One of the persistent debates in the UK listed sector over the last ten years or more has been about the role of proxy advisors – organisations that provide investors with voting research and recommendations.
Many companies believe that proxy advisors have an excessive influence on voting at AGMs and accuse investors of effectively delegating voting decisions to these advisors. The belief that proxy advisors drive the vote affects companies’ own decision-making; some have admitted to changing proposals purely to avoid a recommendation to vote against
However, recent research commissioned by the Financial Reporting Council and carried out by Morrow Sodali and the University of Durham Business School suggests that the extent of proxy advisors’ impact on voting is less clear-cut than is often believed. If this is correct, then it suggests that companies can perhaps afford to be more robust about governance changes that they believe to be in the best interests of the company and shareholders but may not tick the right boxes.
The research included a detailed analysis of voting results in the FTSE350 during the 2022 AGM season. If focused on resolutions relating to remuneration and director appointments – the two most contentious topics – and the recommendations made by ISS and Glass Lewis as the proxy advisors with the largest investor client bases.
The analysis aimed to answer three questions: There were two questions we sought to answer in relation to recommendations to vote against a resolution:
- How frequently do recommendations to vote against a resolution occur?
- What is the voting outcome in such cases?
- Are there differences in the way that types of investors use recommendations?
Impact on voting outcomes
As regards the frequency, there was a significant difference between resolutions on board appointments and remuneration. For board appointments one or both of ISS and Glass Lewis recommended a vote against in just over one percent of cases; that figure rises to over 14% for resolutions on remuneration.
As for the outcomes, only three resolutions were defeated out of a sample of over 3000, all relating to remuneration. All directors of FTSE350 companies were re-elected, most of them with overwhelming support from shareholders.
Interestingly, the research found that many of the largest votes against directors happened in cases where both ISS and Glass Lewis had recommended a vote in favour, which suggests that at least in those instances dissent was investor-led. In many of these cases, the dissent related to concerns about ‘over-boarding’, an issue that has become more prominent in years as expectations on directors and the time they require to meet them have both increased.
Finally, the analysis found that there was no significant difference between average votes against in FTSE100 and FTSE 250 companies. This was interesting as it is sometimes claimed that smaller companies are more exposed to the influence of proxy advisors as they are not viewed as priority holdings by investors.
Investor voting patterns
Investors that were interviewed for the research said that while they will usually vote based purely on the recommendations from their proxy advisors when the resolution is considered uncontroversial – in all cases, voting in favour – they always review any recommendations to vote against management.
The analysis of how different investors voted when their proxy advisor recommended a vote against broadly appears to support these statements. Only one of nearly 40 investors whose voting records were analysed voted against a resolution when recommended by their proxy advisor in more than 75% of cases. Half of them did so in less than 50% of cases.
The research also found that investors were increasingly developing their own in-house voting policies; 75% of investors that responded to the survey said that they now ask their proxy advisor to provide them with recommendations based on these policies rather than the advisor’s own off-the-shelf policies.
However, there was some evidence that may support the contention made by some companies that foreign investors are more likely to vote in line with the proxy advisors as they lack the knowledge of the company or the opportunity to engage. The investors in the sample that did not have a UK base voted in line with the proxy advisor’s recommendations notably more frequently than those that did.
As well as analysing votes, the research looked at the extent to which engagement took place between companies, investors and proxy advisors and whether it was effective.
Many of the interviewees expressed frustration with the process. This was particularly the case with companies, who were especially critical of the limited amount of time they were given to comment on proxy advisors’ research reports, but it was shared to a degree by investors and proxy advisors.
To a certain extent, tight deadlines are unavoidable. There can be as few as 14 calendar days between AGM papers being sent by companies to shareholders and the shareholders having to submit their voting instructions. The concentration of AGMs in May to July every year increases the pressure on investors and proxy advisors who need to process a large number of research reports and votes. As a result, there is limited opportunity for in-depth
engagement during the AGM season.
In principle, there should be plenty of opportunity for engagement in advance of the AGM season, but for many companies, this was not their experience. The evidence suggests that a company’s ability to engage with shareholders may be related to the value of the holding in terms of investor’s portfolio, making it difficult for smaller companies and those with very dispersed share registers to engage effectively.
While it is understandable that investors will prioritise their significant holdings in order to make best use of their own limited resources, it is equally understandably a source of great frustration to companies who are constantly exhorted to engage with their shareholders but are often unable to do so through no fault of their own. Until a way is found to crack this conundrum, companies are likely to continue to believe that they are being left to the mercy of the proxy advisors.
This is a guest blog by Chris Hodge, Senior Advisor at Morrow Sodali, produced for the IoD Centre for Corporate Governance which contains the views of the author and does not necessarily represent the views of the IoD.