Against the backdrop of a growing global consensus on the regulation of proxy advisory firms, a Dutch watchdog group that monitors the Netherlands Corporate Governance Code examined how and to what extent large institutional investors use proxy advisory services. This was part of an overall review of the Code, which contains a best practice providing that shareholders must vote as they see fit. Shareholders who make use of the voting advice of a third party are expected to form their own judgments on the voting policy of the adviser and the voting advice provided by the adviser.
Proxy advisory firms are typically retained by mutual fund and hedge fund asset managers, pension plans, and other institutional investors to provide voting recommendations and otherwise assist in voting by these institutional investors, which range widely in size of assets under management.
The survey by the Monitoring Committee of the Dutch Corporate Governance Code revealed that the influence of proxy advisory services is perhaps not as great as the overall picture suggests. Foreign asset managers indicate that they use proxy advisory services mainly to gather information they can take into account when making their own decision on how to vote. They also state that they do not always subscribe to the voting advisory services and instead confine themselves to the proxy service. If they do subscribe to the voting advisory service, this is often done on the basis of a customized voting policy under which the voting advice is based not only on the internal policy guidelines of the proxy advisory service but also on the specific guidelines for casting a vote on behalf of the investor.
The Committee cautioned that the sample included institutional investors that pursue a more active or activist investment policy and should for this reason be regarded as less inclined to rely blindly on proxy advisory services. The Committee suspects that more passive investors and smaller investors do less research of their own and tend to rely more on the advice of the proxy advisory services, possibly using information available on the websites of the services. Nor has the nature of the customized voting policies been examined in more depth.
To what extent such policies take account of provisions that are specific to the Dutch Corporate Governance Code is as yet unclear. Based on the interviews it held, the Committee perceived a trend in which investors are becoming more aware of their own responsibility for deciding how to vote. The Committee intends to carry out a follow-up survey next year into the role of proxy advisory services in order to obtain a more complete picture of how they influence voting at general meetings of shareholders in the Netherlands.
The Committee noted, incidentally, that only a small number of proxy advisory services give advice relating to Dutch companies. The capacity for advising on Dutch companies is limited, but is supplemented by better equipped organizations or departments of some large Dutch institutional investors, Eumedion and the Association of Stockholders (VEB).
In the US, comments received by the SEC on its proxy voting concept release reveal a growing consensus in the corporate community that proxy advisory firms should be subject to federal regulation requiring greater transparency and accountability with respect to the formulation of voting recommendations and potential conflicts of interest.
The Shareholder Communications Coalition has asked the SEC to erect a regulatory framework for firms providing proxy advisory services to institutional investors in connection with annual or special shareholder meetings. The Coalition is composed of the Business Roundtable, National Investor Relations Institute, and the Society of Corporate Secretaries & Governance Professionals.
In a letter to the SEC, the Coalition urged the Commission to adopt regulations on conflicts of interest by proxy advisory firms, disclosure by these firms regarding the standards, procedures, and methodologies used to formulate voting recommendations, and the correction of factual errors in the information used by these firms to develop their recommendations. The Coalition also asked the SEC to consider requiring proxy advisory services to register as investment advisers under the Investment Advisers Act.