On the 22nd of March, the European Securities and Markets Authority (ESMA) published a discussion paper on proxy advisors. The principal focus of the paper is the development of the proxy advisory industry in Europe, which would appear to be growing.
Ever heard of proxy advisors? ESMA describes them as ‘firms that analyse the resolutions presented at the general meetings of listed companies in order to submit voting advice or recommendations on these resolutions to their clients’ (p. 7). Clients are mainly asset managers, mutual funds and pension funds. Nowadays these institutional investors hold very diversified portfolios of shares and are unable to analyse the developments within the listed companies of which they are shareholder and vote accordingly.
ESMA is aware of this portfolio management and considers this to be a legitimate reason to make use of proxy advisors, but it is also aware of possible over-reliance of aforementioned investors on the voting recommendations of proxy advisors.
This over-reliance is of particular importance in relation to other key issues, such as conflicts of interest, the lack of transparency concerning the methodology used by proxy advisors and the standards of skill, independence and experience of proxy advisor staff. A conflict of interest occurs, for example, as the proxy advisor provides both consultancy services to the issuers (the listed companies) and the clients who invest in those listed companies. It is in this context that ESMA ‘considers that careful attention must be kept in deciding whether, and if so, in what form there should be standards for proxy advisors’ (p. 30).
Thus ESMA has issued this paper ‘to gain evidence to the extent to which market failures related to the activities of proxy advisors may exist, the extent to which EU-level intervention might be appropriate, and what ESMA’s role might involve’ (p. 5). Should standards for proxy advisors be formulated on the European or the national level and should that be in the form of, for example, a corporate governance code or a stewardship code?
Feedback from the market participants may shed some light on this. In our opinion, the wisest thing for ESMA to do would be to keep up with regulatory developments concerning other so-called gatekeepers in the financial markets such as financial analysts, auditors and credit rating agencies.