European Commission Seeks Guarantees of Proxy Advisory Firms’ Work

(From David Polk) – A coalition of proxy advisory firms, including ISS and Glass Lewis, is disputing the requirements in the proposed EU revisions to the Shareholder Rights Directive related to their services, which could take effect in all EU member states. The proposal focuses on many of the same criticisms that US companies have about the advisors, although we are unlikely to see regulatory action in the near term in the US.

The proposed revisions to the 2007 EU Shareholder Rights Directive was issued in early April in response to calls for improvement of the business environment in Europe. Common EU action is being endorsed as necessary given that non-national shareholders hold about 44% of the shares in EU listed companies, and the cross-border nature of those companies means activities in more than one EU member state. After analyzing perceived corporate governance shortcomings in European listed companies focused on insufficient shareholder engagement and lack of transparency, the initiatives announced includes say-on-pay for directors’ compensation (including disclosing a ratio to employee pay), the publication of engagement principles for institutional investors and asset managers and efforts to ensure reliability and quality of advice of proxy advisors.

The European Commission noted that proxy advisors are not subject to any regulation at the EU level and non-binding rules exist only in a few member states, such as the UK. According to the introduction, proxy advisors are viewed to be sufficiently influential so that in some jurisdictions, they are a de-facto “standard-setter” in corporate governance. The failure of proxy advisors to incorporate local market and regulatory conditions in their methodologies and concerns regarding conflicts of interest if the advisors also provide paid services to issuers were the perceived shortcomings that the revised Directive aimed to address….

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