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Investors and companies concerned over “quiet tyranny” of proxy firms: UK governance regulator

Financial Reporting Council notes strong concerns in report.

Proxy voting agencies have been slammed in a new report issued by the UK’s Financial Reporting Council, which says both investors and corporates have serious concerns about their activities. The report on the future of the UK’s comply-or-explain regime of corporate governance said both corporates and shareholders placed proxy firms amongst ‘obstacles’ to its better functioning. The report says corporates and investors “expressed concerns” about what one participant referred to as the “quiet tyranny” of proxy voting agencies. The statement is unusually strong to be included in an official report. No further detail on the discussion is disclosed in the report.

The FRC held a series of meetings between companies and investors late last year, facilitated by the London Business School, to debate comply-or-explain. The results of that discussion are published in the latest report of those meetings. Under the UK corporate governance code companies must demonstrate how they apply the code or explain why if they depart from the recommended practice. Other issues discussed at the meeting included whether shareholder trade associations might produce an annual report giving examples of good or bad explanations.

The firm language employed with regards to proxy firms accompanies increasing scrutiny in Europe and the US. A majority of respondents to the European Commission’s recent Green Paper on Corporate Governance favoured proxy advisors to be more transparent about their analysis, voting policies, potential conflicts of interest and contact with companies ahead of AGM voting recommendations.
Business lobby groups in the US have called on the Securities and Exchange Commission to clamp down on “unregulated and unsupervised” proxy firms.

The FRC says it was promoting the UK’s comply-or-explain approach because Europe had shown signs of driving towards more prescriptive regulation, which it said would mean a “consequent diminution of shareholder rights”.

It said it had been “pushing in Brussels” for continued recognition of comply-or-explain in the face of the Commission’s proposal to make corporate governance statements regulated information under the EU Transparency Directive.

The FRC said the UK Governance Code had a “very high level” of compliance with a minority of firms not complying.

FRC Chairman Sarah Hogg, said: “The comply or explain approach to corporate governance has given us flexibility and enabled us to raise the standards of UK corporate governance over the years in ways that regulation cannot always achieve. We will now consider whether to incorporate the conclusions of this paper into our forthcoming consultation on revisions to the Governance Code.”