The OECD called out proxy advisers grading corporate votes while selling the answers.

Key takeaways

• Proxy advisers compromise their independence by issuing voting grades while simultaneously selling consulting services to those same companies.
• The dual-hat model mirrors past accounting firm scandals. It turns proxy voting recommendations into potential lead-generation tools for consulting arms.
• Global oversight remains highly fragmented, with only 6% of jurisdictions worldwide mandating disclosure for secondary services.

The Proxy Adviser Paradox

When the guardians of corporate governance have their own governance problems, who watches the watchmen?

The OECD’s recently released report “The Role of Capital Market Service Providers in Corporate Governance” calls out a rapidly growing power centre in global markets: proxy advisers. It exposes the systemic conflict: multi-service proxy advisers wield significant influence over voting recommendations while simultaneously selling consulting services to the very issuers they grade.

Imagine a world where a judge sells consulting services to the defendant standing trial in their courtroom.

Echoes of the Big Four: When Lucrative Fees Trump Ethical Independence

If this two-sided business model sounds familiar, it should. For decades, the Big Four accounting firms insisted they could independently audit companies while simultaneously providing tax, IT, and consulting services. Even in Guerdon Associates narrow speciality we see conflicts arise from provision of executive remuneration advice to boards for a relatively small fee while the same firms count on hundreds of thousands of dollars, or millions, in fees paid by management for tax, IT, HR or even other remuneration services. So what board adviser would suggest that the source of their own income is contingent on soft performance targets?

In Australia in recent times, there has been PwC’s 2023 use of confidential government tax secrets to KPMG’s misuse of proprietary data from long-term audit clients, the common denominator is a monetary conflict of interest.

The same dynamic extends to proxy advisers.

The OECD suggest that when a proxy adviser wears two hats, it faces two primary conflicts: they may fear losing consulting clients by issuing adverse voting recommendations, or be reluctant to provide objective advice that contradicts their prior consulting work.

We and our clients observe a highly disciplined pattern of proxy adviser follow-ups to companies post Say-On-Pay (SOP) votes offering consulting services. Clients ask the question: is the initial vote recommendation genuinely about protecting shareholder value, or is it a lead-generation tool for the consulting wing?

Where Australia Stands

Table 2.2 of the OECD report provides an overview of regulatory frameworks for proxy advisers across 50 jurisdictions. In Australia, proxy advisers need an Australian Financial Services (AFS) licence only when advising wholesale investors on votes about financial-product dealings. Australia also legally requires a regulatory framework for proxy advisers. Requirements or recommendations are absent for the following aspects:

• Definition of proxy advisers
• Staff competence
• Engagement with companies
• Competitive landscape and proportionate regime

However, even the AFS licence does not prohibit a proxy adviser from running a corporate services arm.

Across the 50 jurisdictions:

• 58% address conflict of interest disclosure by proxy advisers directly in their laws or regulations, and 8% do so through voluntary code recommendations
• Only 6% of jurisdictions require disclosure when proxy advisers provide secondary services.
• Only India requires proxy advisers to disclose their ownership structure publicly.

The Bottom Line

We believe there is a need for proxy advisers. We are also sympathetic to their need to make a dollar. To protect market integrity, institutional investors could assist by doing 2 things:

1. Demanding rigorous proxy adviser firewalls that decouple voting recommendations from corporate consulting;
2. Paying proxy advisers a decent fee for better quality advice, and cover for the reduction in consulting service fees.

Other actions could be considered, as in our 2021 proxy advisers regulation government submission.

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