Just as the annual meeting season is heating up and issuers are engaging with proxy advisory firms (the most prominent being ISS and Glass Lewis & Co.), the Canadian Securities Administrators (CSA) have published for comment a proposed national policy providing guidance for proxy advisory firms1.
Purpose of the Proposed Policy
According to the CSA, the purpose of the proposed policy is to set out recommended practices for proxy advisory firms in relation to the services they provide to their clients and their activities. It is the CSA's expectation that this policy will:
- Promote transparency in the processes leading to vote recommendations and the development of proxy voting guidelines; and
- foster understanding among market participants about the activities of proxy advisory firms.
The policy is not intended to be prescriptive or exhaustive, rather the CSA are encouraging proxy advisory firms to consider the guidance in developing and implementing their own practices. The CSA are hoping that the policy will provide institutional investors and other proxy advisory firm clients with a framework for evaluating the services provided to them by proxy advisory firms.
Proposed Guidance for Proxy Advisory Firms
1. Conflicts of Interest
The CSA are asking proxy advisory firms to identify, manage and mitigate actual or potential conflicts of interest and to consider doing so by:
- having policies and procedures, internal safeguards and controls and a code of conduct (with the involvement and endorsement of the firm's CEO and board of directors and with annual affirmations and regular training of employees);
- evaluating the effectiveness of their processes on a regular basis to ensure they remain appropriate (including designating a responsible person to monitor, assess and report to the CEO and board of directors);
- disclosing to their clients any actual or perceived conflicts of interest; and
- describing their policies and procedures, internal safeguards and controls and code of conduct on their websites.
2. Transparency and Accuracy of Vote Recommendations
In response to concerns regarding the quality of the information, research and analysis that underlies a proxy advisory firm's vote recommendations, the CSA are also suggesting that proxy advisory firms:
- have policies and procedures describing the approach or methodologies used to prepare vote recommendations, as well as internal safeguards and controls to increase the accuracy and reliability of the information and data used in the preparation of vote recommendations;
- evaluate the effectiveness of their policies and procedures as well as internal safeguards and controls on a regular basis to ensure they remain appropriate;
- have the resources, knowledge and expertise required to prepare rigorous and credible vote recommendations; and
- describe the foregoing on their websites.
3. Development of Proxy Voting Guidelines
With a view to fostering understanding among market participants on how proxy voting guidelines are developed, the CSA are asking proxy advisory firms to:
- have policies and procedures describing the process followed in developing and updating proxy voting guidelines;
- engage and consult with their clients, market participants and the public on corporate governance issues and on their proxy voting guidelines and to take into account local market or regulatory conditions;
- have the resources, knowledge and expertise required to develop and update appropriate proxy voting guidelines;
- publicly disclose their proxy voting guidelines and updates and explain the rationale for their proxy voting guidelines; and
- describe their policies and procedures and consultations leading to the development of proxy voting guidelines on their websites.
4. Communication with Clients, Market Participants, the Media and the Public
The CSA are asking proxy advisory firms to:
- consider communicating certain information when issuing their vote recommendations, including any actual or potential conflicts of interest, the approach or methodologies used, factors considered and weight given to them, which information is factual and which comes from analytical models or is based on assumptions, the reasons for their vote recommendations and a description of the extent to which proxy voting guidelines are applied when preparing vote recommendations and reasons for any deviation;
- also disclose the nature and outcome of any dialogue or contact with issuers in connection with the preparation of vote recommendations and any known or potential limitations or conditions in the research and analysis used;
- correct any factual error or inaccuracy found in a report and to duly inform their clients in a timely manner; and
- have and publicly disclose on their websites their policies and procedures governing their communications with clients, market participants, the media and the public (including whether they provide drafts of reports to issuers for review and comment before sending final reports to their clients).
In response to issuer concerns that proxy advisory firms may have become corporate governance standard setters, the CSA are reminding issuers that they can:
- engage with their shareholders to explain why they have adopted a given corporate governance practice;
- discuss corporate governance and proxy voting matters with institutional shareholders to address their concerns;
- communicate their corporate governance practices to shareholders through their information circulars; and
- participate in the consultations organized by proxy advisory firms to communicate their views on corporate governance issues and proxy voting guidelines.
For background on the development of the proposed policy (including how the CSA arrived at their determination to provide policy guidance as opposed to mandate requirements for proxy advisory firms), please see our June 2012 MarketCaps: Potential Regulation of Proxy Advisory Firms by David Taniguchi and Tina Woodside and our September 2013 MarketCaps: The CSA decide to regulate proxy advisory firms through policy-based approach by Martine Guimond, Tina Woodside and Ali Amadee.
The deadline for providing comments to the CSA is June 23, 2014.
1. Proposed National Policy 25-201 – Guidance for Proxy Advisory Firms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.