Turning the Tables: RiskMetrics's
Faces His Day of Shareholder Judgment
By JOANN S. LUBLIN
June 2, 2008; Page C1
Ethan Berman runs
RiskMetrics Group Inc., which makes money by judging others. Now, the
chief executive is preparing to be judged himself.
RiskMetrics owns ISS
Governance Services, which exerts tremendous clout in advising
institutional investors on proxy fights, director elections and
shareholder resolutions. Critics say ISS judges firms on criteria best
understood by buying its consulting services.
Following its January
initial public offering of stock, New York-based RiskMetrics has public
shareholders of its own. Those investors will meet for the first time
Wednesday, and some may complain that RiskMetrics doesn't meet its own
standards for corporate governance. "I am a little bit worried," Mr.
Berman admits. A reputation for good governance is "crucial to the
success of the company."
The biggest concerns: Mr.
Berman's dual roles as CEO and chairman as well as RiskMetrics' heavy
reliance on subjective factors, such as "exemplifying our corporate
values," in paying top executives other than Mr. Berman. ISS generally
favors separating the chairman and CEO roles and encourages companies to
judge executives by objective factors, such as financial results and
"RiskMetrics is taking
positions on several governance issues that are at odds with what it
recommends for other public companies," says Cary Klafter, corporate
secretary at chip maker Intel Corp. "Many business leaders would
consider all this to be a bit ironic."
This week's meeting will
be a new experience for Mr. Berman. The 46-year-old
playwright-turned-bond-trader has never attended a shareholder meeting
of a public company.
Mr. Berman has led
RiskMetrics since its 1998 spinoff from J.P. Morgan and has long favored
freewheeling transparency. For years, he convened staffers every Friday
to share financial results and seek consensus about key decisions.
In preparing for the IPO,
he promised shareholders similar transparency and unusual access to
inner workings. The company will let investors cast an advisory vote on
executive pay, approve the CEO's 2008 compensation objectives and easily
nominate board members. Its proxy statement divulges the 24 ratings from
Mr. Berman's 2007 performance review; directors rated him 2.5 on a
one-to-five scale for expanding client relationships, for example.
In other ways though, Mr.
Berman has found it hard to live up to his ideals while running a public
company. For a road show last winter, he drafted a slide that described
RiskMetrics' flat hierarchy, lack of internal titles, employees' sizable
stock ownership, entrepreneurial environment and annual "fun day." He
also intended to disclose specific earnings and revenue targets for
Outside investment bankers
and lawyers nixed the ideas. "I have never caved in on more issues in 10
years," Mr. Berman lamented in late December, slamming a conference
In September, he stopped
divulging financial figures during companywide meetings -- and began
scrutinizing regulatory filings before signing them. He asks his
executive assistant to put pink stickers on forms covering "something I
could go to jail for." A 2002 corporate-reform law imposes severe
penalties if high-level executives sign false financial statements.
Mr. Berman signed a
November prospectus where he and eight fellow directors pledged to strip
his chairman's title soon after RiskMetrics went public. After the IPO,
Mr. Berman urged the board to divide the roles this spring. But the
other directors wanted to defer the split until at least next year.
"We have performed well
historically with Ethan as chairman and CEO," says Christopher Mitchell,
a board member and managing director of Spectrum Equity Investors, which
holds a 17.9% stake in RiskMetrics. The firm posted a 20% rise in
first-quarter net income. Its shares, which went public at $17.50, are
at $20.73 on the New York Stock Exchange.
Mr. Berman then asked the
board to publicly commit to dividing his roles by 2009. But on April 3,
its nominating and corporate-governance committee rejected that
That irks Robert A.G.
Monks, a veteran corporate-governance activist and founder of ISS who is
an old friend of Mr. Berman's father.
The refusal of RiskMetrics
directors to endorse naming an independent chairman within a year "is a
very serious matter [because] this is a company with vast impact," Mr.
Monks says. He owns 15,770 RiskMetrics shares through his stake in ISS,
and says he may attend the annual meeting.
"The right chairman would
add enormously to the value of the enterprise,"' he says.
RiskMetrics' criteria for
paying executives also are drawing flak. Egan-Jones Proxy Services, an
ISS rival, suggests that shareholders reject a resolution endorsing
management's pay philosophy because annual bonuses for top officers
besides Mr. Berman largely reflect subjective factors.
In its proxy, RiskMetrics
directors said they "believe no other company knows how to compensate
our people better than do we." That attitude bothers some corporate
executives. "I have never seen this kind of holier-than-thou approach to
executive compensation," says Karl Barnickol, a retired general counsel
and corporate secretary for chemical company Solutia Inc. who is now a
partner at Husch Blackwell Sanders, a law firm in St. Louis.
"The company has clearly
lived up to its responsibility about being transparent," replies Mr.
Mitchell, a member of the board's compensation committee.
Mr. Berman also has been
trying to mollify ISS's corporate critics, who say its governance
guidelines are vague and encourage companies to buy its consulting
services. It is a "heads-you-lose, tails-you-lose kind of environment,"
says David Hirschmann, a senior vice president of the U.S. Chamber of
So far, though, Mr.
Berman's efforts have produced mixed results. An advisory council mainly
formed to air corporate complaints about ISS has met only twice, with
The slow start irked
director Arthur Levitt, a former Securities and Exchange Commission
chairman who championed the panel's formation. Mr. Levitt calls a
protracted effort to expand its size and mission "unnecessarily
bureaucratic," though things now seem to be "on the right track."
Mr. Hirschmann remains
unconvinced. "We do expect a lot more transparency, fairness and clarity
around how they set their policies," he says.
When Mr. Berman takes the
annual-meeting dais, he will read scripted replies to anticipated
questions about RiskMetrics' governance, such as his dual role.
"I feel awkward having to
give a prepared answer about the separate chairmanship, especially since
I can't commit RiskMetrics to a firm date for a split," he says.
Write to Joann S.