I.S.S. Supports Dissident Slate for GrafTech Board

Nathan Milikowsky, a former board member of the steel company GrafTech, has won support from Institutional Shareholder Services, a leading proxy advisory firm, in his effort to regain influence on the board.

I.S.S. said shareholders should vote for Mr. Milikowsky and his two other nominees at GrafTech’s annual meeting on May 15, dismissing the company’s assertion that Mr. Milikowsky was unfit for service.

Mr. Milikowsky, the largest individual shareholder of GrafTech, was ousted from the board after management accused him of leaking material nonpublic information to a hedge fund. That touched off a convoluted war of words that is now coming to a head.

I.S.S. said the current GrafTech board and management had underperformed.

“There is evidence that poor execution and poor operating performance has extracted a huge economic toll on shareholders,” I.S.S. said in its recommendation. “GrafTech has meaningfully underperformed its peers in both the near and longer terms. The relative underperformance has been persistent and most striking beginning in 2008 and sharpening in 2011.”

What is more, I.S.S. said the current board needed to be refreshed.

“The targeted directors have been on the board for extended periods, and as such may bear some responsibility for the company’s history of poor operating and share price performance,” I.S.S. said. “Additionally, it does appear that the board’s recent corporate governance changes â€" in particular, its willingness to refresh the skills, experience, and average tenure of directors and to separate the roles of the C.E.O./chairman â€" are reactive rather than heartfelt and largely driven by the involvement of the dissident. In aggregate, there is compelling reason for shareholders to support significant change at the board level.”

I.S.S. did not directly weigh in on whether Mr. Milikowsky leaked material nonpublic information to a hedge fund, thus violating his duties as a director, as GrafTech contends. But it said at this point the company needed his expertise, especially because, as the largest shareholder, he was still motivated to increase the company’s value.

“Weighed against the significant strengths even the board concedes Milikowsky would bring as a director of this troubled company, the flimsy support” for GrafTech’s accusations offered to shareholders “seems particularly inadequate to the board’s conclusions,” I.S.S. said. “Certainly, as the company’s largest shareholder, Milikowsky’s interest in the success of the company appears well aligned with shareholders.”

GrafTech issued a strong statement of disagreement on Monday.

“I.S.S.’s conclusion not to recommend the election of GrafTech’s seven highly qualified and experienced director nominees demonstrates a complete disregard for both the results of an independent investigation and for its own standards of ethical conduct and corporate governance,” GrafTech said in its statement. “Moreover, it is clear that I.S.S. does not fully grasp the long-term negative impact that the Milikowsky Group’s market-share focused commodity pricing strategy would have on GrafTech’s margins and how severely it could erode stockholder value.”

Glass Lewis, another proxy advisory firm, earlier declined to support Mr. Milikowsky’s slate. But headed into next week’s meeting, the I.S.S. recommendation could be a pivotal moment in one of the few remaining proxy fights roiling corporate America this year.

“We are gratified that an objective and well-respected proxy advisory firm has carefully reviewed this contest and recommends that GrafTech shareholders elect all three of our nominees to GrafTech’s seven-member Board,” Mr. Milikowsky said in a statement. “We are prepared to work collaboratively with our fellow directors to drive shareholder value and address the acute problems that have led to the company’s severe and prolonged underperformance.”