Proxy firms report against ‘best practice’ principles for the first time

Disclosures by influential advisors will now be reviewed by investors including Legal & General and PGGM

Six of the world’s most influential proxy advisors have for the first time reported on how they comply with the industry’s Best Practice Principles (BPP).

Glass Lewis, ISS, Minerva, PIRC, Proxinvest and EOS – the advisory arm of Federated Hermes – have disclosed against the 2019 iteration of the Principles, which were created by the industry in 2014, following a review by the European Securities and Market Authority (ESMA) that called on industry players to develop a code focused on transparency and disclosure. 

That request resulted in the creation of the Best Practice Principles Group for Shareholder Voting Research, a body made up of representatives from ISS, Glass Lewis, Minerva, PIRC and Proxinvest, which produced the first set of Principles in 2014. EOS joined the group in November.  

The Principles were revised in 2019 following a two-year consultation period led by the BPP Group. That process was informed by a 12-member advisory panel that included Richard Gröttheim, the CEO of Swedish pension fund AP7; Carine Smith Ihenacho, Chief Corporate Governance Officer of Norges Bank Investment Management; Ken Bertsch, Executive Director at the Council of Institutional Investors; and Rients Abma, Executive Director of Eumedion, the Dutch corporate governance body.

All six members of the BBP Group have now disclosed against the Principles for the first time, covering the 2020 period. The move brings them in line with the EU’s latest Shareholder Rights Directive, which requires proxy advisors to disclose how they apply a code of conduct. 

Under the 2019 Principles, signatories are expected to disclose information across three main areas: 

  • Service quality, including staff resources, research methodologies and voting policies;
  • Communications policy, including descriptions of how they communicate with client investors as well as public companies and other stakeholders; and
  • Conflict of interests

ISS in particular has come under criticism over a perceived conflict of interest between its corporate and investor advisory services. 

The disclosures by the six firms will now be assessed by a 12-strong Independent Oversight Committee, which was set up last year at the request of ESMA. That body includes investor representatives from Legal & General and PGGM, as well representatives from academia and the corporate world. 

It’s Chair, Stephen Davis, Senior Fellow at Harvard Law School, told RI that the Committee will first check that all the Principles have been addressed by the signatories. Then, he said, “we’ll look at how they are addressed; so are the explanations for compliance persuasive, compelling, thorough, and do they address the concerns of the various stakeholders that gave rise to the principles in the first place”.

If “shortfalls” are found in their reporting, signatories will be engaged on a “confidential basis”, RI was told. 

To assist this work, the Committee appointed Dr. Anna Tilba, Associate Professor at the Durham University Business School, as independent reviewer. 

Proxy advisors provide investors with voting research and analysis  – and in some cases recommendations – to help inform voting decisions at tens of thousands of shareholder meetings each year. But in recent years, as stewardship has risen up the investor agenda and with it the influence of proxy firms, the sector has come under greater scrutiny from regulators and corporates. 

“Voting and engagement, which used to be pretty much a marginal aspect of the capital market, is now coming central,” Davis told RI. “Institutional investors used to treat proxy votes as little more than compliance exercises, but what we've seen in the last few years is the emergence of stewardship, which has been driven by a rising class of savers who want their financial agents to show substantive attention to environmental, social and governance issues.”

Last year, the US Securities and Exchange Commission published a rule amendment requiring proxy advisors to share their advice with companies at the same time as investors. The US securities regulator, however, backed away from a more arduous requirement that voting analysis be sent to corporates for approval before being sent to investors – following considerable backlash from investors.

Davis told RI that regulators globally, including ESMA, are still looking at proxy advisors. 

“My sense is that ESMA is keeping a sharp eye on this process to make sure that it's robust and, I believe, ESMA's intent is to return to a review of how it's working in 2023”, he said. 

The Oversight Committee is expected to release the first annual report on its work by July. It also plans to host an “open forum” for stakeholders to share perspectives on the industry towards the end of the year.