The European Securities Market Association has published its final report on the proxy advisor industry.
While the report found "no current market failure" that warranted regulatory action, ESMA did identify concerns regarding the independence of proxy advisors, as well as "the accuracy and reliability of the advice provided".
ESMA has now recommended a unified code of practice. It is a result that many of those who responded to the March 2012 consultation were hoping for.
Investor Relations Society chairman John Dawson says a code of conduct was supported by "the clear majority" of the organisation's members, over alternatives including more binding measures or no action at all.
"We responded to ESMA accordingly and are therefore pleased to see that the weight of our arguments has been considered and that a Code of Conduct will be established in this important area," he adds.
PIRC managing director Alan McDougall says ESMA's report was important in "demystifying" proxy advisors and their place in the investment chain.
"As an important link in the ownership chain between issuers and shareholders it is entirely reasonable that our role is scrutinised," he comments.
McDougall notes ESMA's proposals have common ground with PIRC's own best practice principles, which were developed three years ago.
However, Manifest chief executive Sarah Wilson questions whether ESMA's conclusions will help to improve transparency and accountability in the investment process.
"The inference that we don't manage conflicts of interest and don't have codes of conduct is actually remarkably insulting to proxy advisors and proxy advisors' clients. It infers we've not done due diligence," she says.
Wilson highlights the scope of Manifest's own codes, which covers conflicts of interest, confidentiality, professionalism, resources allocation, analyst objectivity, among other issues.
While Manifest supports the findings that the proxy market does not need further legislative regulation, Wilson is disappointed that the scope of the investigation was limited to proxy analysts.
She explains: "There are wider market structure problems that the ESMA report did not address.
"The proxy chain does not just include analysts, there's a whole series of activities. We know there have been problems in other areas."
Wilson points to issues around ‘blocking' in Germany and its impact on investor engagement as a direct example of problems in the intermediary market.
"If shareholders want to vote their shares they have to be immobilised, they can't trade them. The Shareholder Right Directive outlawed that seven years ago," she explains.
She also suggests fund manager engagement should have been addressed as part of the proxy market investigation.
Wilson says: "There are some outstanding examples of best practice, but there are people out there who simply vote the recommendations.
"That causes problems for people who are trying to do an informed job and integrate it into the investment process."
Focusing on regulating proxy advisors, albeit with a quasi-binding code of conduct is "missing the point", Wilson argues. She says further work must be done to iron out irregularities in the chain from issuers to shareholders.
"Shareholder protection is so much more than whether or not we have a harmonised code of conduct," Wilson adds.
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