Over the same weekend that the UN wrestled with the question of whether to intervene in the internal affairs of Libya, the French financial markets regulator, the Autorité des Marchés Financiers (AMF), issued a stunning piece of surprise, summary intervention in the proxy advisory market.
Having consulted with “the professionals concerned” according to their own press release (which is only announced on the French pages of their site), the AMF Recommendation touches on four areas: the development of voting policies; the development of voting advice; dialogue with issuers; and conflicts of interest. Regrettably, the AMF has not included any guidance to help in the interpretation of their “Recommendation”.
Although the code is unofficially described as being ‘voluntary’, the AMF’s clout will ensure that proxy advisors making recommendations on resolutions at French meetings are now required to submit to:
- Publishing the details of their entire voting policy prior to the season;
- Publishing and justifying voting advice in terms of the previously disclosed voting policy;
- Giving issuers a preview of draft recommendations 24 hours before publication; and
- Including issuer comments in response to the recommendations in research reports
As a proxy advisor on French issuers for several years ourselves, had we been consulted by the AMF ourselves we would have had some helpful points to make. Stepping aside from the delicious irony that the Recommendation itself requires us to consult with the targets of our work before publishing, but was published by the AMF without giving us a right of reply, this is what we would have said.
Firstly, there are important questions of scope. Does this Recommendation also require engagement service providers who make voting recommendations to also comply? Furthermore, where voting recommendations are made according to a custom policy, are proxy advisors required to publish the custom policy and the subsequent recommendations derived from it as well?
Secondly, doesn’t this Recommendation actually undermines existing AMF policy on the subject? The Recommendation itself actually quotes an excerpt from the 2005 Mansion Report section which held that “the exercise of voting rights … should not be limited to following voting recommendations of a voting advisory service without oversight”. If the intent of that Recommendation was to move away from blindly following off-the-shelf policies, then this new AMF Recommendation undermines it by emphasizing the importance of third party recommendations.
Thirdly, the Recommendation actually requires proxy advisors to go against the grain of CFA guidance on analyst objectivity and independence, which specifically prohibits sell-side analysts from sharing with target companies any explicit recommendation or conclusions prior to publication. Some proxy advice relates directly to financially sensitive investment decisions, such as share issues, mergers, acquisitions and so forth. If proxy advisers really are calling the shots, the last thing we need is issuers vetting the advice they give on such questions, least of all to a selective subscription-only audience (does that amount to “Inside Information”?)
Fourthly, the timing of this Recommendation is interesting to say the least, with the SEC yet to pronounce on the back of detailed consultation of the subject, and the forthcoming EU green paper on corporate governance sure to also address the same issues. If it is designed to be a pre-emptive strike to ‘inform the direction’ of what is likely to be proposed, it seems rushed at best.
Lastly, the Recommendation wrongly focuses market attention on the notion that recommendations-based research is the only way forward. There is no consideration here for the potential of Manifest’s innovative ‘custom’ advisory systems and research. Without further clarification from the AMF, it is possible that we might be expected by French issuers to publish every individual voting policy of each customer in December for the following calendar year, or risk being deemed ‘non-compliant’ in the French market.
There are aspects which are fair requirements, such as transparency relating to conflicts of interest and the correction of material errors. It is, in a way, sad to see the need for regulation of such obvious challenges – a result of the fact that market forces have not been successful thus far in eradicating them.
Overall, this Recommendation has the effect of putting proxy advisory firms front and centre in the engagement process, thereby risking the disenfranchisement of investors in the engagement process. It runs directly contrary to globally accepted guidance on analyst objectivity. It re-enforces the notion that off the shelf recommendations-driven research is the only acknowledged model in the proxy advisory space. It also undermines current AMF policy on investor voting decision-making and has not been arrived at using the same standards of consultation it places upon the target industry.
We hope to see the AMF revise both its approach to consultation on this issue as well as the Recommendation itself, so as to more accurately reflect the variety of proxy advisory methodology available to investors and, more importantly, underscore objectivity and independence in our industry.
We are currently engaging with AMF to seeking clarification of key points prior to issuing a statement with regard to our compliance with the Recommendation.
Last Updated: 23 March 2011