The Financial Reporting Council surveyed companies and investors on how proxy advisors and ESG ratings providers impact shareholder voting, as Europe reviews the effectiveness of industry self-regulation.
According to proxy advisors, the UK Financial Reporting Council’s (FRC) new research will help “dispel myths” about the industry’s impact on companies and investors.
The proxy advisory industry, which provides investors with research, data and recommendations on voting on company shareholder proposals, has long been contentious, especially amongst the corporate sector. In January, Elon Musk tweeted that the industry had “far too much power”.
Much of the ire is directed against Institutional Shareholder Services (ISS) and Glass Lewis, who are considered too powerful in influencing the outcomes of corporate proxy votes. In recent times, the industry has also fallen foul of the US anti-ESG camp, with Gary Retelny, President and CEO of ISS, defending the company last week from accusations that it was pushing an “ESG agenda” with its proxy advice.
The industry currently self-regulates through the Best Practice Principles for Shareholder Voting Research group, but the US Securities and Exchange Commission (SEC) has in the past proposed regulation, while the European Securities and Markets Authority (ESMA), which welcomed the Best Practice Principles when introduced in 2019, is set to report on its effectiveness to the European Commission next month.
The FRC’s research into the proxy voting advisory industry found that its voting recommendations “undoubtedly have some influence on behaviour and voting decisions”. However, the “nature and extent of the influence may be more nuanced and less clearcut” than many companies, stakeholders and other commentators believe it to be. Sarah Wilson, CEO of proxy advisory firm Minerva, told ESG Investor that it welcomed an official report which missed “a lot of the hysteria about the role of proxy research”.
“There has been a lot of politically motivated lobbying which has been time-wasting for everybody,” she said. “It’s really undermined stewardship, so I hope the FRC research finally hits the nail on the head that we are somehow running amok with people’s votes.”
Customised voting research
The FRC research found that while almost all investors polled used the services of proxy advisors, 75% of them ask for voting research to be based on the their own in-house voting polices rather than the advisors’ standard or benchmark policies.
Georgia Stewart, Co-Founder of voting solutions fintech Tumelo, said it was promising to see that the majority of investors in the UK were using a customised voting policy.
“It’s good that asset owners have put that thought into how they’re going to vote, and it’s aligned with the direction that is expected by regulators on stewardship and voting, especially as it relates to our approaches to net zero and other things.”
Most investors do vote based on recommendations from proxy advisors without extra research where the resolution is uncontroversial, according to the FRC research. But all investors surveyed said that they always review recommendations to vote against management and other resolutions that met certain criteria, for example, all companies above a certain size or in which they own more than a certain percentage of the shares, or with which they have engaged about governance concerns. In contrast, some companies surveyed in the FRC’s research believed there was widespread practice of investors voting in line with proxy advisors’ recommendations without any further scrutiny.
The research also found that there was some correlation between negative voting recommendations and voting outcomes in FTSE 350 companies. However, the correlation is not as extreme or consistent as many companies believe, according to Chris Hodge, Special Advisor at Morrow Sodali, which co-authored the report alongside Durham University.
Hodge told ESG Investor a vote of 20% or more against a resolution relating to director elections or remuneration occurred in only half of the cases where one or both of ISS or Glass Lewis had made such a recommendation in 2022, although this increased to 77% of cases when both did so.
Tom Powdrill, Head of Stewardship at the Pensions and Investment Research Consultants (PIRC), noted that the research demonstrated that proxy research and recommendations were an input that investors used to inform the votes they cast.
“As the report shows, investors can and do reach very different views based on the same inputs,” he told ESG Investor. “We [proxy advisors] are an easy part of the investment chain to kick. Hopefully this report will lead to a more informed discussion in the future.”
The research will also be shared with the UK Financial Conduct Authority (FCA) and Capital Markets Industry Taskforce to aid their ongoing consultations on how proxy voting agencies interact with corporates and investors as part of corporate governance programmes.
In the final quarter of 2023, the FRC – working with the FCA, Department for Work and Pensions (DWP) and The Pensions Regulator – will review the regulatory framework for effective stewardship, including the operation of the Stewardship Code. The review will assess whether the Stewardship Code is creating a market for effective stewardship and the need for any further regulation in this area.
