The European Securities and Markets Authority publishes discussion paper on the proxy advisory industry; EU regulation is one option under consideration
ESMA launched a discussion paper titled “An Overview of the Proxy Advisory Industry. Considerations on Possible Policy Options” on 22 March 2012. The purpose of the paper is to:
“to gain evidence on the extent to which market failures related to the activities of proxy advisors may exist, the extent to which EU-level intervention might be appropriate, and what ESMA’s role might involve”.
We discussed the proxy advisory industry in this post - What is a proxy advisor? – in June 2011. Proxy advisory is a big business in the United States and is now developing in Europe, driven (as ESMA notes) by the greater propensity for institutional investors to vote their shares. That propensity is driven by the greater focus on the corporate governance practices of issuers, and by the post-crisis push by policy makers to encourage institutional investors to exercise their ownership responsibilities (exemplified in the UK by the FRC’s Stewardship Code).
Focus of ESMA’s discussion paper
A principal rationale for the discussion paper is concern about the many potential conflicts of interest that accompany the proxy advisor model:
“This Discussion Paper focuses on the following key issues:
i) Factors influencing the accuracy, independence and reliability of the proxy advice such as such as the potential for conflicts of interest to play a role, proxy advisors’ methodology and their dialogue with issuers; and
ii) Degree of transparency on management of conflicts of interest, dialogue with issuers, the voting policies and guidelines, the voting recommendations, and the procedures for elaborating a voting recommendation report.”
Policy options
Although ESMA says that the discussion paper is “an opportunity to gain evidence on the extent to which market failures related to the activities of proxy advisors might exist”, it makes it clear that legislation is already one of the options it is considering:
“The range of policy options that ESMA will consider, and on which it seeks further input from market participants, consists of four broad areas, including:
1. No EU-level action at this stage
2. Encouraging Member States and/or industry to develop standards
3. Quasi-binding EU-level regulatory instruments
4. Binding EU-level legislative instruments
ESMA will consider these options based on the feedback it receives from market participants, and, if appropriate, will undertake further policy action, either directly or by providing an opinion to the European Commission.”
Comments on the discussion paper are invited by ESMA until 25 June 2012.
For a discussion of whether proxy advisors should be regulated, see this article by Manifest, the proxy voting agency.
UPDATE 8 May 2012: The Securities and Markets Stakeholder Group of ESMA has issued an opinion commenting on the discussion paper. The SMSG concludes that proxy advisors should be “subject to regulation that ensures their integrity and the quality of their advice and that regulation should establish minimum standards applicable throughout the Union”, but that at this point “a sufficient and proper measure would be to include these standards in a Code of Conduct for PAs adopted in the form of ESMA guidance”. Such a Code of Conduct would operate on a “comply or explain” basis. The SMSG does not consider it necessary to introduce an authorisation regime for proxy advisors at EU level. National Competent Authorities should register proxy advisors to allow “continued monitoring and transparency of the industry at a Union level”.
UPDATE 13 December 2012: European Commission announces 16 point “Action Plan” on company law and corporate
See also: The influence of proxy advisors: ISS is now the largest player in the UK – Financial Times
Watchdog targets the proxy advisors – Financial Times
Proxy advisors and the tick-box approach to corporate governance
FRC to investment managers: Get stewardship right, or Europe will regulate
European Commission green paper on the EU corporate governance framework
The breaking wave of EU regulation
Leading proxy advisor surprised that Mark Zuckerberg controls Facebook
Friendly Corporate PSL
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