Governance Explainer Proxy advisers

Rebel Forces

The outburst came after more than a third of the pharmaceutical giant’s shareholders voted against a potential £1.8m pay rise for chief executive Pascal Soriot.

The rebellion was sparked by influential shareholder advisers, ISS and Glass Lewis, which recommended that shareholders block the pay package for the group’s long-standing CEO. Glass Lewis said the scale of the increase in incentive-based payments was “excessive”.

Soriot was the FTSE’s best-paid chief executive for the financial year ended in 2022. Although payment reporting standards differ between countries, Soriot receives higher pay than totals reported for other European pharmaceutical executives but is paid slightly less than some US peers.

Demaré hit back in the FT, saying the advisers “often make inconsistent voting recommendations between markets: advising shareholders to vote against pay policies at FTSE-listed companies but supporting US and Swiss businesses that typically have higher compensation levels and a lower degree of performance-indexed pay”.

The war of words perfectly illustrates the tension between UK companies attempting to retain and attract global talent and shareholders accustomed to lower payments for UK executives.

Intelligence Briefing

Proxy advisers provide their clients – usually institutional investors – with research, data intelligence, as well as recommendations, related to management and shareholder resolutions due to be voted on at company annual general meetings.

These firms digest and evaluate lengthy and complex corporate filings on a range of events, including mergers & acquisitions, executive remuneration, and board appointments.

Perhaps the most common, and often contentious, areas of support and advice they offer to investors are in the areas of environment, social and governance (ESG), proxy voting at AGM and EGM, executive compensation models and board diversity.

The four main proxy advisory firms in the UK are ISS (Institutional Shareholder Services), Glass Lewis, Institutional Voting Information Service (IVIS), which is part of the Investment Association, and Pensions & Investment Research Consultants (PIRC).

Executive teams, particularly around AGM time, often accuse proxy advisers of wielding too much power and influence over the investor community on key boardroom decisions.

Don’t Shoot The Messenger 

Chris Hodge, senior adviser at Morrow Sodali, noted in a blog for The IoD last year that research commissioned by the Financial Reporting Council – carried out by Morrow Sodali and the University of Durham Business School – suggested that the extent of proxy firms’ impact on voting is less clear-cut than is often believed.

The research included a detailed analysis of voting results in the FTSE350 during the 2022 AGM season. It focused on resolutions relating to remuneration and director appointments – the two most contentious topics – and the recommendations made by ISS and Glass Lewis.

It found that, for board appointments one or both of ISS and Glass Lewis recommended a vote against in just over 1% of cases; that figure rises to more than 14% for resolutions on remuneration.

It also found that only three resolutions were defeated out of a sample of more than 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 dissent was investor-led.