Best Practice Principles for Proxy Advisors and Chairman’s Report

The following post comes to us from Dirk A. Zetzsche, Propter Homines Chair for Banking and Securities law at the Institute for Financial Services of the University of Liechtenstein and Director of the Center for Business & Corporate Law at Heinrich Heine University in Duesseldorf/Germany. Following the European Securities and Markets Authority (ESMA)’s push for self-regulation of the proxy advisory industry, an industry group published its “Best Practice Principles for Providers of Shareholder Voting Research & Analysis”. Professor Zetzsche functioned as independent chairman of the group.

Regulation of proxy advisers is a widely discussed subject matter worldwide. The European Securities and Markets Authority (ESMA), the regulator responsible for enforcing European securities regulation, declared in its ESMA Final Report and Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry in February 2013, to favor a self-regulatory approach over mandatory regulation of the industry. “In order to ensure a robust process in developing, maintaining, and updating the Code of Conduct,” ESMA set up a list of key governance for developing a Code of Conduct for the industry (see ESMA, Final Report, at p. 11). These included, inter alia, a transparent composition and the appointment of an independent Chair that possesses the relevant skills and experience. The Code of Conduct was required to “adequately address the needs and concerns of all relevant stakeholders (including proxy advisors themselves, institutional investors, and issuers).” ESMA’s Final Report offered guidance for the detailed elaboration of the Code of Conduct on certain subject matters. In particular, ESMA asked the industry to respond to concerns regarding conflicts of interests and communication with issuers.

Following ESMA’s initiative, a number of industry members formed a committee under the independent chairmanship of Professor Dr. Dirk Andreas Zetzsche, LL.M. (Toronto) in April 2013, to develop an industry code of conduct for the proxy advisory industry. While the Chair fulfilled an advisory and coordinating function, he did not interfere with the fundamental decisions with regard to the Principles; these decisions were made exclusively by the industry members of the working group. The group published its “Best Practice Principles for Providers of Shareholder Voting Research & Analysis” in late April 2014.

The Best Practice Principles are designed to help clients and stakeholders understand:

  • The nature and character of shareholder voting research and analysis services;
  • The standards of conduct that underpin those services; and,
  • How signatories to the Principles interact with other market participants.

The Principles operate on a “comply-or-explain” framework. They are intended to complement applicable legislation, regulation and other soft-law instruments. Industry members that recognize the guiding role of the Principles are requested to become Signatories of the Best Practice Principles and submit themselves to the checks and balances as detailed in the Principles.

Three Principles form the core of the industry’s commitment:

  • First, on service quality, Signatories provide services that are delivered in accordance with agreed client specifications. Signatories should have and publicly disclose their research methodology and, if applicable, “house” voting policies.
  • Second, on conflicts of interest management, Signatories should have and publicly disclose a conflicts-of-interest policy that details their procedures for addressing potential or actual conflicts-of-interest that may arise in connection with the provision of services.
  • Third, on communication with issuers, shareholder proponents and others, Signatories should have and publicly disclose their policy (or policies) for communication with issuers, shareholder proponents, other stakeholders, media and the public.

Unless otherwise stated, all policies should be disclosed on the signatory’s website or made available on request.

Each of the three Principles is supported by detailed Guidance that explains the background, relevance and application of the Principles. The comply-or-explain framework applies to both the Principles and the Guidance.

Accompanying the Principles, Prof. Zetzsche in its function as chairman issued a report on the consideration of the industry committee. The report aims to enhance transparency and understanding on the functioning of proxy advisors and their role in corporate governance. The report discusses, inter alia,

  • the scope of the Principles,
  • the Committee’s general approach,
  • the delineation of responsibility between proxy advisors, institutional investors and issuers that forms the basis of the Principles,
  • the attitude of the industry towards local governance standards, and
  • how Signatories should deal with conflicts of interests.

A major section of the report is devoted to the communication between issuers and Providers of Shareholder Voting Research & Analysis. In particular the Chair explains why a mandatory distribution of research report to issuers would put the providers’ commitment vis-à-vis their clients (the investors) at risk. The report concludes with details on the Principles’ enforcement as well as the committee’s next steps.

As permanent repository, a package including the Best Practice Principles, the Chairman’s Report on the Principles, the consultation document and the feedback statement that summarizes the stakeholders’ positions is available here.

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