* Execs blame proxy advisory groups for inflaming discord
* Firms prompt ESMA regulators to issue consultation paper
* Paper sets out possible regulation of proxy firms
* Proxies say measures could curtain their activities
By Tom Bergin
LONDON, May 25 Fighting back in defence of their
lucrative pay deals, Europe's company executives are targeting
the investor advisory groups they blame for inflaming
European CEOs are so angered by the rise of opposition to
gold-plated executive payouts that they have taken the unusual
step of pushing for more red tape, calling for regulation of the
advisory groups who advise fund managers on how to vote on
issues such as executive pay.
At the prodding of companies, the European Securities and
Markets Authority (ESMA), a European Union body that seeks to
align financial regulation across the bloc, issued a
little-noticed consultation document in March.
The document outlines scenarios for state-level and EU-level
regulation of advisory or proxy firms and discusses measures
which it says would help ensure their reports are free from
factual errors, avoid conflicts of interest and that they act in
a transparent way.
Yet proxy agencies such as Pirc and Manifest say the
measures could seriously curtail their ability to operate.
"We are under a lot of pressure. What companies want is the
right to interfere in our recommendations," said Sarah Wilson,
chief executive of UK-based Manifest. "There is no proof of
market failure here".
Most chilling for the proxies is ESMA's belief that "even
without clear evidence of market failure, some regulatory
initiatives may be considered as necessary in order to prevent
potential risks," according to its consultation document.
Proxy firms aren't new but have gained a higher profile
lately because of the prominence of the executive pay issue,
with sky-high packages - often awarded for less than stellar
performance - attracting resentment at a time of pay constraint
and austerity elsewhere.
Proxies advise clients how to vote on resolutions put before
shareholder meetings or AGMs. They often highlight deviations
from accepted best governance practices, or note when executive
pay levels are out of synch with industry norms.
Their influence is being boosted by calls from politicians
for shareholders to be more active in guiding managers to ensure
excessive pay is not condoned.
Also, growing interest in ethical investment on the part of
retail investors, forces fund managers to beef up their
oversight of corporate governance at the companies in which they
The role of proxies could be further boosted if calls are
heeded from some corporate governance advocates for fund
managers to disclose how they vote at AGMs.
By issuing recommendations that shareholders reject pay
plans from a raft of companies this year, they are credited with
influencing a wave of protest votes on pay.
Historically companies could expect to have reward schemes
approved nearly unanimously by shareholders, but this year the
likes of Barclays, Credit Suisse and BP
have seen large minorities oppose their plans.
More dramatically, CEOs at insurer Aviva and newspaper
group Trinity Mirror Plc have stepped down after
shareholder opposition to their awards.
With the UK government proposing to make votes on pay
binding, rather than advisory as they are now - and EU
regulation Commissioner Michel Barnier urging a pan-European law
on binding pay votes - this trend of shareholder activism is
threatening to constrain soaring executive payouts.
Yet many company bosses deny any broad investor
dissatisfaction and instead blame proxies for fomenting discord.
Company directors say proxy agencies make their judgments on
pay policies without understanding the challenges of retaining
and motivating top managers.
DeAnne Julius, who sits on the boards of Swiss drugmaker
Roche and U.S. property group Jones Lang LaSalle
, said this is partly because proxy firms don't listen to
managements' points of view.
"Some of the advisor services really won't discuss their
recommendation with companies and that's extremely annoying for
companies," she said.
Directors say many fund managers blindly follow the
agencies' advice, leading to protest votes that don't reflect
genuine, underlying investor dissatisfaction.
"There are active investors who are really concerned to make
sure that people are properly paid and properly incentivised and
they take an active role in talking to the remuneration
committees to make sure the packages are correct, they are the
bulk of shareholders," said Tullow Oil Plc CEO Aidan
"You do have shareholders who vote automatically and that's
completely different," Heavey added, speaking on the sidelines
of his company's AGM where - despite a 19 percent rise in
Tullow's shares in 2011 against a fall in the FTSE 100 index -
26 percent of investors refused to back the explorer's
However, proxy firms say they do listen to companies' points
A spokesman for Pirc said the organisation sends companies a
draft copy of its notes before publishing and takes account of
any feedback. But he said a legal requirement to give management
the right to include a rebuttal in proxy reports would severely
hobble its ability to operate effectively.
Advisory bodies have a narrow window between companies
beginning to issue annual reports and holding their AGMs.
Hundreds of companies follow a broadly similar timetable,
which means a requirement to allow time for feedback would make
it a challenge to produce notes a period far enough ahead of
AGMs to be useful for clients.
Also, a requirement to allow companies to include their own
commentary could be open to abuse, allowing a company to drag
its feet in responding to an unflattering note, thus delaying
the report and making it less useful to clients.
Some asset managers who use proxy agencies reject the claim
that it was common for fund managers to automatically vote on
the basis of proxy advice, saying shareholder votes against
burgeoning pay packages reflect genuine investor concerns.
Karina Litvack, head of governance at F&C, said: "There has
been an attempt to shoot the messenger."