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Canada weighs in proxy analysts, more missing of "the point"

April is probably not the ideal month to launch a consultation for anyone involved in corporate governance, nevertheless the Canadian Securities Administrators (CSA) issued a call for comment on its proposed  best practice guidance for the proxy research industry. The consultation was scheduled to close on June 23rd,  however following representation from stakeholders, the CSA has granted a one month extension. Manifest has already submitted its comments which are available here. Even if you are not based in Canada or don’t invest in Canada directly, we would encourage you to read the proposals. The governance debate is now truly global and we are seeing a great deal of inter-agency communication on a variety of financial reform topics. What is discussed in Canada this month will be making its way to Brussels the next.

CSA’s proposals are for a number of comply or explain principles which largely follow the voluntary code of conduct adopted in March 2014 by Manifest and five other co-signatories of the BPP Group’s Best Practice Principles for Shareholder Voting Research.

CSA picks up the usual themes brought up by the debate over shareholder voting research: accuracy of recommendations, conflicts of  interest, policies etc. Where Canada’s approach stands apart is its reminder that responsibility for stewardship is two-way:

“We wish to remind issuers that they may engage with their shareholders, who have the ultimately responsibility of determining  how to exercise their right to vote, to explain why they have adopted a given corporate governance practice. Where appropriate, issuers may discuss corporate governance and proxy voting matters with institutional investors to address their concerns. If issuers have practices that are different from the standards set out in the proxy advisory firms’ proxy voting guidelines, these practices can be discussed with institutional investors.”

CSA’s best practices approach is welcome and proportionate. We have no doubt that the EU’s Shareholder Rights Directive negotiations will be influenced by their proposals, as will the US Securities & Exchange Commission.

In Washington DC the last minute lobbying from the US issuer groups against corporate governance is as frenetic as ever, with threats of repercussions for the SEC if they fail to “fix the proxy advisors”. Leading the political charge for hard regulation is Rep. Patrick McHenry (Republican, North-Carolina). McHenry is chairman of a financial services subcommittee in the US House of Representatives and has been prominent in the media warning that legislation backed by top Republicans will be forthcoming if the SEC doesn’t act “appropriately”.

The SEC was granted its annual budget at the passing of the 2015 Appropriations Bill on a number of conditions, notable of which is a paragraph on page 71 outlining McHenry’s committee expectations of SEC action on proxy advisors.

High expectations of professionalism and probity are a given for anyone involved in supporting investment professionals. Unfortunately, what should be a matter of professional and contractual standards has become a political football.  The lobbying against shareholder voting research grew out of a response to fix the broken US proxy plumbing, the vote execution and the problems associated with pooled nominee or ‘Street Names’, which keeps investors are companies apart. The amendments for the Shareholder Rights Directive, as proposed,  have been similarly blown off course by hard lobbying by vested interests with little appetite for changes which may directly impact their profitability.

The vehemence of the US lobbying will probably take most European and Commonwealth country’s by surprise. Speaking with colleagues at the ICGN conference in Amsterdam recently it has certainly offended many US investors too. Would anyone imagine UK chancellor George Osborne threatening to keep funds back from the FCA unless they sorted out a handful of  ‘dangerous’ SMEs  somehow intent or capable of leading the nation’s pension funds and asset managers astray? Probably not.

The push to hobble the research industry is now being seen for what it is, an attempt to introduce corporate censorship and suppress dialogue. European companies have much to lose with a bad Shareholder Rights Directive. Manifest will therefore continue to press the case for what is the priority issue – an open-standards open-access voting system that is secure, trustworthy and works for stewardship, not against it.

What do you think?