

The European Securities Market Authority has launched a consultation on the role of proxy advisors.
They are bracketed alongside auditors, analysts and the credit ratings agencies for their role in the financial crisis in a new discussion document from the regulator.
ESMA says it has identified key issues related to the proxy advisory market “which may have an impact on the proper functioning of the voting process”.
It will consider a range of policy options, with binding European Union-level legislation a possibility. ESMA notes that, national standards aside, proxy firms are currently “not regulated at a pan-European level”.
“The key issues with regard to policy options influence the accuracy, independence and reliability of the proxy advice,” ESMA said. “Other issues take into account the transparency of procedures within proxy advisors and mitigation of conflicts of interest.”
The move prompted an angry reaction from one proxy firm mentioned by ESMA. “Proxy/ESG advisors, probably the most socially USEFUL part of finance, get heat for blowing the whistle on poor corporate governance,” said Manifest on its Twitter feed. “Whither free speech?”
The other firms referred to include Glass Lewis (owned by the Ontario Teachers’ Pension Plan), MSCI’s Institutional Shareholder Services (ISS), the Association of British Insurers’ IVIS, PIRC and Paris-based Proxinvest.ESMA said companies (issuers) have raised concerns about the influence that proxy firms have over institutional investors’ voting. It sees a “clear conflict” when proxy firms provide consultancy services to companies while offering research to clients about those companies. There will be a need to address any evidence of market failures, ESMA said. But it added: “Even without clear evidence of market failure, some regulatory initiatives may be considered as necessary in order to prevent potential risks.”
“Some regulatory initiatives may be considered as necessary”
Last month a report from the UK’s Financial Reporting Council said both corporates and investors had concerns about what one participant referred to as the “quiet tyranny” of proxy voting agencies. ESMA said any action should not go against recent efforts to improve standards for investor stewardship.
The ESMA move follows similar action from the Securities and Exchange Commission in the US last year.
ESMA’s 40-page consultation is called An Overview of the Proxy Advisory Industry. Considerations on Possible Policy Options. The consultation runs until June 25 and ESMA will publish a feedback statement in the fourth quarter of this year.