Stephen M. Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance and Chair of the Best Practice Principles Oversight Committee (OC) 2020-2022; and Konstantinos Sergakis is a Professor of Capital Markets Law and Corporate Governance, University of Glasgow, and Chair of the OC 2023-Present.
The proxy voting advisory and research industry, which includes leaders ISS and Glass Lewis, are increasingly at the center of a whipsaw debate between those who urge that investor stewardship be constrained and those who advocate for it to be enhanced. Regulators have long been drawn into the vortex. But until recently two of the world’s prominent market watchdogs—the US Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA)—had taken opposite tacks on how to address the industry. Today they have converged on the same path, as first became clear in an under-reported October 2022 conference in Rome. There an SEC representative, speaking virtually, spelled out for the first time the Commission’s new, EU-like approach to proxy advisory and research firms.
Implications of this regulatory conjunction have immediate consequences for proxy advisors, as well as for companies and investors on both sides of the Atlantic. Before we address those effects, however, it is important to spotlight the two regulators’ perspectives.
ESMA’s road has been consistent. In 2013, facing issuer calls to install hard rules on proxy advisors, the Authority instead asked the industry to develop its own code of best practice. Five rival firms—ISS, Glass Lewis, Manifest, PIRC, and Proxinvest (now part of Glass Lewis)—collaborated to respond with global-scope principles that tackled service quality, potential conflicts of interest, and communications. Federated Hermes’s EOS arm later joined the original group of signatories.
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