An ISS voting recommendation adds 9%+ to the value of BKS: does this make sense?

My guess is that it doesn’t.  But this will be an interesting case to watch.

Barnes and Noble

The management of BKS, the Riggio family, is locked in a struggle with dissident shareholders, Ron Burkle and Peter Eichler, over the strategic direction the bookseller should take.  Each side controls about a third of the stock.  The Burkle group has nominated three candidates to oppose management’s selections in the upcoming shareholder vote for members of the company’s board of directors at the firm’s annual meeting.

Both sides are actively campaigning for their candidates.  That’s where Institutional Shareholder Services (ISS), a part of the MSCI asset management consulting conglomerate MSCI, comes in.

what does ISS do?

Each year, a publicly traded company will prepare a list of proposals that it needs a favorable vote of shareholders to implement.  The list varies from company to company, and country to country, but almost always includes names of candidates for election to the firm’s board of directors.  The document that contains this list is called a proxy statement. In the US, companies file the proxy statement with the SEC and send copies, along with what amounts to an absentee voting ballot, to its shareholders.

Over the past twenty years or so, government regulation has more closely defined the obligations of registered third-party investment advisers, like mutual fund or pension fund money managers, toward voting the shares of stock they hold for their clients.  Current SEC rules require that investment advisers:

–vote the shares they control,

–vote in the best interests of their clients, and

–let clients know what they’re doing, and why.

This is a large legal and administrative burden for an asset management company, which may hold thousands of different stocks in its portfolios.  And if a money management firm performs this task completely by itself, it risks being second-guessed or possibly sued for actions it takes.  So virtually everyone hires a proxy consulting firm, both to ease the administrative burden and as insurances agains possible lawsuit.

ISS is the largest and most influential proxy advisory firm.  It has been in business since 1985, about the time voting clients’ shares started to become a hot-button issue.  ISS analyzes and makes voting recommendations to its clients–primarily asset management companies–on matter contained in publicly traded companies’ proxy statements.  Yes, someone–more likely, a committee of investment professionals–in the asset management firm will review the proxy and cast the firm’s vote.  But in addition to the proxy, he will have a detailed ISS report in his hand.  As a practical matter, he/they will either follow the ISS recommendations, or extensively document the instances where the vote is in the other direction.

The bottom line:  ISS has immense influence in directing the votes of institutional shareholders of stock.  And for most publicly traded companies, institutions hold a majority of the shares.

the BKS case…

In the case of BKS, ISS has recommended voting for the dissident board nominees, not management’s.  Hence the spike upward in BKS stock yesterday.

…is not a typical one

BKS has a market capitalization of about $1 billion.  That’s tiny, but it still overstates the liquidity of the stock.  In addition, the Riggio family + the dissidents own about two-thirds of the shares.  That means that the “float,” that is, the shares available for ordinary trading, amounts to only about $350 million.

Average trading volume is about one million shares a day–or about $15 million worth.  So an institution would figure to be able to trade at most $2-$3 million a day without making a lot of noise in the market.  Even that might require very skillful trading.

In other words, BKS is too small and too illiquid for most institutions.


My guess is that the ISS recommendation is going to have little effect on BKS voting.  Institutions probably don’t own the stock, and non-institutions don’t know–or care–who ISS is.

I think retail investors hold most of the float.  That’s important.  Typically, retail investors are intensely loyal to the incumbent management, even in cases where this attitude seems to fly in the face of common sense and the retail investor’s own economic interest.

There is, of course, the wider issue of whether having  Mr. Riggio or Mr. Burkle calling the shots will make any difference for a firm whose market is undergoing rapid structural change.

As I said at the outset, this vote should be interesting to watch.

Leave a Reply

%d bloggers like this: