…..on the facts.
The world’s proxy seasons draw to a close with the last remaining Japanese vote deadlines on Tuesday 26th June. That’s one day after the European Securities Markets Authority’s consultation on proxy advisors closes.
Shareholders do like to be consulted, up to a point. 2012 could go down in history for the most number of consultations in such a short space of time – and all during proxy season.
The ESMA consultation has been particularly provoking, it wasn’t just the timing, but the general tone of shooting the messengers which came across. There’s a degree of irony in the public disquiet about the perceived regulatory failure to control what some have termed the ‘socially useless’ parts of finance and instead the ‘socially useful’ get picked on instead.
Manifest has three concerns with ESMA’s approach:
- Concerns with the regulatory process – ESMA has no right of initiative in this area;
- Definitions and terminology – a lack of clarity about who does what and why;
- Conceptual misapprehensions – much more fundamental research is needed before solutions are proposed.
Our full response is here : Manifest-ESMA Proxy Advisors 2012
Update as@ 2nd July 2012: Full list of responses availabel Here >>
Some readers of our paper may assume a degree of complacency on our part about the need for proxy advisor regulation and that we are blind to any notions of improving standards. Those readers that know Manifest would know how far from the truth such an assumption would be. When it comes to issues of analyst objectivity, independence and, most importantly, investor protection, Manifest has been a staunch advocate for reform for over 15 years.
The entire process left us wondering what ESMA’s priorities are in protecting markets and shareholders? Can the regulation of a selective sub-set of market data vendors be justified at this point in time, especially given a lack of evidence of market failures, a clear view of what the potential for market harm might be and the early stage of development of soft regulation encouraging better stewardship practices on the part of investors?
We believe that ESMA and the European Commission need a much clearer understanding of how and why investors make proxy voting and stewardship decisions to be able to understand the dynamics of the market incentives which determine proxy advisor behaviours. Existing regulations as they affect proxy advisors, investors and issuers, the way intermediaries are used by investors should all be mapped, understood and enforced before additional regulation can be considered.
When it comes to the integrity of financial markets and the role of corporate governance, ESMA has a far wider choice of options open to it than has been presented. There are existing mechanisms in place to use investor behaviour to great effect in terms of addressing the issuer concerns of which ESMA has been made all too volubly aware.
If there are suspicions of Market Abuse (for which there is a clear inference) then ESMA must act promptly and use the existing regulatory frameworks to ensure than any such abuse is dealt with. To not respond to such allegations would, we believe send the markets entirely the wrong message.
To date, the problems of cross border voting in Europehave not been addressed and existing regulations regarding the conduct of intermediaries has been weakly enforced, despite overwhelming evidence and knowledge of the need to act.
The effectiveness of the Shareholders Rights Directive was greatly compromised by an inability to address the problems of cross border voting and any attempt to regulate investor decision-making on voting will be equally futile until cross-border voting is rendered efficient and effective by genuine competition and innovation.
Investor Use & Application of Proxy Advice
Fund managers are currently regulated in their role as investment fiduciaries. In the UK context (many of the Financial Services Authority’s rules are based on MIFID) there are specific rules in relation to both the investment management as well as the administrative functions in relation to managing investments have specific duties including: the ‘monitoring and processing corporate actions’ (generally speaking proxy voting is seen as what is known as a ‘voluntary corporate action’). If there is a suspicion that fund managers are not in compliance with their local market regulations then ESMA should be seeking enforcement of the existing regulations as they apply to the investment fiduciaries.
For example, if it is considered that a fund manager is voting by auto-pilot without oversight of the process or input is in breach of its fiduciary responsibility or client agreement, then it is for regulators to investigate using the powers they already have.
Market Dominance Questions
There is, without doubt, a serious problem of lack of competition in the global proxy advisory and execution markets. This dominance affects the way in which the growing number of foreign voting shareholders cast their votes at European meetings. Consumers have suffered as a result of vested interests with strong economic reasons for forcing shareholders to use ineffective and inappropriate technologies for managing their voting.
If ESMA (or any other stakeholder) is using the term ‘the dominance of proxy advisors’ as a verbal short-hand for the dominance of an individual market participant, and there are genuine complaints about the effect of that dominance, then ESMA is obliged to make a referral to DGComp.
Codes of Conduct
We are extremely sceptical of regulatory proposals which don’t actually solve quantifiable problems and simply generate what the technology community calls ‘shelfware’. Seeking to introduce soft regulations or codes of conduct would do nothing to address the underlying problems of market inefficiency which brought about market dominance issues.
In preparing our response paper we were reminded that on 1st July 2000 Ken Lay announced Enron’s new and improved 65 page Code of Ethics, stating that: “Relations with the Company’s many publics . . . will be conducted in honesty, candor, and fairness.” So while codes of conduct set out very high minded principles, their operational impact is sometimes very questionable.
Obviously we were thankful that there was any form of consultation process at all and that we had an opportunity to present our views at all. Generally speaking, in a fair or reasonable judicial process the protagonists are innocent until proven guilty. Regrettably, the ESMA Discussion Paper has turned that common law maxim on its head.
We’re looking forward to continuing our engagement with the European Commission on the important issue of investor protection and getting the plumbing fixed so that companies and shareholders can talk to one another with far greater clarity.