If proxy advisers can rattle Jamie Dimon, what chance do smaller firms stand?
The power of proxy advisers has been enough to disturb big firms like JP Morgan and Astrazeneca, so what hope do the smaller players have, asks James Ashton
Proxy advisers wield too much power. Not my assertion, but that of Jamie Dimon, the Wall Street titan who sits atop US financier JP Morgan Chase as chairman and chief executive.
“While asset managers and institutional investors have a fiduciary responsibility to make their own decisions, it is increasingly clear that proxy advisers have too much influence,” he wrote in his annual letter to shareholders.
These data-crunching firms that churn out millions of boardroom voting recommendations to investors every year may well ease the pressure during the busy AGM season. They may well provide a useful filter, undertaking a huge amount of ground work that asset owners and managers would struggle to complete in-house. They certainly influence voting outcomes.
But none of this is done without cost. As Dimon added: “Many companies would argue that this information is frequently not balanced, not representative of the full view and not accurate. In addition, companies complain that they often cannot get the data corrected, and, therefore, a vote may go uncorrected.”
He isn’t the only business leader to air concerns about proxy advisers recently. In a column for the Financial Times, Michel Demare, chairman of the UK pharmaceuticals giant Astrazeneca, pointed out another worry.
“Proxies often make inconsistent voting recommendations between markets: advising shareholders to vote against pay policies at FTSE-listed companies but supporting US and Swiss businesses that typically have higher compensation levels and a lower degree of performance-indexed pay,” he wrote. “These double standards cannot easily be justified, and do serious harm to the competitiveness of global companies based in the UK.”
If some of the largest companies in the world feel they are being let down by proxy advisers, and struggle to combat what they see as errors and inconsistencies, what hope do smaller quoted stocks have?
The results from our survey of Quoted Companies Alliance (QCA) members on this topic were startling. Companies found themselves in a race against time to correct what they viewed as basic errors and misunderstandings. Often there was no discernible right to reply. Sometimes they were charged to discover what had been written about them. They reported a reluctance to engage, even outside the AGM season. Relations were soured with shareholders. And then there was the ensuing negative media and market sentiment.
Far from improving governance, proxy advisers appear to be closing down conversations and making broad brush assumptions. Large companies have some hope of holding back the tide, speedily calling out what they see as unfair or inaccurate, but small companies are much more exposed, without the same company secretariat and investor relations resource to challenge claims from proxy advisers..
It is important to note that there is no regulatory requirement for asset managers to employ proxy advisers, of which the biggest names are Glass Lewis and ISS. So why go along with a high-handed, often slap-dash approach that risks damaging the very investments they hope will prosper while in their ownership?
Several of these proxy advisers operate globally, but we need to see local solutions applied to improve their effectiveness. Devising them would underscore the UK’s claim to lead the way in the creation and adoption of good corporate governance.
A strengthened UK Stewardship Code is the best place to start. As the Financial Reporting Council noted last month, one theme to emerge from its initial outreach for the Code’s current review was concern related to the influence of proxy advisers. “We are carefully considering how the Service Providers Code [part of the Stewardship Code] might support greater transparency of their activities,” it said.
Among measures the QCA has drawn up in conversation with our members, we are proposing that proxy advisers guarantee a seven-day window for companies to respond to research reports written about them; that they proactively seek out companies they choose to write about to schedule an annual meeting outside the AGM season; that UK quoted companies that have chosen to adopt one governance code are not judged by the principles of another; and that investors take greater responsibility for the performance of service providers they choose to employ.
When such a premium is put on good governance to support growth it is hugely worrying that companies are so easily misunderstood or seemingly misrepresented and open dialogue is frowned upon. It’s time to make the system work better – for large and small.
James Ashton is chief executive of the Quoted Companies Alliance