I.S.S. Backs Elliott in Fight Over Hess’ Board

An influential adviser to shareholders sided with Elliott Management in the fight over Hess Corporation‘s board, recommending that investors support the hedge fund’s slate of five directors.

In a report published late on Thursday, Institutional Shareholder Services backed virtually every argument that Elliott has made for its director nominees since beginning its fight earlier this year.

Much of Hess’ board has presided over significant erosion of the oil driller’s share price, and even a recent shake-up of the directors indicated that the company knew it needed change.

“It is hard to avoid the conclusion that the sweeping changes to this class of management nominees in March, a month after the proxy contest was announced, were not a de facto admission that the existing board would not withstand much scrutiny from shareholders given a real choice of nominees,” I.S.S. analysts wrote in their report.

The recommendation â€" coupled with the backing from another proxy advisory firm, Glass Lewis â€" marks a significant victory for Elliott in its campaign. The hedge fund, which owns a 4.5 percent stake, has proposed weighing a number of significant changes at Hess, including a potential break-up of the driller.

At the heart of the hedge fund’s campaign is the belief that Hess has been undisciplined in its operational focus and profligate in its spending.

I.S.S. wrote in its report that Hess appears to have consistently lagged its peers in terms of stock appreciation, having delivered a total shareholder return of 1.7 percent over the three years before Elliott began its campaign. That’s compared with a 46.6 percent average for the driller’s peers and 46.2 percent for the Standard & Poor’s 500-stock index.

For its part, Hess has argued that a plan it instituted in 2010 is finally bearing fruit, even as it replaced a number of incumbent directors with new names. But I.S.S. questioned that argument, as well as the decision to overhaul the slate of board nominees up for election this year.

“The question is never whether an incumbent board, having presided over a long destruction of value, has suddenly awakened to the need for change,” the proxy firm wrote. “It is whether, when the heightened scrutiny of the proxy contest ends, the same board is likely to remain as reinvigorated as it now professes to be.”

Unsurprisingly, Elliott was elated by the I.S.S. report. “We appreciate I.S.S.’ support and recognize that I.S.S. rarely endorses a full slate of nominees,” John Pike, a senior portfolio manager at the hedge fund, said in a statement. “This conclusion further underscores the issues at Hess and the need for change.”

For its part, Hess lambasted the report as “flawed and shoddy analysis” and the latest supporting activist investors over a company. The driller added that a smaller proxy adviser, Egan Jones, backed its slate of nominees in full.

“ISS has betrayed its own principles,” Hess said in a statement. “It is troubling that ISS would suggest that shareholders support dissident candidates who are beholden to a new, four percent shareholder that has offered no constructive ideas for change at Hess.”

Hess’ shareholder meeting is currently scheduled for May 16.