The Best Practice Principles for Governance Research Providers Group (the Best Practice Group) has been working to develop best practice rules for the disparate body of service providers falling within the category of "governance research providers" and has recently consulted on its draft Best Practice Principles for Governance Research Providers.
The Best Practice Group was established independent of, but under the sponsorship of the European Securities and Markets Authority (ESMA), following ESMA's Final Report and Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry of 19 February 2013. The Best Practice Group was charged to produce a code of best practice for the diverse providers of corporate governance research, probably better known in the market as the proxy advisory industry, and duly produced a draft for consultation in October 2013.1 The consultation has recently closed and the final Principles are expected to be published in March 2014.
ESMA concluded that work was required on transparency and disclosure to foster greater understanding and assurance among stakeholders. It was unfortunate that the Best Practice Group was only comprised of governance research providers. The absence of peer contributions, most notably investors and companies, reduces understanding and the value of assurance available.
The draft Best Practice Guidance is developed around three basic principles, summarised below:
| Service Quality | Conflicts Of Interest Management | Communications Policy |
|
Services must be of an acceptable standard and delivered in
accordance with agreed client specifications. Governance research providers should disclose a research policy and, if applicable, "house" voting guidelines. |
Governance research providers should disclose a conflicts of interest policy that details their procedures for addressing potential and actual conflicts of interest in connection with the provisions of services. | Governance research providers should disclose their policy for communication with issuers, shareholder proponents, other stakeholders, media and the public. |
There is not a single homogenised corporate governance research product. There are a number of different players in the market who perform similar, but notably different services in different ways. This presents a challenge for the creation of best practice. Generally, we believe that the principles and guidance should be tightened up.
However, the current draft presents a good start to seek to bring this disparate sector together with two notable caveats:
- we believe it is essential that there is independent review and monitoring of the performance of the industry against these principles; and
- the need for procedures to deal with errors and disputes.
When things go wrong
We believe that governance research providers should disclose their process for the identification and correction of any potential errors in relation to the services that they provide. The omission of this from the Best Practice Principles represents a major deficiency. While we understand that often perceived 'mistakes' may arise from differing judgements rather than fact, we believe that it is essential for governance research providers to put in place a process to identify and remedy genuine true mistakes in a speedy manner.
It is important that published voting guidelines disclose the extent, if at all, explanations of non-compliance are taken into account.
After having made these and other comments in the consultation, we wait to see the final form of the Best Practice Principles.
Footnote
1. The draft Best Practice Principles and related Guidance can be found at http://bppgrp.info/wp-content/uploads/2013/11/BPP-Group-Principles-Consultation.pdf.
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