Proxy Advisory Firms Release First Reports on Latest Best Practices

Stephen Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance.

For the first time, six of the world’s most influential shareholder voting research and analysis firms (better known as “proxy advisors”), which help institutional investors vote shares at stock-exchange-listed companies worldwide, have each publicly released reports showing how they comply with the latest industry Best Practice Principles. [1]

Proxy advisors have been a target of corporate criticism ever since Institutional Shareholder Services (ISS) pioneered the voting-recommendation industry in 1985. Through its landmark 1988 Avon Letter, [2] the US Department of Labor first declared the share ballot an asset—making it all but mandatory that ERISA-regulated funds cast them. The rule paved the way for an expanded industry of voting research and advisory firms. But for decades many institutional investors commonly handled the responsibility as a low-status compliance exercise. In 2007 Lord Paul Myners, later UK City Minister, scathingly referred to proxy staff as the “open-toed sandal brigade” beavering in the basements of investment houses. [3]

That’s not the case today. Increasingly, investors are merging the voting responsibility with investor-corporate engagement in a new discipline that has become known as stewardship. Moreover, as asserted most prominently in annual letters from BlackRock’s Larry Fink [4] and State Street Global Advisors’ Cyrus Taraporevela, [5] stewardship is now seen as a central means for mainstream investors—not just activists—to seek and protect share value. As a result, institutions have piloted a steady drift away from routine endorsements of corporate management and toward more critical stances on executive pay, director nominations, ESG, and a host of other issues.

Not surprisingly, detractors have escalated attacks on proxy advisors, charging them with feeding that drift with toxic conflicts of interest, shoddy and inaccurate research, and chronic unresponsiveness. Despite general investor satisfaction with the industry, critics have succeeded in multiple jurisdictions in persuading regulators to step up oversight of voting advisors. In 2020 the US Securities and Exchange Commission, for example, reclassified proxy advice as “solicitation” and adopted new guidance designed to give issuers more advance notice of analyses and investors more explanations of conflicts of interest. [6] The Department of Labor, for its part, placed fresh duties on investors to monitor proxy advisors they hire. [7] Such measures are under legal challenge and may be reversed or amended by the Biden administration. But Europe has not been far behind. France’s Autorité des marchés financiers (AMF), under Article R. 544-1 of the Monetary and Financial Code, now requires proxy advisors registered in the country annually to disclose research methods, conflicts of interest, and policies on communication with issuers. [8]

However, the European Securities and Markets Authority (ESMA), regulator for the EU, took a more indirect approach. In 2013, following a market consultation, ESMA set in motion a process leading to the industry developing its own voluntary Principles of Best Practice. [9] The idea was hardly new; a proposal first surfaced for a code in a 2009 paper issued by the Millstein Center for Corporate Governance and Performance at the Yale School of Management. [10] But ESMA’s promise to regularly test the integrity and effectiveness of the principles represents a latent compulsion on proxy research and advisory firms to keep the process robust. ESMA is scheduled to next review the Principles in 2023.

The current version of the Best Practice Principles for Shareholder Voting Research was adopted following market consultations in July 2019, with firms committing to first reports covering 2020. Under its provisions, signatories are to disclose information in annual compliance reports in three main areas on an ‘apply and explain’ basis:

  • Service Quality, including staff resources, research methodologies, and voting policies;
  • Conflict of Interest Avoidance or Management; and
  • Communications Policy, including descriptions of how they communicate with client investors as well as public companies and other stakeholders.

Further, following an ESMA review of earlier Principles, the founder firms agreed to create a 12-person Oversight Committee [11] to provide independent assessments of compliance reports, invite market views on industry performance against the Principles, and produce its own annual report on whether the Principles and independent oversight are advancing stakeholder confidence in the proxy voting and research advisory industry. The Committee came into being in July 2020, composed of distinguished international representatives of public companies, investors, and the academic community. I serve as chair.

On February 18 2021 the independent Oversight Committee announced [12] that all six proxy research and advisory firms which had committed to the process had now issued their first compliance reports against the 2019 Best Practice Principles. The six are EOS at Federated Hermes, Glass Lewis, Institutional Shareholder Services (ISS), Minerva, PIRC, and Proxinvest. With all signatory reports now available to the public, the Oversight Committee has begun its first review of the statements to assess how they comply with the Principles. To assist in this work, the Committee appointed Associate Professor Dr. Anna Tilba of Durham University Business School as its independent reviewer. Any shortfalls identified by the Committee will be discussed on a confidential basis with the relevant firm in the expectation that improvements would be incorporated in 2021 reports. The Oversight Committee is expected to release the first annual report on its work by July 2021. It also plans to host an Open Forum for stakeholders to share perspectives on the industry late in Q4 2021.

The 2020 compliance reports may yield new data and insights on how proxy advisors operate and how they compare to each other. Moreover, they should offer additional resources to clients who face regulatory requirements or fiduciary duties to conduct regular due diligence on proxy research and advisory firms they hire.

The Oversight Committee is composed of the following members:

  • Stephen Davis, chair; Senior Fellow at Harvard Law School; (United States)
  • Amy Borrus, Executive Director, Council of Institutional Investors (CII); (United States)
  • Clare Payn, Senior Global ESG & Diversity Manager, Legal & General Investment Management (LGIM); (United Kingdom)
  • Margriet Stavast, Senior Advisor Responsible Investment, PGGM; (Netherlands)
  • Massimo Menchini, Director of Institutional Relations and Corporate Governance, Assogestioni; (Italy)
  • Michael Herskovich, Head of Corporate Governance, BNP Paribas Asset Management; (France)
  • Michael McCauley, Senior Officer—Investment Programs & Governance, SBA of Florida (United States)
  • Jean-Baptiste Duchateau, VP Legal Corporate & Securities, Veolia Environnement (France)
  • Geof Stapledon, Vice President Governance, BHP (United Kingdom & Australia)
  • Hope Mehlman, Executive Vice President, General Counsel and Corporate Secretary, Bank of the West (United States)
  • Konstantinos Sergakis, Professor of Capital Markets Law and Corporate Governance, University of Glasgow (United Kingdom)
  • Nermeen Shehata, Associate Professor, The American University in Cairo (Egypt)

The home page of the Oversight Committee may be found here:


1See all six statements here: back)

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3Financial Times (December 4 2007), back)

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9See “Summary of the Review Process” in back)

10Meagan Thompson-Mann, “Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry”, Millstein Center for Corporate Governance and Performance, Yale School of Management (2009). back)

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