It hardly comes as a surprise that two in five UK plcs find that proxy analysts have a so-called “negative influence” on the relationship between companies and their investors (Financial Times: “Proxy agencies fail to tick boxes” July 1, 2013) However, Sir John Parker appears to misunderstand the role of governance analysts. As the Investment Management Association’s recent survey of fund managers’ adherence to the FRC’s Stewardship Code shows, fund managers are quite clear in their view: it is they who make the ultimate voting decisions and proxy analysts are, quite rightly, an information input into their analysis.
Sir John is correct that some proxy analysts don’t engage with companies, that is simply because it is not our job to do so, we are not the owners. Like the FT, which “Without fear and without favour” reports on the workings of financial markets, proxy analysts review thousands of annual reports to flag the issues which fund managers tell us they deem to be contentious or require additional scrutiny. What companies seem to miss however, is that just because they have provided an explanation, that does not mean that shareholders or stakeholders are going to be convinced by what, in too many cases, could be charitably described as “boiler plate”. As consumers of thousands of annual reports from around the world, our analysts would attest to the lack of clarity through to outright obfuscation they have to contend with each proxy season. A shareholder should be able to make a decision based on a company’s public disclosures. If additional explanations are required then they should be in in the annual reports and proxy statements, not via selective disclosures to some parts of the market and not others.
It is also clear that there is a great deal of misunderstanding about the various roles and responsibilities in the stewardship process. For example, outsourcing vote administration to a proxy voting agency which executes votes according to the instructions of its principal (the asset manager or owner) is not the same as a proxy advisor who, in a co-fiduciary capacity, may be responsible for every aspect of the governance process from policy-setting through to voting and engagement. There also appears to be an assumption that fund managers always have the authority to vote all the shares under their direction; this is not necessarily so, the beneficial owners (typically pension funds) will have their own views and may exercise independent judgement through the ballot box. Similarly, if companies do not engage with the in-house stewardship experts together with the fund managers, it is hardly surprising that the votes may end up going in a different direction to expectations.
Not all fund managers make voting decisions the same way, some are fully integrated with their stewardship teams, others less so. Timing is also as important as the message itself – when engagement takes place at the last minute then deadlines may have passed everyone by. Then we have to contend with the compliance and cultural expectations which drive decisions – mandatory voting regulations can result in very different behaviours to a best practice approach, in other words your US shareholders may look at the world very differently to those in the UK.
Over the past two to three years there has been an escalating and negative anti-governance, anti-shareholder rhetoric from the issuer community and their advisors, most notably from the USA but this has also spread to many parts of Europe. This has all the hallmarks of a desire to suppress any opinion which does not accord with the received corporate wisdom. What is particularly disappointing is that when sell-side analysts issue negative ratings which may influence shareholders to sell their shares there is barely a murmur, yet when proxy analysts raise question marks over corporate disclosures it is asserted that we must have made a mistake or be incompetent.
The British philosopher John Stuart Mill opened his 1859 essay “On Liberty” with a discussion of the historical struggle between authority and liberty describing the need for governments to be freely challenged in order to ensure that their policies are correct and proportionate. The great corporations of the 21st century are as influential as governments, if not more so, and no less requiring of close scrutiny.
Over the past 5 years, AGM resolutions at UK plc have received support of over 97% on average, a record which politicians would dearly love to claim. As for the remaining 3% dissent, the best solution is talk directly to the owners, not ignore them on the basis that “abstain votes don’t count” or that shareholders must have been led astray by their analysts or outsourced their thinking. That would be like suggesting that corporate brokers, company secretaries or investor relations officers had misinformed boards.
Democracy, shareholder or otherwise, needs informed voters if it is to function properly. Stewardship has come a long way since the publication of the Cadbury Report, it can always be improved, however it is both simplistic and untrue to suggest that proxy analysts are the source of stewardship’s woes.
Update: 10th July 2013
A shorter version of this post appeared in the Financial Times letters page
Last Updated: 7 July 2013