Submission in response to Public Consultation on Best Practice Principles for Governance Research Providers
Date: 20 December 2013
Type: Policy submission
On 20 December 2013, GNDI lodged a submission in response to the Public Consultation on Best Practice Principles for Governance Research Providers (the Principles).
In our submission we noted that, despite proxy advisory firms playing such an important role and, in our view, exerting significant influence over their
clients with respect to the exercise of voting rights, they are currently not held to any standard with respect to the communications that they make to
shareholders. This is to be compared with the obligations of issuers and their directors who, in most jurisdictions, must comply with a number of regulations with respect to shareholder communications, and have potential liability in the event the materials that they send to shareholders contain inaccuracies, misrepresentations and/ or misleading statements.
The draft Principles represent a useful step towards addressing the disconnect between the influence and accountability of proxy advisory firms. However, as stated in our submission, if a comply or explain approach is taken to the Principles (which we do not agree with), then the standards set out in the Principles need to be much stronger and set a higher standard than is currently provided for in the draft. There are also still a number of areas of concern that were raised by the European Securities and Markets Authority (ESMA) in its Final Report in February 2013, that have not, in our view, been adequately addressed under the proposed draft Principles. In particular:
Type: Policy submission
On 20 December 2013, GNDI lodged a submission in response to the Public Consultation on Best Practice Principles for Governance Research Providers (the Principles).
In our submission we noted that, despite proxy advisory firms playing such an important role and, in our view, exerting significant influence over their
clients with respect to the exercise of voting rights, they are currently not held to any standard with respect to the communications that they make to
shareholders. This is to be compared with the obligations of issuers and their directors who, in most jurisdictions, must comply with a number of regulations with respect to shareholder communications, and have potential liability in the event the materials that they send to shareholders contain inaccuracies, misrepresentations and/ or misleading statements.
The draft Principles represent a useful step towards addressing the disconnect between the influence and accountability of proxy advisory firms. However, as stated in our submission, if a comply or explain approach is taken to the Principles (which we do not agree with), then the standards set out in the Principles need to be much stronger and set a higher standard than is currently provided for in the draft. There are also still a number of areas of concern that were raised by the European Securities and Markets Authority (ESMA) in its Final Report in February 2013, that have not, in our view, been adequately addressed under the proposed draft Principles. In particular:
- Principle One needs to be expanded to better address the serious concerns that exist regarding the quality of some services provided by proxy advisory firms. The Principle should include requirements that proxy advisory firms consult with issuers in the development of voting guidelines, have their voting recommendations “fact checked” with the issuer before they are finalised and ensure that their staff possess appropriate qualifications and experience to analyse or advise on the relevant issues and have sufficient time and resources to analyse the issues
necessary to make informed and accurate voting recommendations. - Principle Two, which deals with conflicts of interest, also needs to be expanded to require that proxy advisory firms seek to avoid conflicts, adequately disclose any conflicts that exist together with the steps which it has taken to mitigate the conflict, publicly and comprehensively
disclosing conflicts that exist with respect to any voting recommendation that the proxy advisory firm will be issuing, and that voting recommendations not be issued on matters where the proxy advisory firm has provided consulting services to the issuer or, if applicable, where the proxy advisory firm’s owner or significant investor has a material interest. - It is not appropriate for Principle Three to leave it to signatories to decide whether or not they will engage with issuers - where the proxy advisory firm intends to issue a contrary voting recommendation, the firm should be required to share its report with the issuer and discuss its proposed contrary recommendation before the recommendation is finalised and published. If a contrary recommendation is still to be made, the issuer should be given enough time and opportunity to provide a response to be included as part of the analysis in the materials that are provided to the proxy advisory firm’s client.
| submission_-_public_consultation_on_best_practice_principles_for_governance_research_providers.pdf |
