ESMA’s (European Securities and Markets Authority) follow-up analysis of the proxy advisory industry’s self-regulatory code of conduct, aka, Best Practice Principles for Providers of Shareholder Voting Research and Analysis, found that although the industry is “moving in the right direction,” the Best Practice Principles Group (composed of ISS, Glass Lewis, Manifest Information Services Ltd, PIRC Ltd, and Proxinvest) should focus on: (i) improving its own governance – including the transparency of the group and its internal structure and the degree to which the BPP would appear to be workable from a practical point of view, and (ii) further clarity and transparency around the monitoring process it conducts to evaluate the effectiveness of the BPP – including any changes to the BPP resulting from its self-monitoring process or new market developments.
Conclusion Regarding Governance Approach
- To summarise, ESMA’s expectations in relation to the governance of the BPP are to date partly fulfilled. While the drafting phase met ESMA’s expectations, both in terms of structure and process, there is room for improvement and open issues to be resolved in a number of other areas related to the on-going work which needs to be carried out to ensure the successful evolution of the BPP.
- As for the BPPG’s structure and independence, it can be recalled that in its Final Report ESMA indicated that the industry committee was expected to be transparent about its composition and status, including the selection of its chair. While ESMA considers that the BPPG fulfilled these expectations regarding the drafting process, it highlights that the on-going monitoring work should also be based on a clear and sound governance structure.
- Regarding the BPP being workable, the principles and guidance provided by the BPP are clear and the comply-or-explain system is widely understood as the most effective means to signal compliance with self-regulatory codes. However, signatories’ compliance statements do not always clearly point out when elements of the BPP framework are not complied with nor do they highlight the reasons for non-compliance or alternative practices applied
- As for the monitoring framework, ESMA considers that it is not at this stage possible to draw a final conclusion as some developments are not yet completed. A feedback mechanism has been set up and the structure of a comparative framework established, although neither had been used at the closing of ESMA’s review in October 2015. The BPPG has announced that it will undertake a biannual review; however, there are no details available on this to date. ESMA encourages the BPPG to provide more information on these initiatives and to take them forward as substantively as possible in order for stakeholders to have confidence in the role of the BPP in addressing the areas identified in ESMA’s Final Report.
UK Group Aims to Improve Investor Compliance with Stewardship Code
The UK’s Financial Reporting Council (FRC) announced plans to evaluate institutional investor compliance with the Stewardship Code and report on its findings publicly beginning in July 2016. The Stewardship Code, directed at institutional investors with holdings in UK-listed companies and – by extension, to their service providers such as proxy advisors – purports to establish areas of good practice to which investors should aspire, and operates on a comply-or-explain basis.
The FRC indicates that the quality and quantity of stewardship has improved over the past five years – but not consistently and transparently. The objective of the new evaluation scheme is to improve signatories’ reporting of their stewardship activities against the principles of the Code.
Stewardship and the Code
1. Stewardship aims to promote the long term success of companies in such a way that the ultimate providers of capital also prosper. Effective stewardship benefits companies, investors and the economy as a whole.
2. In publicly listed companies responsibility for stewardship is shared. The primary responsibility rests with the board of the company, which oversees the actions of its management. Investors in the company also play an important role in holding the board to account for the fulfillment of its responsibilities.
3. The UK Corporate Governance Code identifies the principles that underlie an effective board. The UK Stewardship Code sets out the principles of effective stewardship by investors. In so doing, the Code assists institutional investors better to exercise their stewardship responsibilities, which in turn gives force to the “comply or explain” system.
4. For investors, stewardship is more than just voting. Activities may include monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration. Engagement is purposeful dialogue with companies on these matters as well as on issues that are the immediate subject of votes at general meetings.
5. Institutional investors’ activities include decision-making on matters such as allocating assets, awarding investment mandates, designing investment strategies, and buying or selling specific securities. The division of duties within and between institutions may span a spectrum, such that some may be considered asset owners and others asset managers.
6. Broadly speaking, asset owners include pension funds, insurance companies, investment trusts and other collective investment vehicles. As the providers of capital, they set the tone for stewardship and may influence behavioural changes that lead to better stewardship by asset managers and companies. Asset managers, with day-to-day responsibility for managing investments, are well positioned to influence companies’ long-term performance through stewardship.
7. Compliance with the Code does not constitute an invitation to manage the affairs of a company or preclude a decision to sell a holding, where this is considered in the best interest of clients or beneficiaries.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Report: Steady Rise in Voluntary Audit Committee-Related Disclosures
– Guide to Pro Forma Financial Information
– IIA Calls on SEC to Mandate Internal Audit Function
– Compliance Officers Call for SEC Enforcement Guidelines
– Study Estimates Almost 20% of Directors Nearing Retirement
– by Randi Val Morrison