by Beth Bailey
Executive Director, Suits and Boots
We all know what the visible opponents of the energy sector look like.
Greenpeace. Extinction Rebellion. LeadNow. Climate Justice. We see them all the time, marching on streets, dangling off of bridges, blocking trains or traffic. Visible, noisy and in your face.
But there is another group, less visible, but likely even more powerful, that is quietly working in the highest circles of Canada’s financial community.
These people are “proxy advisors”. They hold sway on billions of dollars of investment capital. The problem is this: Proxy advisory ﬁrms’ activities lack any level of reasonable transparency, operate in oligopolistic markets, have a check-the-box mentality to determine ratings, and suﬀer from conflicts of interest.
You don’t hear from them, but make no mistake about it – they are waging a silent war on Canada’s energy sector. And capital flow
How did we get to this place?
The origins of Proxy Advisors
Sarbanes-Oxley Act was introduced in 2002 to crack down on corporate fraud in response to massive failures of Enron and WorldCom. Born out of those reforms was a new breed of “for profit” security regulator disguised as champions for shareholders, the “Proxy Advisory”.
These groups now advise institutional shareholders how to vote on corporate governance issues at Annual and Special Meetings of shareholders. Their reach has not stopped at merely proxy advice on governance issues, they are now providing ratings on social programs adopted (or not) by companies and, even more alarming, are judging the environmental impact and footprints of companies.
Their impact is staggering. Proxy advisors can influence the choice of board member, the auditors, audit fees, executive pay and remuneration programs, essentially anything that requires a shareholder vote.
How does it work?
Proxy voting, is a vote cast on behalf of a shareholder, rather than that shareholder participating in a public shareholder meeting. Considering the vast number of shareholdings an institutional investor may have, they rely on the Proxy Advisor to recommend how to cast their vote.
The influence Proxy Advisors have over shareholder outcome essentially makes them self-appointed, self-regulators of governance policy.
But, get this: there is an inherent conflict of interest. Proxy Advisors provide consulting services, for a fee, to public companies on how to best manage the rating and voting results.
Public companies are required to provide an “open book” on corporate governance issues while the Proxy Advisors have no obligation to do so, nor do they offer any details on what information they use, how they judge, and the consequential opinions and recommendation they provide.
Who are they?
The two largest Proxy Advisors control 97% of the market; the largest one is Institutional Shareholder Services and right behind it is a second entity, Glass Lewis. These two firms effectively control nearly thirty-eight per cent of shareholder votes of public companies. The influence of these ﬁrms on how institutions vote is becoming increasingly important and politicized, with their support of certain shareholder proposals that are increasingly geared toward social, political movements and environmental assessments, rather than being tied directly to shareholder value.
A surge in so-called Environmental, Social and Governance (ESG) investing has empowered activist institutional investors to increasingly push public companies to take a stand on political issues such as climate change, no matter the impact on profits or shareholder value. So, Proxy Advisory firms also need a modicum of guidance from a fund manager as to their priorities.
It is this flawed business model from which they have come from and are now building out their businesses with feverish acquisition activity, to begin providing advice in regards to rating services on corporate social policies and impact of environmental and sustainability.
How do we fix this?
The energy industry needs a proactive approach to establish its own rating and disclosure system to be used by the Proxy Advisors.
Implicit investment advice provided by Proxy Advisors is having a significant impact on share valuations and is being provided to a select few institutional shareholder completely leaving out the individual retail investor.
Securities regulators need to be proactive and provide a regulatory frame for Proxy Advisors to operate and ensure separation of those providing judgment and advise on each of: i) environmental; ii) social; and iii) governance issues. In addition, a good regulatory framework, like those in which public companies operate, should ensure Proxy Advisors’ conflicts of interest are at a minimum disclosed and discouraged and provide clear transparency to all stakeholders that are affected by these practices.
Let’s push for these changes. They are long overdue.