Corporate governance agencies: the need for transparent voting decisions

Let’s be honest, corporate governance advisory firms like PIRC are not universally popular with the companies we monitor. There’s a long history to this. When we first started providing research and advice to shareholders the best part of 20 years ago many investors didn’t even vote. So to be faced for the first time with the kind of interest from their owners that economic theory tends to assume exists (or should do) was something of a shock to companies. Many didn’t like it, or consider it legitimate. We are a long way past that point now. Corporate governance has become mainstream. Most companies accept that many shareholders will take an interest in things like board structure and remuneration. They exhibit exactly the kind of transparency and accountability in respect of these issues that was once so controversial. As part of the mainstreaming of corporate governance in the investment world, companies that work with shareholders to address ownership rights and responsibilities have become increasingly influential. So why do companies still bristle at the mention of voting advisers? We know from many heated exchanges over the years that one of the things that gets companies really annoyed is the lack of an opportunity to comment. Advisers put out reports on companies without giving them the opportunity to have their say on the content. Companies are also often flummoxed by how advisers arrive at their voting recommendations, especially when they have made an effort to explain their governance arrangements andconsulted with some shareholders directly. Occasionally there are questions about conflicts of interest: do we get paid by any of those we research? (By the way the answer to this one in PIRC’s case is simply, no). Then there’s the ‘do as I say, not as I do’ criticism. We ask a lot of companies (and sometimes investors) in terms of transparency and accountability. But what level of openness do we demonstrate ourselves? This last point is particularly important, as we do see ourselves as advocates for better governance as well as a provider of services to shareholders. We expect companies to adhere to the UK Combined Code (or Corporate Governance Code as it is to become) or explain why not. More recently, best practice has been set out for institutional investors in the form of the Institutional Shareholders Committee principles, which in turn are expected to form the bedrock of the proposed new Stewardship Code. Now even remuneration consultants have their own code of best practice. An obvious missing piece in the chain of accountability is a best practice framework for governance advisers. Therefore we accept that something needs to change. In January 2009 we took what we consider to have been quite a radical step, and began publicly disclosing via our website the voting recommendations that we make at company meetings. As far as we know we are still the only voting adviser to have done this. However, given the scale of reform underway in response to the financial crisis, we believe we now need to go even further. So, after a prolonged
period of internal discussion, we recently decided that the best way to address the legitimate issues raised by companies and other about the role of governance advisers was to develop our own code of conduct. In doing this we have sought to both focus on some of the specific issues raised by companies – like the right to reply and disclosure of potential conflicts – and the need to exhibit the same transparency demanded of others. In order to take this discussion further we have set out six best practice principles, which are as follows –

• Clear voting policy guidelines should be made available to clients, the companies whom the adviser is monitoring and to the market;
• Clear audit trail and explanation of the process for assessing companies and making voting recommendations should be available to clients and the companies monitored;
• Possible conflicts of interest should be disclosed to clients and to companies monitored and, where necessary, to market regulators (i.e. paid consulting with companies);
• Companies monitored should be given reasonable opportunity to comment on voting recommendations made and the basis of such recommendations;
• Voting agencies should routinely report to clients on actions taken on their behalf;
• All voting recommendations made by a voting adviser should be publicly disclosed post-meeting.We do not expect that publishing this set of principles will take all the antagonism out of the relationship between companies and advisers. There will always be disagreements. But we do hope that it will help embed certain procedures that are quite reasonable requests on the part of companies. We also believe it will help to make clear how we reach the decisions that we do, and, through public disclosure, make completely transparent what those opinions are.

“We ask a lot of companies (and sometimes investors) in terms of transparency and accountability. But what level of openness do we demonstrate ourselves?”

Finally we hope that publishing these principles will lead to more discussion of the role of organisations that provide services to investors relating to their ownership responsibilities and the kind of standards can be expected of them. Our message to companies is quite simple: you’re right. We do need to be more transparent and more accountable. It is quite reasonable of you to ask us to adhere to the same principles we have long expected of you. We can do better. We therefore hope that the framework we have published represents a step forward in the standards businesses like ours adhere to. If you have any thoughts on the principles we would very much like to hear from you.
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