No binding regulations for proxy advisers, says European regulator

European Securities and Markets Authority calls for increase in transparency from proxy advisory firms

No binding regulations are needed to govern the proxy advisory industry but proxy advisers should agree on self-regulation to guide behavior in areas such as transparency and disclosure, according to a report by the European Securities and Markets Authority (ESMA).

The regulator’s report, which follows months of interviews and meetings with proxy advisory firms and other market participants, urges the industry to establish a code of conduct to minimize the possibility of conflicts of interest and to enhance transparency in the way advisers reach their decisions.

‘ESMA currently considers that the introduction of binding measures would not be justified,’ the regulator says in its report. ‘However, based on its analysis and the input from market participants, ESMA considers that there are several areas, in particular relating to transparency and disclosure, where a co-ordinated effort of the proxy advisory industry would foster greater understanding and assurance among other stakeholders in terms of what they can rightfully expect from proxy advisers.’

The regulator says it will revisit the issue in two years and may change its mind if it believes the proxy advisory industry has taken no clear steps toward self-regulation.

In the report, ESMA sets out a series of observations and guidelines it calls ‘high-level’ principles to kick-start a discussion within the proxy advisory industry, including a definition of the advisers’ role as ‘facilitators for institutional investors to help them to discharge a specific part of the investors’ stewardship responsibilities more efficiently.’

The principles also state that the advice of the proxy advisory industry is to be viewed as a ‘signaling tool’ and should not be ‘mechanistically’ relied upon. The investors, the report states, are ultimately responsible for ensuring votes are ‘appropriately carried out.’

ESMA says its research reveals that the influence held by proxy advisers in the voting process is difficult to measure as investors vary widely in how much they rely on advisers’ judgments. The regulator calls for ‘a sufficient degree of transparency about the use of these services.’

During the consultation period, which started in March last year, ESMA interviewed representatives of dozens of market participants, including proxy advisory firms ISS and Glass Lewis, as well as companies including ArcelorMittal and investors such as JPMorgan, BlackRock and Hermes Fund Managers.

In its reply to an ESMA questionnaire, Glass Lewis argues that ‘the extent to which advisers influence voting outcome is overstated. More than 80 percent of Glass Lewis’ 900 clients – including the majority of the world’s largest public pension funds, asset managers and mutual funds – vote according to a custom policy or via a custom process for reaching vote decisions [that] often result in votes in line with Glass Lewis’ recommendations for the same or different reasons,’ the firm notes in a public letter to ESMA.

PIRC, which offers European corporate governance, proxy voting and CSR investment research and advice to clients holding combined assets of more than £1.5 tn ($2.3 tn), welcomes the findings, adding that ‘the need for transparency and accountability in the proxy advisory industry’ is an important issue for corporate governance in general.

‘The most significant point for the proxy advisory industry is that ESMA finds there is no market failure,’ says Alan MacDougall, managing director of PIRC, in a press release. ‘We hope critics of proxy advisers accept this finding.’


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