Here you’ll find our lawyers’ latest perspectives on the business, legal and wider issues that matter. This piece was originally published in the Wall Street Journal in December and is republished with permission. Vol. However, there is disagreement about whether the impact of proxy advisors’ recommendations is as strong as is sometimes claimed. Sorry, you don't have permission to repost or create posts.
However, Advisory Firms may place conditions on Target Companies, including filing the definitive proxy statement at least 40 calendar days prior to the shareholder meeting and an acknowledgement from the Target Companies that receipt of the Advice is for internal use and will be shared with a limited group of the Target Company’s advisers and employees. These changes were first telegraphed by the SEC in its August 2019 guidance and first proposed in November 2019. The impact of disclosing to investment advisers the fees paid to ISS by public companies should not be underestimated. The amendments condition the availability of these existing exemptions for proxy voting advice on the proxy advisory firm complying … In July 2010, the agency asked for public comment about these organizations in light of growing concerns that "proxy advisory firms may be subject to conflicts of interest or may fail to conduct adequate research and base recommendations on erroneous or incomplete facts." In connection with matters that are “highly contested or controversial,” such as acquisitions or contested elections, the investment adviser should consider whether a higher degree of analysis may be required when considering a proxy advisor’s voting recommendation.
In 2003, SEC rules and related actions allowed institutional investors to rely on advice from third-party advisory firms to fulfill their fiduciary obligations when they voted their shares. Thus proxy advisory firms’ recommendations help in maintaining good corporate governance and also they help the companies to comply with the provisions of law. Of course, auditors have faced, and largely overcome, a similar concern regarding their independence based on concerns relating to the provision of non-audit services alongside audit services. Ultimately, this all drives toward more transparency by proxy advisors on their selection of the peer groups, many of which differ from the peer group used by the issuer to determine compensation. 0 There is evidence that such influence may not be for the better, as far as shareholder value is concerned. A proxy firm (also a proxy advisor, proxy adviser, proxy voting agency, vote service provider or shareholder voting research provider) provides services to shareholders (in most cases an institutional investor of some type) to vote their shares at shareholder meetings of, usually, quoted companies.
Prior literature concludes that ISS recommendations move at least some fraction of the votes, but whether this fraction is large or small remains unclear. Available at: Office for Professional Body Anti-Money Laundering Supervision (OPBAS), Raising procedural issues with our Procedural Officer, Complain about us, the PRA or the Bank of England (the regulators), Review into change and innovation in the unsecured credit market (The Woolard Review), Contact us by web chat, email, phone or post, FCA Innovation – fintech, regtech and innovative businesses, Banks, building societies and credit unions, Electronic money and payment institutions, General insurers and insurance intermediaries, Directory of certified and assessed persons, Coronavirus (Covid-19): Information for firms, eCommerce Directive – changes at the end of the transition period, Securities Financing Transactions Regulation (SFTR), How to report suspected market abuse as a firm or trading venue, How to report suspected market abuse as an individual, Exemptions from short-selling requirements, Market making exemptions and preparing for Brexit, Net short positions reporting and preparing for Brexit, Notification and disclosure of net short positions, Short selling restrictions and prohibitions, Requesting sample transaction reporting data, How to claim compensation if a firm fails, Report information about a payment services or e-money firm, The Proxy Advisors (Shareholders’ Rights) Regulations 2019, Modern Slavery and Human Trafficking Statement. Specifically, when giving recommendations on say-on-pay proposals over 2010-2011, ISS used to conduct an initial screen of companies focusing on their one- and three-year total shareholder returns (TSRs) and only performed a deeper analysis of the company’s compensation practices if its TSRs fell below the median of peers in their 4-digit Global Industry Classification Standard group (“TSR cutoff”). In addition to the potential conflict between the proxy advisor and the subject company relating to the provision of proxy voting recommendations and voting services,5 conflicts to be considered include conflicts related to activities other than providing proxy voting recommendations and voting services and conflicts that may result from relationships that the proxy advisor has with lenders, shareholders or significant sources of business.6 Moreover, the 2019 Advisor Guidance implies that conflict of interest disclosure to investment advisers related to the provision of consulting services to subject companies is unlikely to be adequate absent disclosure of the amount of compensation paid by the issuer to the proxy advisor. In the 2019 proposed regulations, the SEC considered a robust and company-favorable set of required interactions, including a period of advance review by the company, before advice could be distributed by Advisory Firms to their clients (the “Firm Clients”) as well as the mandatory use of hyperlinked materials to disseminate issuer (“Target Company”) responses. If your registered office or head office is not in the UK, another EEA State or Gibraltar, do you provide proxy advisor services through an establishment located in the UK? The 2019 proposed regulations’ strict choreography between Advisory Firms and Target Companies for the review and comment on Advice would have been a dramatic shift for Target Companies that have long argued that information is compiled, and voting recommendations are distributed, without a chance to review and provide some quality control over the content of Advice before it makes its way to the Firm Clients over which it has substantial influence.
The Proxy Advisors (Shareholders’ Rights) Regulations 2019 (Proxy Advisors Regulations, or the regulations) transpose into UK law Article 3j (transparency of proxy advisors) of the Shareholder Rights Directive (as amended by the Revised Shareholder Rights Directive II (SRD II)). These rules are the culmination of the SEC’s lengthy efforts to review the regulatory framework applicable to Advisory Firms. Equally unfortunate, there was no direct representation of corporate directors on the panel, leaving out the very people the law requires to be responsive to shareholders. With respect to peer groups that feature significantly in issuer proxy statements and proxy advisor analyses, the SEC states that “an investment adviser should also consider how the proxy advisory firm, in constructing peer groups, takes into account the unique characteristics of the issuer, to the extent available, such as the issuer’s size; its governance structure; its industry and any particular practices unique to that industry; its history; and its financial performance.” While this will likely force more disclosure by proxy advisors as to their methodologies, it is hard to avoid the implication that investment advisers need to review with care, on an individualized basis, the formulation of peer groups by proxy advisors on a company-by-company basis.
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