Battle for proxy reform heats up – advisors in the spotlight

RiskMetrics is to governance as Microsoft is to Internet browsers: discuss.

No, not the next MBA dissertation topic for students to grapple with – but it’s certainly worth a thought. And that’s not just Manifest’s view either. Two members of the US lobby alliance, the Shareholder Communications Coalition, have issued a discussion document looking at the role of Proxy Advisory Services. In their view it’s “to help policymakers and regulators in their review and evaluation of the proxy voting systems”. Others may say it’s another way of taking a potshot at the dominant players in the governance space. In the absence of a robust Competition Commission, it may be all that the US can do, unless Neelie Kroes would like to turn her attention to the market anomalies in the proxy space in Europe and hope that it has a global trickle down effect.

There’s no doubting that the governance space could do with looking at and Coalition members the Society of Corporate Secretaries & Governance Professionals and the National Investor Relations Institute have put together a series of recommendations which they hope will improve the regulatory oversight and transparency of proxy advisers. Their proposals include: 

  • Regulatory oversight of proxy advisers
  • Public disclosure of the advisers governance models
  • More robust due diligence of vote recommendations
  • Issuer input on voting recommendations 
  • Public disclosure of voting errors

As a discussion paper it’s only a starting point for a wider debate and not a firm set of regulatory proposals. There’s plenty to argue with the authors over the supply/demand dynamic of the proxy advisory industry – it seems to overlook entirely that proxy advisers are customer-driven economic animals and that while one brand has come to dominate, fund managers have freedom to chose –  if they have the right incentives. 

Clearly a lot of thought has gone into the proposals, and Manifest has publicly supported the Coalition’s aims for reforming the US proxy plumbing. Sadly, the paper has missed a significant opportunity to address the real underlying issues and sidesteps the fact that until fund managers are required to have more robust governance processes, the quality of dialogue and engagement between issuers and owners is not likely to improve – which is not the fault of proxy advisers.

The suggestion that issuers should have input into recommendations is likely to meet with stiff opposition as it flies in the face of the CFA’s investment analyst independence and objectivity standards which were put in place after the dotcom scandals of conflicted investment research and associated SEC investigations in 2000/1.

There are undoubtedly structural issues to address in the proxy process but scapegoating proxy advisers, while undoubtedly providing an excellent outlet for pent-up frustrations about the governance of the governance industry, could divert attention from the real challenges of the reform. But there’s no disputing that “The SEC and the Labor Department should consider establishing a more robust due diligence process for institutional investors, so that proxy voting enjoys a more important role in the investment process and within the fiduciary responsibilities of these investors.”


Shareholder Communications Coalition >>

Proxy Advisory Services: The Need for More Regulatory Oversight and Transparency >>

CFA Institute Research Objectivity Standards >>

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