European securities regulators have decided that the proxy advisory business doesn’t require regulatory intervention, but that it’s recommending a code of conduct for the industry.
The European Securities and Markets Authority (ESMA) published a new report, which found that “there is no current market failure related to proxy advisors interaction with investors and issuers”, which would justify regulatory intervention. However, the ESMA also identified a number of concerns regarding the independence of proxy advisors, and the accuracy and reliability of their advice.
So, it is recommending that the proxy advising industry (which provides voting recommendations to shareholders on issuer and shareholder proposals and M&A transactions, among other services) develop a code of conduct that focuses on identifying, disclosing and managing conflicts of interest; and, fostering transparency to ensure the accuracy and reliability of the advice.
The ESMA reports that it has had initial discussions with several firms from the industry who are supportive of beginning work on a code, including Glass Lewis, Institutional Shareholder Service (ISS), IVOX, Manifest, Nordic Investor Services, PIRC and Proxinvest. The work is expected to begin in the next few weeks, it says.
Last year, Canadian regulators also initiated a consultation about possible regulation of proxy advisors here too. And, the Canadian Securities Administrators (CSA) published a consultation paper setting out possible options for regulating these firms. It also cited concerns such as conflicts of interest; transparency; and the level of engagement with issuers; among other things. The CSA has not yet said whether it believes any regulation is justified.
“In its efforts to intensify its work on corporate governance issues, ESMA has undertaken an extensive analysis of the proxy advisor industry in the EU, with input from users, providers and issuers, and has found no evidence of a market failure requiring regulatory intervention,” said Steven Maijoor, chair of the ESMA.
“However, there are a number of concerns regarding conflicts of interest management and the transparency of analysis and advice, which we believe would benefit from improved clarity on the part of the industry,” he added. “The establishment of an EU code of conduct will assist in improving understanding amongst issuers and investors of the proxy advisors’ role, allowing them to better focus on fostering effective and robust corporate governance, thereby contributing to investor protection and efficient markets.”
The report sets out a framework for a code, including the roles of the different stakeholder groups, the relationship with other corporate governance codes for issuers and the key principles concerning proxy advisors which ESMA would expect such a code to cover. The ESMA says that it will facilitate work on a code, but this will need to be drafted and adopted by the proxy advising industry itself.