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Proxy advisors are used to being caught in the crossfire between boards of directors and shareholders.
Still, it was a surprise to see AstraZeneca president Michel Demaré shoot directly at the messenger. in the Financial Times last week. He criticized the advisors for having the temerity to recommend Vote against CEO Pascal Soriot’s salary package at the pharmaceutical company’s recent shareholders meeting.
Not that the advisors’ message reached all fund managers and shareholders. Almost 36 per cent of shares voted against the package, which could be worth up to £18.7m to Soriot. But most backed it, despite advice from top advisers Institutional Shareholder Services and Glass Lewis, which called the increase in incentive-based pay “excessive.”
Are proxy advisors really to blame for fomenting such revolts?
The clue is in the name. “It’s advice,” said Alex Edmans, a finance professor at London Business School. “If investors blindly follow proxy advisors, investors are to blame.”
But there are flaws in the system. ISS and Glass Lewis dominate the market. However, there is strong evidence in the US that the ISS influences voting results. the study in question it does not judge whether its impact is positive or negative. Some overloaded fund managers automatically follow their recommendations, particularly on uncontroversial resolutions. Errors can creep into the agencies’ analysis. Advisors who sell consulting services alongside proxy advice must protect themselves against the risk of conflict.
Proxy-skeptics like JPMorgan CEO Jamie Dimon, who last month Announced bank asset managers would phase out the use of proxy voting recommendations, they have complained about Ubiquitous advisors and “lazy” investors since at least 2015.. Indeed, many of these concerns already existed when I first wrote about the growing influence of ISS in 2003, following the collapse of US energy trader Enron, which triggered a surge in demand for impartial advice on good governance.
The main change since then is that critics in corporate America have added a layer of culture war, lumping agencies in with a supposed cabal of government-protected “woke capitalism” advocates.
In the United Kingdom, the debate remains somewhat gentler, which is why Demaré’s criticisms stood out.
In fact, a paper of the UK Financial Reporting Council last year which analyzed the impact of proxy advisors and ESG rating agencies concluded that “the nature and extent of [the firms’] The influence may be more nuanced and less clear-cut than many companies, stakeholders and other commentators believe.”
ISS and Glass Lewis are not the only advisors on the market and they do not always agree. Indeed, in two-thirds of UK cases in 2022, when one recommended a vote against a resolution, the other suggested a vote for it. Nearly a third of investors use more than one advisor; some even focus their attention on cases where agencies’ opinions clash. As for the extent of the influence of proxy advisors, the FRC report estimated that it was “less extensive than is sometimes claimed.”
The changing shape of the British market has undoubtedly added to the tension. “Absentee” investors, without a team in the UK, are more likely to vote in line with the recommendations of proxy advisors than those with boots on the ground. The transatlantic divide in executive pay Concerns have grown that the wrong benchmarks are being applied to bosses of UK multinationals like Soriot.
Still, the proper focus of board members’ ire on unruly shareholders should be the asset owners and managers themselves rather than the agencies they hire.
As Sarah Wilson of Minerva Analytics, one of the smaller advisers, points out: “If companies don’t like what shareholders think, they need to go talk to them, not at them.”
At their best, proxy advisors help fund managers make consistent judgments and comparisons between companies. They also help smaller shareholders pool their influence and keep fees low by performing analysis that funds would otherwise have to do in-house. Their clients appear to be happy: only 6 per cent of investors told the FRC they were dissatisfied with the research they paid for.
Diligent proxy advisors and committed investors make an important contribution to a democracy of informed shareholders. Demaré and his fellow presidents should suspend proxy wars and support that goal, even if they occasionally don’t like the electorate’s conclusions.