A partial defence of proxy advisors

When ICSA and the FT surveyed opinions for the latest Boardroom Bellwether survey published in May, companies were asked: how do you perceive the influence of proxy advisors on shareholder engagement?

Only 3% of respondents felt they had a positive impact. Can proxy advisors really be doing as bad a job as this survey suggests?

This industry has become important because many institutional investors these days invest in thousands of companies across many countries.

Each of these companies will hold an AGM at which resolutions are tabled on which shareholders are asked to vote. Factor in the fact that the majority of AGMs take place in a concentrated period, and it is obvious that investors cannot meaningfully assess each and every resolution on its merits before deciding how to vote.

Investors need a process that enables them to sift through all these resolutions and identify which are uncontentious and which require them to carry out a more detailed assessment. This is the role proxy advisors perform, and for investors it makes sense to use their services as a means of reducing costs.

But as it is driven by a desire to cut costs, it is no surprise that advisors have had to adopt relatively low-cost business models, which of course will have an impact on the quality of analysis they can undertake.

More contentiously, some investors also contract out their thinking to proxy advisors. Investors choose to delegate the authority for deciding how to vote to the advisor, signing up to a standard voting policy that they want to be applied to their investments.

This is the source of the ‘box-ticking’ charge from companies, who are concerned that this has an impact on both the results of voting and the quality of engagement.

Despite the public profile enjoyed by some of them, I have yet to come across compelling evidence that the recommendations of proxy advisors have a negative impact on voting results to any significant extent.

In 2015 the average vote against resolutions at FTSE 350 AGMs was less than 3%, which hardly suggests there is a systemic problem. There is, however, a huge amount of irritation generated by the activities of proxy advisors.

Many companies feel that they are being judged against some sort of standard template and that little attempt is being made to take account of their particular circumstances, no matter how much effort they have made to communicate and engage with their shareholders – so of course they will be frustrated.

But where do you lay the blame? At the proxy advisors? Or at their clients – the company’s shareholders – who have delegated this activity rather than taken responsibility for it themselves, and are only willing to devote limited time and money to analysis and engagement?

In my view, the advisory firms are a symptom of the problem, not the root cause. While the advisors are not immune from criticism, what is really needed is a change of approach on behalf of many of their clients and – to quote the UK Stewardship Code – recognition that although they can outsource activities, ‘they cannot delegate their responsibility for stewardship’.

Before joining ICSA's policy team as a consultant, Chris Hodge was the FRC Director of Corporate Governance.

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