In a recent edition of The Times, Financial Editor Patrick Hosking wrote an item entitled “Adviser is accused of mafia‑style shakedown” in which the business community raised concerns about the potential conflicts of interest in the governance services industry. It explained how ISS, the largest proxy voting adviser had developed a service which helps companies draft governance and voting disclosures in a way which improves the chances they will get the nod from shareholders.

One commentator said: “It’s raised some people’s backs. They see it as some kind of implicit threat — that unless they hire ISS CS, they may be more likely to face a negative recommendation.”  The chairman of a remuneration committee at a UK-listed company told The Times that the approach was tantamount to “a mafia-style shakedown”.

The publication of the article, a little like FBI letters about email servers, may have been designed to inflame the corporate lobby ahead of  the BEIS Green Paper deadline. But it did serve a useful purpose by highlighting the risks of snap decisions rather than taking a considered view.

As Patrick identifies, the market for shareholder research is dominated by a single US-based vendor – ISS. With 1,700 clients, it is larger than the rest of the industry added together. In a recent public interview, Gary Retelny, CEO of ISS laid out their mission in simple terms that: “because ISS’s core proxy advisory business presents limited growth opportunities, ISS is focused on growing in other areas. This includes ISS’s work with corporate issuers, especially outside the United States”  

When a single vendor dominates the voting views of nearly all institutional investors, this can only create the type of problems outlined in The Times.

Like ISS, Manifest offers its research on a commercial basis – like a subscription to The Times or any other commercial business intelligence service. In addition to our asset owner and manager clients, many listed companies buy our reports and data because they find our evidence-based analysis help them understand how they stand in relation to the market and their peers across a range of governance and sustainability dimensions.

Unlike ISS, however, we do not offer generic, default voting recommendations which are automatically executed or where client votes can be over-ridden by an algorithm. Nor do we seek to frame our offering as a way designed to “improve” companies standing with investors, nor do issuers get any pre-publication access or provide advisory services. This would, as The Times identifies, be a conflict of interest which undermines trust in the stewardship process and completely side-steps the role of shareholders.

It is a very short step from Group-Think to No-Think and so companies and investors are right to be concerned that important voting decisions are taken without a detailed appraisal and understanding of their individual circumstances.  Which is why last week the board of Manifest sent Dear Chairmen letters to all UK-listed companies outlining our concerns about the state of relations between companies, shareholders and analysts, inviting them to discuss their concerns with us directly.

We are certain that Dept BEIS and ministers will be swamped with responses to the green paper. We are confident that many of those responses will also, if not criticising the role proxy advisers in outright terms, will allude to problems with investor relations and consultations. We are also confident that committed stewards will be angered by the misdirection of the debate. At the end of the day (or should that be AGM) the view that matters  is the view of the owners.

Despite the efforts of the industry to explain its role through the Best Practice Principles for Shareholder Voting Research nagging doubts remain. The complaints are oft-times vague generalisations rather than specific accusations.  But given the persistence of complaints a third-party intervention is required. Not more regulation as envisaged by the so-called CHOICE Act or the Shareholder Rights Directive Mk II both of which overlook the glaringly obvious point that the largest vendor is already regulated.

Coy hints and suggestions of exploitation suggest that there is now only one proper course of action – an investigation by the Competition & Markets Authority. The FCA has already announced its provisional decision to refer the investment consultancy services for review on the grounds of structural weaknesses. If  FCA has an issue with a market of 12 firms and the top three sharing 70% of the revenues, then a market of less than half that number dominated by a single vendor with 70% market share, with negligible switching ought to raise a few eyebrows. On the precautionary principle alone, action is justified.

The job of rebuilding trust in business and investment in the eyes of society is going to be tough. If there is a structural problem in the industry, if proxy analysts are to good governance as the credit ratings agencies were to the capital markets crisis, then let’s get it all out into the open. Let’s get it sorted right now and get the distractions out of the way so we can get on.

In the debate over proxy advisers, the time has come to put up or shut up.

Last Updated: 19 February 2017