Governance research firms launch debate on draft set of industry principles

A group of leading governance research providers has launched a consultation about a set of industry principles in a self-regulatory response demanded by the European financial authorities.

The group, comprising proxy advisory firms Glass Lewis, Institutional Shareholder Services, IVOX, Manifest, PIRC and Proxinvest, has drafted a set of ‘comply-or explain’ principles focusing on service quality, conflicts of interest and market communications with supporting guidance.

The consultation into the ‘Best Practice Principles for Governance Research Providers’ will run until December 20 ahead of finalization in February next year.

An industry code of conduct was called for by the European Securities and Markets Authority (ESMA) regulator last year which reviewed the industry following concerns about the influence of proxy firms over investors’ voting decisions at company meetings.

Although the body found no clear evidence of market failure in the sector it did want it to develop a code centering on transparency and disclosure.

The research firms have appointed Professor Dirk Andreas Zetzsche of the University of Liechtenstein to chair a working group to oversee the process. They have set up a website here.

Zetzsche, who is also Director of the Center for Business & Corporate Law at the University of Dusseldorf, is joined on the committee by industry executives KT Rabin (Glass Lewis), Jean-Nicolas Caprasse (ISS), Alexander Juschus (IVOX), Sarah Wilson and Paul Hewitt (Manifest), Alan MacDougall (PIRC) and Pierre-Henri Leroy and Loic Dessaint (Proxinvest).Interest will centre on how the industry deals with conflicts of interests. The draft states that signatories “should have and publicly disclose a conflicts-of-interest policy that details their procedures for addressing potential or actual conflicts of interest that may arise”.

The guidance adds that the overriding objective of this principle is “to reasonably ensure that research and business conduct are independent, fair, clear, not misleading and free from possible bias or undue influence”.

Signatories to the code will have to disclose their research policy and, where applicable, their house voting guidelines. In addition, they will also disclose their policy for communication with companies (issuers), shareholders proponents, other stakeholders, media and the public.

Although firms’ written conflicts-of-interest policy should be made available, there is no requirement for the public disclosure of specific conflicts. “Such disclosures could conflict with information barriers put in place by a signatory to prevent a potential conflict from becoming an actual conflict.” Each signatory will be able to decide “on a case-by-case basis” whether disclosure of the conflict to the public is appropriate, although they should disclose all potential and actual conflicts to clients.

Once released, the principles will be reviewed in September 2015. The consultation draft and guidance is available here.