The Best Practice Principles for Shareholder Voting Research Providers were launched in March 2014, following a public consultation and in response to an initiative of the European Securities and Markets Authority (ESMA). The Principles are applied on a comply-or-explain basis, and may be concisely defined as the proxy advisors’ code of conduct (the longer name is due to the fact that not all research providers issue voting recommendations). Frontis Governance's comments on the first consultation are available on the website of the Best Practice Principles Group.
In October 2017, a Steering Group, including an independent Chairman and the 5 current signatories (Glass Lewis, ISS, Manifest, PIRC and Proxinvest), launched a new consultation to identify whether changes are needed to the Principles, especially taking into account the mandatory requirements for proxy advisors contained in the Revised EU Directive on Shareholders' Rights, which will take effect in 2019. The consultation period ended on 15 Decemberth.
Frontis Governance complies with all the Best Practice Principles approved in 2014:
- Principle 1 – Quality of ServiceFrontis Governance is an Italian proxy advisor based and focused on the domestic market. Frontis Governance’s corporate governance principles and voting guidelines are specific for the Italian market, written in Italian and publicly available on its website (frontisgovernance.com/en/resourcesAll research published by Frontis Governance is written by senior analysts, and all ECGS research is subject to the control of the network's senior analysts. A third level of control is performed by other ECGS partners and clients, who may contact analysts directly for further clarification or to express differing views on specific items.
- Principle 2 – Management of Conflicts of InterestThe independence of Frontis Governance, and all ECGS partners, is guaranteed by the mandatory prohibition on providing advisory services to listed companies included in their research universe. Any actual or potential conflicts of interest outside of Frontis Governance's control, arising from a client's ownership structure or activities (e.g., clients proposing a resolution at a Meeting), are duly disclosed on the first page of the relevant proxy voting research and in the analysis of the specific resolution.
- Principle 3 – Communications PolicyFrontis Governance has adopted a dialogue policy with issuers and media, which is publicly available (in Italian) on its website.
Nevertheless, Frontis Governance decided not to be a signatory of the Best Practice Principles as long as there is no clear opposition to proxy advisory firms providing consultancy services to listed companies that fall within their scope of analysis.
In our opinion, the best way to manage any conflicts of interest is to avoid them. Some types of conflicts of interest are not avoidable, as generated by the ownership structure or activities performed by clients, but all conflicts originating from the activity of the proxy advisor may and should be avoided. Indeed, almost all proxy advisors have eliminated such conflicts of interest by voluntarily renouncing to potentially significant revenues generated by advisory services provided to listed companies.
We do not believe that “Chinese walls” are an effective solution, as the proxy advisor's analysts can easily identify those listed companies that hire their corporate services (at least, both services are based on the same guidelines adopted by the research firm). On the other hand, listed companies may decide to purchase the corporate services of the proxy advisor to increase the possibilities of a favourable voting recommendation. Furthermore, we believe that “comply or explain” rules are not strong enough to solve all the problems generated by conflicts of interest.
The ability to offer advisory services to issuers could also represent a competitive advantage for a proxy advisor, which would be able to adopt aggressive commercial strategies by significantly reducing the price of proxy research thanks to higher revenues generated from advisory services to issuers. Investors are certainly interested in the quality of analysis, but the pricing of reports remains one of the main factors taken into account when choosing research providers, especially in markets where investors are compelled by regulations or codes to vote at all general meetings, so that voting may be perceived as a mere matter of compliance.
In our opinion, allowing the possibility to provide advisory services to listed companies represents a clear distortion of competition, and the elimination of any competitive distortion should be a best practice in any industry. This principle is even more necessary considering that almost all of the firms that provide voting recommendations have voluntarily self-regulated.