EU Commissioner Michel Barnier’s Green Paper on Corporate Governance closed for consultation on Friday. The irony of the US declaration that shareholders cannot nominate their own directors coming out on the same day will not be lost on the governance community.
What is at stake is “Comply or Explain” versus a rules -based regulatory environment which puts bureaucrats at the centre of company ownership.
As much as US financial institutions are expending vast sums of shareholders’ funds to roll back the Dodd Frank reforms, it is clear that the issuer and advisor community is doing its utmost in Europe to constrain the comply or explain stewardship model. For all its criticisms, it’s a model which has done so much for advancing global governance standards and has put the UK and EU in the driving seat since the Cadbury Report of 1993.
Comply or Explain isn’t perfect – and possibly never will be, if it were then we wouldn’t have companies thinking that getting a 49% vote against an executive pay proposal is a “pass”. Companies seem to be confused when, in their view, shareholders are reluctant to accept explanations for non-ccompliance with best practice principles. Perhaps that’s why proxy advisors are taking a lot of stick for having the temerity to cast a little sunshine on otherwise recondite boilerplate. If chairmen have been led to believe that such disclosures were automatically going to grant them 100% ratings at the ballot box then they have been badly let down. And investment banks griping to regulators about how dreadful proxy advisors are isn’t going to improve the situation any time soon.
It is the nature of financial markets that there will be lively counterpoint. On any given day there will be both buyers and sellers of securities, each convinced that theirs is the right view of the world. So it is with corporate governance. There are investors who will readily accept every corporate disclosure as gospel and others who see significant disconnects between investor and manager interests. Blaming proxy advisors or investors for not playing along with the executive agenda is to miss the point. As much as we need free speech in our newspapers and broadcast media, investors need to be able to express their views, no matter how uncomfortable those might be to the wider issuer community.
What of Manifest’s response to the EU? As we are not owners, merely the information and administration agents of owners, perhaps unsurprisingly we have confined our comments largely to the questions relating to the role of proxy advisors. We recognised that there is an all out war being waged on this little community. We may have commercial and competitive disagreements with one another, but there’s probably something we all have in common, a determination to ensure that investors can cut through over-bloated disclosures to come to an informed judgement about the quality of corporate management.
In truth there are aspects of the governance industry as a whole which leave us disturbed – not least the Commission’s lack of clarity as to what a “proxy advisor” actually is. Comparing us to credit rating agencies is unhelpful, likewise trying to carve out a special regulatory niche which would put is in a compartment separate from say sell-side research or the major information and research vendors such as Bloomberg or Reuters.
We know that there are vested regulatory interests who would like nothing better than to banish proxy advisors from the landscape. Which is why we have no hesitation in saying to Barnier, if you are serious about investigating the role of the various actors in the governance space, let’s take it to DG Comp and get to the bottom of why so many vested interests appear to collude to suppress reform which is in the best interests of shareholders. Let’s get the Shareholder Rights Directive working properly. Let’s get rid of the cross border voting barriers. Let’s stop having AGMs on the last Thursday in April. Let’s stop giving the “markets” priority in the reform agenda. Instead let’s put shareholders where they belong, at the heart of the governance debate.
We’re sure our response isn’t going to be entirely popular but after 15 years of “feather ruffling” we’re used to that. But evolution and reform only comes from challenging the received wisdom and flagging up some of those uncomfortable issues that some would rather forget.
Manifest’s Green Paper Response can be found Here >>
Last Updated: 24 July 2011