Proxy firms group renew self-regulated code of conduct with investor input

Principles dovetail with requirements of the EU Shareholder Rights Directive II

A reviewed version of the so-called Best Practice Principles (BPP) for Shareholder Voting Research Providers has been published after a two-year consultation period by the group of five firms that sponsor them link.

The revision was informed by a 12-member advisory panel that included Richard Gröttheim, CEO of Swedish state fund Sjunde AP-fonden (AP7), Carine Smith Ihenacho, Chief Corporate Governance Officer of Norges Bank Investment Management, Ken Bertsch, Executive Director at the Council of Institutional Investors and Rients Abma, Executive Director of Eumedion, the Dutch corporate governance body.

The BPP Group was set up in the wake of a review of the proxy advisory industry initiated by the European Securities and Market Authority (ESMA) which found no clear evidence of market failure in the sector.

But ESMA wanted industry players to develop a code focused on transparency and disclosure, which led to the creation of the first principles in 2014 by the current five signatory members: ISS, Glass Lewis, Minerva (formerly Manifest), PIRC and Proxinvest.

The purpose of the 2019 Principles, the group wrote, is “to complement applicable legislation, regulation and other soft-law instruments” as well as to promote greater understanding of their work.

European legislation that is currently being transposed in a number of member states, the Shareholder Rights Directive II (SRDII), introduced comply or explain transparency requirements for proxy advisors, acknowledging that “they may also have an important influence on the voting behaviour of investors,” as stated in the preamble of the Directive.The SRDII requires proxy advisors to disclose reference to a code of conduct and report on its application. When they do not apply a code or they depart from the one they use, an explanation should be provided.

Whether as signatories of a third-party code or of their very own code, proxy advisors should disclose information such as: their methodologies, sources, whether they take company-specific conditions into account, or conflict of interests policies.

According to the BBP Group, the 2019 Principles address the SRDII requirements, although they emphasize that it is a “global code of conduct” which is “based on the understanding that the ultimate responsibility to monitor investments and make voting decisions lies with investors.”

The observance by signatories of the reviewed principles will be monitored by the “BPP Oversight Committee”, whose members are yet to be appointed, and is granted power to “the ultimate sanction of ending BPP Signatory status and BPPG membership”.

Despite the limited scope for competition of an industry dominated by two large players, there are a range of other proxy firms that are not signatories to the principles.

Danielle Melis served as the Independent Review Chair, after taking over from Chris Hodge who led the first phase of the process.