Annual meeting season is in full swing on both
sides of the Atlantic. This year, a new player is being dragged onstage to
perform alongside traditional characters such as the generously-paid-off
former executive and the lone campaigning investor. The proxy adviser’s
moment is here.
Proxy firms’ reluctant move from their
behind-the-scenes role has two causes.
In the US, it stems from reaction to the
first annual meetings to be subject to advisory “say on pay” votes. As
shareholders have persuaded some companies to change pay policies and
voted against the remuneration reports of a handful who were not listening
hard enough, attention has shifted to the firms such as
ISS and
Glass Lewis & Co which advise institutional investors how to vote.
The
Securities and Exchange Commission is in the early stages of
considering new rules.
In Europe, meanwhile, regulators have
started looking at proxy firms because institutional shareholders are
becoming more dependent on them. This reliance comes as investors must
respond to criticism that they were too dozy during the financial crisis,
while managing widely diversified portfolios: Norges Bank Investment
Management, the Norwegian state fund manager, has holdings in more than
8,000 companies, for example.
So this month’s
EU green paper on corporate governance asked whether proxy firms
should be more transparent (hard to see that getting a resounding No) and
if they should face greater regulation. AMF, the French stock market
regulator, has weighed in too.
The two central concerns are that proxy
advisers lack transparency and that they are subject to conflicts of
interest. I would add a vaguer worry – that firms may sometimes get in the
way of constructive discussion between companies and investors since they
necessarily have their own agendas to pursue.
So far, proxy firms’ responses to the
concerns have had their awkward aspects.
Take the idea that the fuss about proxy
advisers is overblown because the firms merely offer recommendations and
do not decide how investors should vote.
Fine. Sometimes an advisory firm does end
up on the losing side of a poll. Depending on where you look, estimates of
how a recommendation can affect a decision range from 6 per cent of votes
to over 30 per cent.
Yet this “we’re not so influential after
all” line sits uneasily alongside a business model based on providing
shareholders with advice they think is worth buying. It would be an
unusual investor that consistently disregarded recommendations but was
content still to pay for them. And where a firm sells customised advice
that reflects a particular investor’s values then that – surely – is very
likely to be heeded.
Then there is the question of conflicts.
Proxy firms that choose to run a corporate advice business can argue that
companies have asked them for this service and it makes no commercial
sense to provide it for free. That sounds fair enough. They may also say
it is a good way to raise standards. Perhaps. As for the potential for
conflict, they use firewalls to ensure that those who make recommendations
to investors do not know which companies are corporate clients and so
cannot be influenced by that knowledge.
But this approach leaves firms with a tough
line to sell. It means arguing that the best way to manage potential
conflicts is not to be transparent to the market in general, since this
would destroy the firewalls that are the bulwark against such conflicts.
Good luck with that one.
It boils down to this. Proxy firms are an
inevitable – and often valuable – part of enabling shareholders to reach
decisions about the companies they own. The trends that have fed their
growing influence show no signs of going into reverse any time soon. So
even if proxy advisers believe questions about their role come with
ulterior motives, answers are still needed.
Clearer regulation would be a good start.
About half the current proxy firms in the US are registered with the SEC
as investment advisers. Pirc, one of the UK’s bigger shareholder advisory
firms, is registered with the Financial Services Authority. Yet in neither
market is the oversight comprehensive and clear.
Compulsory registration would provide a
basis for minimum standards on, for example, publishing how voting
policies are decided. Beyond a registration requirement, greater
disclosure is a more promising avenue than new restrictions on business.
If companies and investors can see what a proxy firm is doing, they can
make up their own minds about the value of that activity and can argue
their opinions.
This is not a case of causing damage by
letting daylight in upon magic. Instead, it is about ensuring the
spotlight falls as it should on a leading figure in the ongoing drama that
is the corporate-investor relationship.
alison.smith@ft.com
