UPDATE 1-EU watchdog wants code of conduct for proxy share voters

Tue Feb 19, 2013 8:16am EST

By Sinead Cruise

LONDON Feb 19 (Reuters) - Groups who advise institutional investors on which way to vote at shareholder meetings on such matters as executive pay need a code of conduct but not regulation, the European Union's financial services watchdog ESMA said on Tuesday.

After extensive analysis and consultation with market participants, The European Securities and Markets Authority (ESMA) said it had concluded that the proxy adviser industry did not need regulatory intervention but a voluntary Code of Connduct could give reassurance on the independence of advisers and the quality of their advice.

"ESMA has identified a number of concerns regarding the independence of proxy advisors, and the accuracy and reliability of the advice provided, which would benefit from improved clarity and understanding amongst stakeholders," it said in a statement.

Pension funds, insurance companies and other big institutional investors often consult proxy advisors to help them make decisions on how to vote their shares on such matters as boardroom appointments and pay and takeovers.

Tensions between them and the firms they monitor have ramped up since the financial crisis, as the advisers step up their criticisms of a company's management over policies that they believe go against the best interests of their client shareholders.

As the influence of proxy advisers grows so has the debate on whether they are as independent and transparent in their thinking as they claim.

The recommended code will focus on identifying and managing potential conflicts of interest among proxy advisers and increasing disclosure of voting policies and methodologies.

Work on drafting the code is expected to begin in the next few weeks, ESMA said.

ESMA said several leading proxy advisers were supportive of beginning work on a Code, including Glass Lewis, MSCI's Institutional Shareholder Service (ISS), IVOX, Manifest, Nordic Investor Services, Pensions Investment Research Consultants (PIRC), and Proxinvest.

Alan MacDougall, managing director of PIRC, said: "ESMA has done an important job of demystifying how proxy advisors work in practice. The proposals it has put forward are, in our view, entirely reasonable."

Some of the advisers, however, said the initiative lacked a thorough examination of how the industry has grown in recent years and the varied roles played by each adviser.

"Codes of conduct are motherhood and apple pie but they will not address a genuine issuer concern - the structure of the proxy analysis market," Sarah Wilson, chief executive of Manifest told Reuters.

"We very much hope this will not be the end of the line for regulatory scrutiny of the entire proxy voting process; we are extremely concerned about the abuses in the voting chain which are causing investors and companies so many problems."