Proxy voting: Ethos in favour of well-targeted regulation

Proxy voting advisory services at general meetings (GMs) may involve a risk of conflict of interest, particularly when the firm advising a company’s shareholders is simultaneously providing advice to that company, for example on its remuneration system. Such conflicts are likely to undermine market confidence and damage the reputation of the entire sector. To manage this risk, the Federal Council wishes to require companies that use the services of a voting adviser to disclose this information in the notice convening their AGM.

The Ethos Foundation, whose operational arm, Ethos Services, has been providing voting recommendations to Swiss pension funds since 1997, is directly affected by this proposed amendment to the Swiss Code of Obligations and is submitting its views as part of the consultation process.

Ethos Position Statement (German)

Ethos Position Statement (French)

“The primary role of proxy advisors is to provide their clients – generally institutional investors – with recommendations enabling them to exercise their voting rights in an informed manner and thus fulfil their fiduciary duty,” emphasises Vincent Kaufmann, CEO of the Ethos Foundation. “It is therefore essential that they are able to provide advice with complete independence, transparency and objectivity.”

These principles are, however, sometimes undermined, particularly when a proxy adviser, or one of its subsidiaries, acts as a consultant in an area on which it must subsequently issue a voting recommendation. The risk is particularly pronounced in relation to remuneration, when a proxy adviser gives its opinion on a system that it has itself helped to design.

This is why the Ethos Foundation has already spoken out on several occasions in favour of a ban on proxy advisors providing other advisory services to companies for which they issue voting recommendations.

In the absence of a ban, targeted transparency

The Federal Council did not adopt this option and is instead focusing on transparency. Ethos therefore calls for clarification of the draft legislation, particularly regarding the information that listed companies using a proxy advisor will be required to disclose. In Ethos’s view, they should disclose information regarding the services received that relate specifically to matters they are putting to a vote by their shareholders, whether these concern the annual report, the remuneration report or the composition of the board of directors. It is these services that create the risk of a conflict of interest.

An alternative would be to require listed companies to disclose in their remuneration report any use of external consultants in the preparation of the report or the remuneration system. This would reveal business relationships not only with proxy advisors, but also with other consultants exposed to conflicts of interest. In Switzerland, for example, audit firms regularly advise listed companies on the implementation of remuneration reports or schemes. Yet these same firms may subsequently be commissioned to audit that very report. Such disclosure is already widespread amongst listed companies and is even mandatory in certain markets, such as the United Kingdom.

In summary, Ethos unreservedly supports the principle of a transparency obligation enshrined in the Swiss Code of Obligations, and puts forward three proposals to ensure that the future regulation achieves its intended purpose:

• The term ‘company providing proxy advisory services’ should encompass any company within the same group. Otherwise, the transparency obligation could be circumvented simply by legally separating corporate advisory activities from investor advisory activities.
• The services to be disclosed should be limited to those provided to the company itself on matters submitted to its own AGM (‘corporate services’). The standard services provided by proxy advisory firms that banks and asset managers receive in their capacity as investors relate to the AGMs of third-party companies, do not create any conflict of interest and should be excluded from the scope of the law.
• A requirement for listed companies to disclose any use of an external consultant in the preparation of the remuneration report or remuneration system. This requirement, based on the UK model, would be a prime alternative as it would specifically target high-risk services, apply to all external consultants – not just proxy advisers – and be included in the remuneration report, where the information is most useful to shareholders. This approach has also been tried and tested, as it essentially corresponds to the UK regime in force since 2013.