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Proxy advisers are used to being caught in the crossfire between boards and shareholders.
Still, it was a surprise to see AstraZeneca chair Michel Demaré take a direct shot at the messenger in the Financial Times last week. He lambasted advisers for having had the temerity to recommend a vote against chief executive Pascal Soriot’s pay package at the pharmaceutical company’s recent shareholder meeting.
Not that the advisers’ message got through to all the fund managers and shareholders. Almost 36 per cent of shares were voted against the package, which could be worth up to £18.7mn to Soriot. But the majority backed it, despite the counsel from the largest advisers, Institutional Shareholder Services and Glass Lewis, which judged the increase in incentive-based payments “excessive”.
Are proxy advisers really to blame for fomenting such revolts?
The clue is in the name. “It’s advice,” said Alex Edmans, professor of finance at London Business School. “If investors blindly follow proxy advisers, the investors are to blame.”
But there are flaws in the system. ISS and Glass Lewis dominate the market. There is solid evidence in the US that ISS influences voting outcomes, though the study in question makes no judgment about whether its impact is positive or negative. Some overstretched fund managers do follow their recommendations automatically, particularly on uncontroversial resolutions. Mistakes can creep into agencies’ analysis. Advisers that sell consulting services alongside proxy advice need to guard against the risk of conflict.
Proxy-sceptics such as JPMorgan chief executive Jamie Dimon, who last month announced the bank’s asset managers would phase out the use of proxy voting recommendations, have been grumbling about ubiquitous advisers and “lazy” investors since at least 2015. Indeed, many of these concerns were around when I first wrote about ISS’s growing influence in 2003, in the wake of 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 culture-war layer, lumping the agencies in with a supposed cabal of government-protected enforcers of “woke capitalism”.
In the UK, the debate remains somewhat more genteel, which is why Demaré’s sniping stood out.
In fact, a paper from the UK’s Financial Reporting Council last year that looked at the impact of proxy advisers and ESG rating agencies concluded that “the nature and extent of [the firms’] influence may be more nuanced and less clear-cut than is believed to be the case by many companies, stakeholders and other commentators”.
ISS and Glass Lewis are not the only advisers in the market and they do not always agree. In fact, in two-thirds of UK cases in 2022, when one recommended a vote against a resolution, the other suggested a vote in favour. Nearly a third of investors use more than one adviser; some actually focus their attention on cases where the agencies’ views clash. As for the extent of proxy advisers’ influence, the FRC report reckoned it was “less extensive than is sometimes asserted”.
No doubt the changing shape of the UK market has increased the tension. “Absentee” investors, without a team in the UK, are more likely to vote in line with proxy advisers’ recommendations than those with boots on the ground. The transatlantic gap in executive pay has added to concern that the wrong benchmarks are being applied to heads of UK multinationals such as Soriot.
Even so, the proper focus of board members’ ire about revolting shareholders ought to be 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 to talk to them, not at them.”
At their best, proxy advisers help fund managers to make consistent judgments and comparisons between companies. They also help smaller shareholders to pool their influence and keep fees down by carrying out analysis that funds would otherwise have to do in-house. Their clients seem to be happy: only 6 per cent of investors told the FRC they were dissatisfied with the research they paid for.
Diligent proxy advisers and engaged investors make an important contribution to an informed shareholder democracy. Demaré and his fellow chairs should call off the proxy wars and support that objective — even if they occasionally dislike the electorate’s conclusions.