Now a Public Company, RiskMetrics Gets Transparent about Its Governance Issues

Firm to tackle independent chair issue later this year

By James C. Hyatt

Once upon a time, a group of deep thinkers at J.P.Morgan organized a venture to provide sophisticated portfolio risk analysis for a wide range of securities.

They got their payday in January, when their spun-off company, now RiskMetrics Group Inc., went public at $17.50 a share (NYSE symbol RMG). The offering put $66 million in the pockets of selling shareholders, who had paid an average $4.52 a share, and raised $163 million for the company.

At the offering price, with about 57.8 million shares outstanding, the IPO valued the company at just more than$1 billion. Principal stockholders still control about 63 percent of the outstanding shares.

But the tale gets more interesting because in January 2007, RiskMetrics paid $542.8 million to acquire Institutional Shareholder Services, the largest proxy advisory service and a major player in the corporate governance world.

So, the 2008 IPO and public company disclosures of RiskMetrics provide a look at how RiskMetrics goes about practicing what it preaches in terms of hot-button governance issues.

Proxy access? A shareholder with at least 4 percent of the outstanding shares for at least two years can nominate a candidate for the board of directors.

Majority voting? It is required for uncontested elections and directors submit a contingent resignation in advance of each annual meeting.

Independent directors? RiskMetrics has standards that meet or exceed NYSE rules.

Say on pay? Shareholders will vote on an advisory resolution at each annual meeting to approve executive compensation policies and practices.

Pay equity? “The difference between our highest and lowest paid employees should be equitable,” with figures “guided simply by common sense,” the company’s proxy says. Executives receive no special perquisites. All employees receive the same retirement, health and welfare benefit opportunities, and none of the named executive officers have severance or change-in-control agreements.

The company says it seeks to “align the interests of our executives with our shareholders” by splitting incentive compensation for executives about 50-50 between cash and equity.

A major governance exception: RiskMetrics hasn’t separated the duties of Chair and Chief Executive Officer, a move often endorsed by ISS. At RiskMetrics, both jobs are held by Ethan Berman, 46, one of the company’s founders when it was spun-off from J.P. Morgan in 1998.

RiskMetrics’ Governance Principles call for the Chair to be an independent director “unless the Board concludes that it is in the best interests of shareholders to do otherwise.”

The company notes that it is evolving as a young public company and plans an evaluation of the Independent Chair role later this year, at which time the Board “will be in a better position to identify a potential Independent Chair.”

It does, however, have an Independent Lead Director.

RiskMetrics’ business is growing nicely. Revenues rose 19 percent in 2007 to $243 million, split about 50-50 between risk analysis and proxy services. Income from operations rose 45 percent, to $39.6 million. Net income fell from $16 million to $2.4 million, in part due to heavy interest expense from costs of the ISS acquisition.

In its first quarter 2008 report, RiskMetrics said revenue rose 36 percent, net income rose almost 20 percent, and the company anticipates that revenue for 2008 will be “in the upper half” of its previous range of $285 million to $295 million.

RiskMetrics deals with lots of heavy hitters. As of last September, the company’s client base included 2,300 financial institutions and 1,200 corporations and professional service organizations in 50 countries, including 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, and 41 of the 50 largest hedge funds.

Its database includes more than four million active global securities from 150,000 issuers in 200 countries and 220 exchanges.

In 2006, ISS provided proxy research and vote recommendations for more than 38,000 shareholder meetings in 100 countries, and voted 7.6 million ballots representing almost 700 billion shares.

In 2007, it processed 9.6 million ballots. (Its major competitors are Broadridge, formerly ADP Proxy Services, Glass, Lewis & Co., and Proxy GovernanceInc.)

The latest proxy statement spells out in unusual detail the basis on which RiskMetrics sets Berman’s compensation and the results of his performance review at the end of 2007. On a scale of one through five, with four indicating a target objective had been achieved, he was rated 4 overall, but only 2.5 in a Clients objective, which called for him to “expand existing relationships through cross-selling.”

Berman received $619,757 in salary, bonus and other items in 2007, up from $586,821 in 2006. For this year, he’ll be judged on these objectives:

•     Does the company have the right vision?
•     Are the right people in place to achieve that vision?
•     Has the CEO been the right kind of leader? Has he set the right “tone at the top”?

Among more specific objectives, was: “Prepare to become one of the Fortune ‘100 Best Companies to Work For’ in 2010.”