The role and influence of proxy advisers
But let me be clear: they are hugely influential and have been for many years. In a recent Sunday Times article, its Business Editor, Oliver Shah, described them as “anonymous box-tickers” that many investors simply defer to on major resolutions at AGMs, covering issues such as executive pay, boardroom composition and the re-election of directors.
The problem, Shah argues, is that when pay schemes (for instance) do not fit the stringent criteria of proxy advisers, they guide shareholders to vote against them. The problem is that proxy advisers – by their very nature of being one step removed – do not take context into account when coming to these decisions and many investors, who do not have adequate resource or knowledge of a particular market, often blindly follow that advice.
It should of course be said, as Shah himself acknowledges, that many investors do undertake a lot of engagement with firms on various policies, including pay, and make a judgement call based on their own findings and in-house criteria. In the UK, generally seen as a bastion of good corporate governance globally, this is a prevalent practice with many of the big asset managers investing large resources into their own ESG functions placing a premium on engagement with issuers.
But who exactly are these so-called anonymous proxy advisers? There are two main players in the market, Institutional Shareholder Services (ISS) and Glass Lewis who provide research and voting recommendations to help investors vote their shares on some of the issues described above, spanning a whole range of ESG matters and beyond.
According to ShareAction, a prominent charity that promotes responsible investment practices in the UK, ISS and Glass Lewis hold an estimated 87% of the US market between themselves, with ISS – the older firm – holding over 60% of the US market.
In the UK, there are two smaller, but equally influential, proxy advisory firms: the Institutional Voting Information Service (IVIS), which was founded in 1993 by the Association of British Insurers (ABI) and since 2014, has been part of The Investment Association. IVIS is used by 20% of asset managers ShareAction researched, but never as the sole proxy advisor.
There is also PIRC (Pensions & Investment Research Consultants), which was established in 1986 by a group of public sector pension funds. PIRC’s influence, according to ShareAction, is restricted as their client base does not ordinarily include larger financial institutions. So, whatever way you cut it, there are effectively only two major players in the global proxy advisor market.
There is then the apparent mystery of how proxy advisors come to their decisions. In my experience, there is generally a three-step process involving internal expertise, external consultation with their investor clients and then, based on feedback and internal reflection, recommended policies are issued.
One of the main criticisms levelled at the big two – ISS and Glass Lewis – is that they do not engage directly with issuers, in addition to the opaque decision making described above.
However, as I’ve seen, there are ways to engage with them – although it should be said, to avoid any real or perceived conflict of interest, engagement will almost certainly have to be undertaken through formal channels. Nevertheless, it can be done.
The truth is that most proxy advisory firms are open to meeting with companies. Meeting a company representative face to face or over the telephone allows the analyst at ISS or Glass Lewis to learn more about the company and while it may not necessarily impact their recommendations, engagement is possible. Issuers can also engage what are called proxy solicitors to help set up meetings with proxy advisors and investors.
It is worth bearing in mind, however, that proxy advisors have a very busy season, which generally spans December to May. To maximise engagement, it would be best wherever possible, to seek a meeting during the off-season, typically in September, October or November.
I have only briefly, in a few hundred words, been able to tackle some of the big issues around proxy advisors and how issuers can engage with them. However, the team at Instinctif Partners has a vast amount of experience of advising issuers on these matters and are always happy to support clients tackling the rather opaque and sometimes complex world of proxy advisors.