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European Commission “re-working” text of planned regulation of proxy firms

Tweaks being made to new Shareholder Rights Directive.

The European authorities are “re-working” the text of the revised Shareholder Rights Directive as it refers to proxy advisors to focus on “high-level principles” as opposed to a strict regulatory regime, a senior European Commission official has said.

It’s a sign of a potential softening of approach by the Commission to overseeing firms which advise institutional investors how to vote at company AGMs. The Commission had previously spoken of “regulatory action” against the firms.

Jeroen Hooijer, Head of Unit, Corporate Governance and Corporate Social Responsibility at the European Commission, said the current draft of the directive is being “re-worked” by the Italian presidency of the European Council. Italy has the revolving presidency of the member state-level Council until the end of the year.

Speaking at an event in Brussels organized by Eurosif, the European Social Investment Forum, Hooijer hoped a self-regulatory code set up by the industry, in response to earlier pressure from the European Securities and Markets Authority (ESMA), would have a chance to get going.
Under the current draft of the directive, proxy firms would have to guarantee their recommendations are “accurate and reliable” and disclose annually their methodologies, information sources, the nature of their dialogues with companies and the total number of staff involved in making recommendations. Proxy firms would also have to identify and disclose “without undue delay” any actual or potential conflict of interest or business relationships.
The proxy advisory industry has been a focus in the wake of the financial crisis though a review of proxy firms in 2013 by ESMA found no market failure and instead called on proxy firms to self regulate. This led to the formation of the Best Practice Principles, which published a set of comply-or-explain principles for shareholder voting research in March.If the directive is tweaked, it would be welcomed by proxy firms who feel they are a ‘soft target’ for regulators. “We’ve been libeled and slandered and misrepresented,” said fellow panelist Sarah Wilson of Manifest, which is a member of the industry group. She added the directive as it currently stands “doesn’t understand” ESG research and doesn’t even mention governance overlay. A group of Europe’s independent proxy advisors that work together as Expert Corporate Governance Services (ECGS) had earlier challenged the proposals.
Hooijer stressed that the overall impetus for the revised directive is to clarify how institutional investors deal with their long-term liabilities, adding: “We’ve been quite inspired by the report from John Kay [the economist who wrote the influential Kay Review for the UK government in 2012].”

Hooijer was optimistic a revised text of the directive would be in place by the end of the year. But, he said, the “big question mark” was how the “increasingly influential and independent” European Parliament looked at it.

Also speaking at the event was Fabio Galli, Director General of Italian asset management association Assogestioni, representing pension fund federation PensionsEurope, where he is heading a working group on the Directive. Galli, who’s also a board member at fund management industry group EFAMA, citing the rush to invest in China-based e-commerce group Alibaba, said: “I’m not sure about the intrinsic value of corporate governance for investors.”

And he worried that Europe may end up with a “very healthy corporate governance environment” but a stagnant economy. PensionsEurope published a position paper last month in which, while welcoming the promotion of long-term investment in the directive, it warned that its provision covering disclosure of investor engagement with companies could cause unnecessary red tape and ‘box-ticking.’