Canadian Securities Authority Guidance for Proxy Advisory Firm

Tuesday, 22 July 2014

On 22 July 2014, Company Directors lodged a submission with the Canadian Securities Authority in response to its proposed National Policy 25-201 Guidance for Proxy Advisory Firms (Guidance).  

While the Guidance is only intended to apply to proxy advisory firms providing services in relation to Canadian companies, Company Directors considered that it is important to comment on the proposed Guidance as there is a tendency for Australian regulators to look to the regulations that are in place in other jurisdictions when developing regulation for Australia.

In our submission we noted that, despite proxy advisory firms playing such an important role and, in our view, exerting significant influence over their clients with respect to the exercise of voting rights, they are currently not held to any standard with respect to the communications that they make to shareholders. This is to be compared with the obligations of issuers and their directors who, in most jurisdictions, must comply with a number of regulations with respect to shareholder communications, and have potential liability in the event the materials that they send to shareholders contain inaccuracies, misrepresentations and/ or misleading statements.

While acknowledging that the Guidance represents a useful step towards addressing the disconnect between the influence and accountability of proxy advisory firms, we do not agree that they should apply on a voluntary basis. Instead, proxy advisory firms should, at a minimum, be required to meet the standards set by the Guidance. Our view is that the proxy advisory industry should be regulated by an industry body that could set and enforce professional standards, investigate complaints and administer discipline to ensure the integrity of the services being provided by proxy advisory firms.

We have recommended that the Guidance be expanded to require that proxy advisory firms seek to avoid conflicts, adequately disclose any conflicts that exist together with the steps which it has taken to mitigate the conflict, publicly and comprehensively disclosing conflicts that exist with respect to any voting recommendation that the proxy advisory firm will be issuing, and that voting recommendations not be issued on matters where the proxy advisory firm has provided consulting services to the issuer or, if applicable, where the proxy advisory firm’s owner or significant investor has a material interest. However, we did note that the expectation under the Guidance for the board of directors of a proxy advisor to preserve the culture of compliance respecting conflicts of interest and to ensure that individuals acting on behalf of the proxy advisory firm are made aware of its policies and procedures and code of conduct are, in our view, inappropriate, unreasonable and not practicably achievable by the board of directors. We argued that this places too high a burden on the board (particularly non-executive directors who are not part of management) and blurs the roles and responsibilities of the board with those of senior management.

Our submission also noted that, in our view, the Guidance does not go far enough to address concerns relating to the transparency and accuracy of voting recommendations made by proxy advisory firms. The Guidance should include requirements that proxy advisory firms have their voting recommendations “fact checked” with the issuer before they are finalised, not apply proxy voting guidelines rigidly as a “one size fits all”, and ensure that their staff possess appropriate qualifications and experience to analyse or advise on the relevant issues and have sufficient time and resources to analyse the issues necessary to make informed and accurate voting recommendations.

Finally, we argued that it is not appropriate to leave it to proxy advisory firms to decide whether or not they will engage with issuers - where the proxy advisory firm intends to issue a contrary voting recommendation, the firm should be required to share its report with the issuer and discuss its proposed contrary recommendation before the recommendation is finalised and published. If a contrary recommendation is still to be made, the issuer should be given enough time and opportunity to provide a response to be included as part of the analysis in the materials that are provided to the proxy advisory firm’s client.

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