Ellason lens on… the influence of proxy advisors

Thu 15, June

Proxy advisors including ISS and Glass Lewis have always been regarded as influential in swaying shareholders to vote for or against Directors’ Remuneration Reports and remuneration policies. In this Lens, we review the Financial Reporting Council’s (FRC) report into the influence of proxy advisors on the voting at FTSE350 companies (the FRC report covers the ISS and Glass Lewis recommendations on 322 companies offering 411 remuneration-related resolutions during the 2022 AGM season, with input also from 32 investors).

Proxy advisors often disagree, with ISS being considered the most influential for shareholders

The FRC report suggests that almost all investors use the services of the proxy advisors, with the vast majority (78% of investors surveyed) using ISS, 16% Glass Lewis and 13% IVIS (with other agencies used by a further c.20%); c.30% suggested they use multiple advisors.

Remuneration issues lead to the most Against recommendations; approximately 15% of FTSE350 remuneration resolutions attracted an Against recommendation from either ISS or Glass Lewis, compared to only c.1% of Board appointment resolutions. There is often a lack of consensus amongst the proxy advisors as to how shareholders should vote for an AGM resolution, with Glass Lewis and the ISS providing different recommendations in two-thirds of cases.

Impact of advisors’ recommendations is more muted than most assume

The FRC suggests that whilst proxy advisors’ recommendations “undoubtedly have some influence” the correlation between recommendations and actual voting outcomes is “less than extensive than sometimes asserted”.

Their research indicates that when a resolution is uncontroversial, most investors will follow the proxy advisor recommendation without any intervention. However, when a proxy advisor recommends an Against vote, most investors will do their own independent review of the situation; three quarters of investors indicated that their voting is based on their own customised criteria rather than the ‘benchmark’ criteria set by proxy advisors (suggesting perhaps that 25% of investors use the proxy agency criteria).

In terms of correlation, the FRC found that an ISS Against recommendation drew a vote of 80% or lower in 59% of such cases, but this fell to just 21% for a Glass Lewis Against. More materially, when both ISS and Glass Lewis are not in favour, votes are lower than 80% for around three quarters of affected resolutions.

Companies and investors have different perspectives on shareholder engagement and the quality of proxy reports

Just over half of companies (60%) have attempted to engage with at least one proxy advisor in the last two years, with remuneration being the most significant issue for companies; nearly all (96%) discussing matters relating to remuneration.

Around half of companies are dissatisfied by the quality of proxy advisor reports and nearly all believe they have a right to review draft reports. This contrasts with the view of investors who generally express satisfaction with the proxy reports (only 6% disapprove) and only a small majority (56%) believe that companies should review drafts of the reports.

The lack of consensus between companies and investors is highlighted with regards to attitudes towards shareholder engagement. The report suggests that companies engage with shareholders due to their size and composition of shareholders. Meanwhile, investors are driven by their own priorities rather than in response to requests from companies.

Ellason commentary: The FRC report suggests there is some correlation, but not necessarily causality, between voting recommendations, particularly from ISS, and actual voting outcomes. This is consistent with our own analysis – conducted over multiple AGM seasons – which concludes that an Against recommendation from ISS has the potential to impact AGM support by 15-25% depending on the shareholder register. This (perceived) influence continues to be a source of frustration for UK corporates, although Ellason’s view is that remuneration committees should continue to do what is right in their specific company circumstances and to engage directly with major investors to make their case. Once a key consideration in conversations around executive remuneration, we are increasingly finding that achieving 80% support is a ‘nice to have’ for many committees.

The FRC study makes for interesting reading and serves to highlight some of the key differences in opinion about proxy advisors from companies and investors, most notably around the perceived accuracy and quality of their research and reports. What is clear from the study is that there is significant frustration around the general AGM process, and in particular the limited time in which advisors must produce their reports and in which companies must respond. Short of significant increases in resource, it is not immediately clear how best this issue can be resolved, although we strongly advocate meaningful engagement by all parties outside of the AGM season wherever possible. We would also encourage proxy advisors to accelerate the review process and publication of their annual voting guidelines to allow remuneration committees more time to reflect this in their thinking. Too often we find that committees are left scrambling to consider new information from proxy advisors deep into their remuneration review processes.

Please do not hesitate to contact any of the Ellason team should you wish to discuss this issue further.