When Outsiders Oust Your Board: The Ramifications of ISS’ Influence on Public Companies

Institutional Shareholder Services’ call to oust seven of Target’s 10 Board members begs the question: How concerned should all public companies be regarding the influence that proxy advisory firms have over shareholders?

June 19 2014 by Lynn Russo Whylly

“Every public-company CEO is terrified of ISS,” says Robert L. Dilenschneider, a crisis communications consultant, who likened their power to former Senator Joe McCarthy’s witch hunt for communists in the 1940s and ’50s.

This particular situation, more than any other in the last year, carries a lot of weight. Just the way the ousting of Target CEO Gregg Steinhafel set a new precedent for making the CEO responsible for cyber-security, so too, the ability of ISS to influence the resignation of board members could set a new precedent, should they succeed in their goal.

The recommendation is specifically focused on those directors who serve on Target’s audit and corporate responsibility committees, which are tasked with overseeing and managing risk. ISS blames these committees for allowing the December data breach to happen and for not reacting quickly enough after it did happen.

In addition to the above recommendation, the ISS also calls for the separation of the CEO and chairman positions to increase oversight.

“The ability of ISS to influence the resignation of board members could set a new precedent, should they succeed in their goal.”

After hitting a low of $55.07 per share in February, down from $73.32 last July, Target’s stock rallied somewhat in March and April, then tanked again in May on the news of Steinhafel’s resignation.

Clearly in a volatile state, would a replacement of Target’s board finally be the jolt that puts the stock price on steady footing?

Let’s look at a few options:

  • They could reach out to ISS and try to work things out privately. For any company trying to get ahead of a situation, or trying to prevent one from happening, Dilenschneider suggests executive ask, what are the big issues ISS might choose to focus on? Then get your strongest director, who is clean as the driven snow, and go to ISS and lay out why these things are not an issue and how the company is doing the right thing going forward. The key, he says, “is to get ahead of it before it becomes an issue.”
  • They could strike preemptively, by removing one or two specific board members they feel are the weakest links or the least appropriate fit for the organization’s future vision. This would allow the board to maintain control of the situation and hopefully appease shareholders. “Generally, when you have a problem, you identify an expert in the problem area and try to put that person on the board,” says Dilenschneider.
  • Making their own changes would also give them the opportunity to add some competencies that aren’t currently represented, such as data and analytics. A board member from Acxiom, itself a hacking victim, or Oracle, Knowledgebase, Teradata or SAS, would certainly go a long way toward instilling confidence in its constituents.
  • They could also increase their communication with shareholders and the general public. By addressing the issue honestly and openly, and then proactively providing a plan for ensuring it doesn’t happen again, they could win back the trust of their shareholders and overrule outside firms. “This is where Target really dropped the ball,” Dilenschneider says. “They absolutely should be doing this.”

Those who think this couldn’t happen to them should take note. Despite the toll that the breach has taken on Target’s reputation and stock price, infrastructure consultants do not feel that other CEOs are learning from Target’s mistakes. Dale Peterson, CEO of security software firm Digital Bond, told the Claims Journal, “I’m convinced … C-level executives don’t understand the risks they’re accepting.”