European regulator: Proxy voting advisory industry should regulate itself

Proxy-voting advisory firms should develop a code of conduct within the European Union for identifying, disclosing and managing conflicts of interest and fostering transparency to ensure the accuracy and reliability of advice, according to the European Securities and Market Authority.

In “Final Report: Feedback statement on the consultation regarding the role of the proxy advisory industry,” ESMA found no current market failure related to how proxy advisers interact with investors and issuers in the European Union, requiring regulatory intervention.

“On this basis, ESMA currently considers that the introduction of binding measures would not be justified,” the report states about the role of the proxy advisory industry.

Instead, the report recommends the industry regulate itself.

A “number of concerns regarding conflicts of interest management and the transparency of analysis and advice … would benefit from improved clarity on the part of the industry,” Steven Maijoor, ESMA chairman, said in a statement.

“The establishment of an EU code of conduct will assist in improving understanding amongst issuers and investors of the proxy advisers' role, allowing them to better focus on fostering effective and robust corporate governance, thereby contributing to investor protection and efficient markets.”

ESMA sets out a framework for a code of conduct in the report, including the roles of different stakeholder groups and key principals affected.

ESMA plans to review the move to develop a code of conduct within the next two years and might “reconsider its position if no substantial progress has been made by that time,” the report states.

In response, the Expert Corporate Governance Service, a venture of a group of proxy advisory firms, issued a statement Thursday saying, “a code should make a clear distinction between the buy-side service providers (paid by investors), and sell-side providers (paid by issuers). Such a code should prevent this basic conflict of interest and prohibit any mix of income sources.”

Olivier Gamache, president and CEO of Responsible Investment Group, a proxy advisory firm and ECGS partner, said in an interview a code should ensure firms avoid conflicts by selling services to only investors and not corporations.