Calls for greater stewardship by institutional investors are almost certain to lead to demand for wider use of corporate governance ratings and advisory services. The field of proxy voting agencies has had its share of controversy over the years. While their presence in the marketplace has certainly caused many corporations to pay attention to codes and best practice, there's a downside as well. What we hear frequently – from corporate directors, in the main – are complaints that the scrutiny of these agencies is driven by a tick-box mentality and that the voting decisions they lead to bear little resemblance to the conversations that take place between senior management and the fund managers who buy and sell the shares. Into this controversy steps the European Union.
The European Securities and Markets Authority has published a discussion paper which seeks to provide an overview of the industry, its role in the market and the possible policy options available to regulators. It looks in particular at:
- Internal issues: Factors influencing the accuracy, independence and reliability of the proxy advice such as such as the potential for conflicts of interest to play a role, proxy advisors’ methodology and their dialogue with issuers; and
- Transparency and disclosure: Degree of transparency on management of conflicts of interest, dialogue with issuers, the voting policies and guidelines, the voting recommendations, and the procedures for elaborating a voting recommendation report.
The paper makes clear the policy options are open, ranging from taking no action, to letting member states deal with, adopting quasi-regulation or even binding legislative action. The consultations closed in June and a feedback report will come sometime before the end of the year.
Source document: The ESMA discussion paper is a 40-page pdf file.
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