Proxy advisors provide a useful service to shareholders voting their shares cross-border but the service could be more useful if proxy advisory firms were more transparent about their analytical methods and conflicts of interest, said the International Corporate Governance Network in a comment letter to the European Securities and Markets Authority. According to the global network, one way to increase transparency would be the development of a code of conduct for proxy advisory firms.
Disclosure is a key element to understanding and governing the role of proxy advisors as intermediaries between investors and issuers. It would thus be beneficial if voting guidelines were made available. In addition, the level of engagement between proxy advisors and companies needs to be made transparent.
Proxy advisory firms also need to disclose any additional services that are bundled with proxy voting services, which could affect the neutrality and objectivity of voting advice. However, the group would not impose a duty on proxy advisors to provide research results to issuers systematically since this could undermine their independence. It is also important to keep in mind that most proxy advisory firms implement customized policies on behalf of some of their clients, noted the group, and this research should remain proprietary information of those clients.
The global network also cautioned against overstating the influence of proxy advisory firms. There is no direct correlation between proxy advice and voting outcomes, said the network, adding that institutional investors often use several other sources of information and there can be various reasons to agree or disagree with a proposal. In addition, there are many institutional investors that vote all shareholder meetings based on their own voting policies. This means that these shareholders do not blindly follow the standard proxy advice, reasoned the corporate governance group, but instead have their own customized policy implemented in the voting system, which reflects the investment philosophy of the institutional investor.
Finally, the network emphasized that the use of proxy advisors does not induce a risk of shifting the investor responsibility. Proxy advisors only provide recommendations, observed the group, while the ultimate decision remains with the institutional investor. At the end of the day, institutional investors remain accountable for the way they fulfill their own fiduciary duty towards the ultimate beneficiaries.