Pensions industry calls on Brussels to improve disclosure for proxy services
EUROPE - Institutional investors and pension fund associations have called on Brussels to introduce a European framework for proxy services and warned that asset owners must ensure the suitability of third-party services, since the investor incurs the ultimate voting decision for each resolution at a company meeting.
Responding to a discussion paper on the development of the proxy advisory industry launched by the European Securities and Markets Authority (ESMA), the Universities Superannuation Scheme (USS) in the UK said it supported a requirement for users of proxy advisory firms to disclose publicly how they employ such services.
"The user should be required to publicly disclose how they employ the services of proxy advisory firms and the extent to which the signatory follows, relies upon or uses the recommendations made by such services," it said.
"The disclosures would encourage regular reviews of the suitability of service providers and be a low-cost solution to ensuring accountability and continued improvement in the proxy advisory industry."
According to the pension fund, similar disclosures are now being proposed for the 2012 revisions to the UK Stewardship Code Engagement with issuers.
"However," the USS pointed out, "a commitment to the Stewardship Code is on a 'comply or explain' basis. We would support a strengthening of the proposed disclosure requirements alongside implementation across Europe."
The USS also expressed concerns over suggestions that issuers should have sight of proxy voting research prior to distributing to clients.
"Issuers may see this as an opportunity to negotiate a favourable voting recommendation or message that dilutes the research and usefulness to the user," it said.
"Requiring or recommending feedback from issuers will also shorten the amount of time we have to assess meeting materials and vote in an informed manner."
The pension fund claimed that few investors had access to research from all proxy advisory firms, and said it preferred analysis based on public disclosures available to all shareholders.
Asset manager Hermes also called on ESMA to increase the accountability of proxy advisors, simplify voting systems to lower entry barriers and incentivise investors for the continual stewardship of their holdings.
"We are concerned that the current structure of the proxy advisor market, as well as some widespread investor behaviours, could lead to overreliance on proxy advice and create potential for principal-agent conflicts," it said in its response to the discussion paper.
"Often, this occurs because the benefit of good governance flows to the underlying owner of the company, while the cost of carrying out voting often sits with the fund manager, which, as an agent, has less incentive to invest in doing the job well."
Meanwhile, the UK's National Association of Pension Funds (NAPF) said there was no need for EU-level action at this time.
"We are not aware of any evidence to indicate the inappropriate use of proxy advisors that might warrant regulatory intervention," it said.
"We are not in favour of EU-wide legislation with regards to proxy advisors. It is important to remember that regulating organisations such as proxy voting agencies will add to their importance and confirm their role in the system."
In Spain, however, the Association of Collective Investment Schemes and Pension Funds (INVERCO) argued that the "most reasonable" option would be the adoption of a European code for proxy advisors subject to the 'comply or explain' principle.
According to INVERCO, this code should contain "precise and weighted" guidelines and recommendations, so that all proxy advisors subscribing to it are bound to comply with the code, or explain why and to what extent they have failed to do so.
"Although adherence to the code would be voluntary for proxy advisors, it would be binding in nature - albeit not legally binding -because, if they fail to comply with the recommendations and do not provide any explanation as to why they have failed to do so, they would incur reputational risk that could cast a shadow over the reliability of their recommendations and reports," it said.