S. Observers wonder whether the firm, which has almost no competition in advising on proxies, really has the best interest of investors at heart. A closer look shows that ISS has the same “stakeholder” agenda of the Ethos Fund, even if the firm is less explicit about its mission.
ISS was founded in 1985 by Robert Monks, a former official with the U.S. Department of Labor. Mr. Monks has complained frequently about too much power of society in the hands of CEOs and has argued that institutional investors can and should be change agents. “Corporate power over the state tends to inhibit attention to non-profit-generating consideration,” Mr. Monks said in a 1996 speech at Cambridge University. Arguing that corporations cause “externalities” such as “unemployment and impact on the environment,” Mr. Monks concluded that “institutional shareholders possess the characteristics essential for an effective corporate monitor.”
Mr. Monks no longer owns ISS, but recent actions show the firm is still guided by his philosophy on pension-fund activism to reduce corporate “externalities,” rather than pursuing the bottom-line interest of shareholders. Last year, for instance, ISS sided with American unions in their quest to remove Safeway CEO and Chairman Steve Burd, who had clashed with unions over benefits. ISS claimed Mr. Burd was bad for shareholders but openly worked with the unions, hosting the American Federation of Labor/Congress of Industrial Organizations at an ISS conference. As David Hirschmann, a senior vice president for the U.S. Chamber of Commerce, put it to the Associated Press, “This is a labor dispute disguised in corporate governance clothing.”
ISS has also supported dissident shareholder resolutions for various companies ranging from climate change to affirmative action. Although its recommendations still have tremendous sway over mutual funds and state-run pension systems in particular, there are signs the firm might be losing its influence. When the final shareholder vote was counted, Safeway’s Mr. Burd easily survived. Only 17% of the company’s shareholders voted with ISS to oust him from the board.
So before Nestlé shareholders cast their ballots, they should do some “due diligence” on the firm attacking their CEO. They may find that it is not “best practice” to follow a firm that may not have their best interests at heart.