European proxy advisory firms hit back at EU’s regulation plans

ECGS grouping challenges Shareholder Rights Directive proposals

A group of Europe’s independent proxy advisors that work together as Expert Corporate Governance Services (ECGS) have challenged proposals by the European Union to regulate proxy advisory firms, arguing that any rules that are applied to shareholder voting advice should also cover broker research supplied by banks or advice given by trade associations and proxy solicitors.

In its paper, ECGS suggests that the EU proposals could be subject to legal clarification. It said: “If any new European regulation of these services is imposed then this must be done in a non-discriminatory way and made compulsory for all types of advisory services….there should be no exceptions in order to enable the necessary level playing field: we believe that this is consistent with fundamental European law.”

The new EU rules, which came via proposed amendments to the EU Shareholder Rights Directive published in April, could be in place by the beginning of 2015, although the text still has to be approved by the member state-level Council of Ministers and the European Parliament.

The new rules would require proxy firms to guarantee their recommendations are “accurate and reliable” and disclose annually their methodologies, information sources, the nature of their dialogues with companiesand 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.
In its new position paper, ECGS said it was surprised that the European Commission had targeted proxy firm regulation.

It pointed out that a review of proxy firms in 2013 by the European Securities and Markets Authority (ESMA) had found no market failure and instead called on proxy firms to self regulate.

Following the ESMA review, a group of proxy advisors, Glass Lewis, Institutional Shareholder Services, IVOX, Manifest, PIRC and Proxinvest, formed an industry group, the Best Practice Principles and published a set of comply-or-explain principles for shareholder voting research in March, which can be accessed here.

ECGS comprises Proxinvest in France, Ethos in Switzerland, Deutsche Schutzvereinigung für Wertpapierbesitz (DSW) in Germany, Shareholder Support in the Netherlands, Frontis Governance in Italy and Responsible Investment Group in Montreal, Canada. The US Securities and Exchange Commission recently published its own oversight on proxy voting firms.