Proxy advisors’ independent oversight body ‘favours’ giving companies ‘opportunity to review and correct’ research

Inaugural report by Committee overseeing industry’s ‘Best Practice Principles Group’ prompts pushback from member Minerva on pre-disclosure

The independent body set up to oversee proxy advisors’ own best practice industry group has said that it “favours” giving companies the “opportunity to review and correct” research before it is shared with investor clients. 

The sharing of research, which increasingly includes consideration of sustainability factors, by proxy firms with companies ahead of publication is, however, a controversial topic: A number of regulators in different regions have recently mulled the introduction of such a requirement, with the most well known example being the SEC under President Trump’s administration – although the US regulator dropped that plan last year, following backlash. More recently the idea has been raised in consultations by regulators in Canada and Australia.

Opponents argue that corporate lobbyists – spooked by the growing interest investors are showing in governance and sustainability issues – are the driving force behind attempts to regulate advisors’ research on them.

In its first annual report, published yesterday, the Independent Oversight Committee (IOC) of the Best Practice Principles Group (BPP) for proxy firms said that “in general” it “favours” pre-disclosure. 

“In general, the Committee favors a scenario in which companies have a timely opportunity to review and correct (where appropriate) Signatory factual descriptions and data, since this scenario could improve product accuracy.”

The BPP was created in 2014 following a review by the European Securities and Market Authority (ESMA), which called on the sector to develop its own set of principles focused on transparency and disclosure. 

Earlier this year, its six members – Glass Lewis, ISS, Minerva, PIRC, Proxinvest and EOS – reported against the updated 2019 version of the Principles for the first time. 

The 12-strong IOC was created last year at the behest of ESMA to oversee the BPP. The body is made up of investor representatives from BNP Paribas AM, Legal & General IM and PGGM, as well representatives from academia and the corporate world. 

Based on the recent disclosures by the proxy firms, the IOC’s report suggests a raft of improvements on practice and disclosure. 

Its Chair, Stephen Davis, Senior Fellow at Harvard Law School, told RI that the Committee was not recommending that proxy advisors should give corporations a right to reply to research, as each has its own business model to consider, but said that what it is asking them is that they “be clearer about who gets to see what and when”.

“[T]hat's really what this report is about,” he added, “about enhancing confidence in the industry by being clear about how that feedback process unfolds”, he said. 

The report approvingly notes that Proxinvest, for example, “explained in detail” why it decided to drop its company feedback process and why it no longer includes company comments on its voting recommendations in its reports. 

Davis, however, also reiterated the general view of the report that “timely feedback can contribute to the accuracy” of research. 

Minerva’s CEO, Sarah Wilson, told RI that she does not support the IOC’s position on “pre- review of research”, stating that there is “no evidence that this is required or would lead to any beneficial outcomes for shareholders”. 

On the contrary, she said that there is “strong evidence” that the sort of disclosure requirements that have been considered by some regulators would “create significant additional cost and effort burdens for all concerned”. Wilson also pointed out that ESG or sell-side analysts are not being called on to undertake similar advance disclosures. 

Bruce Duguid, Head of Stewardship at EOS – the advisory arm of Federated Hermes – told RI that he agrees with the principle of checking the facts behind a voting decision. But added that the “bigger challenge is explaining to companies the reasons for disagreeing on how to vote on a resolution, which is rarely based on a misunderstanding of the facts”. 

On cost, he also said that “care is required to take a principles-based approach to fact-checking, rather than a legalistic approach which could drain investor resources better spent on engaging with companies on the most material issues.”

A spokesperson for Glass Lewis when asked for comment directed RI to its portal which gives public companies 48 hours to review data and provide suggested updates to reports before publication. 

ISS declined to comment but also directed RI to its policies and procedures.