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Article originally published on the AMF website on 18 October. You will find the link to the original page at the end of the article.
Speech by Robert Ophèle, Chairman of the AMF – Law & Growth Conference “Corporate governance and shareholders engagement: the new normal conference” – Friday 18 October 2019
The issue of shareholder engagement is naturally central to the proper functioning of companies in general, but it has a particular dimension in the case of listed companies, where the maintenance of affectio societatis is by nature more demanding. This is an issue that lies at the heart of the AMF’s remit and one to which it will devote a substantial part of its next annual report on corporate governance.
Shareholder dialogue has recently taken on a special dimension with three specific focuses:
– as part of the debate on activism,
– in the perspective of the increased integration by companies of sustainable development concerns,
– in the debate on the role and influence of voting advice agencies, “proxy advisors”.
Let us briefly discuss these three themes this morning.
For various reasons, stock market activism is the subject of a lively debate this year in France. Beyond possible regulatory changes, on which opinions are divided, there seems to me to be an emerging consensus on the usefulness of strengthening shareholder dialogue by structuring it in a transparent manner.
As suggested by the AFEP-MEDEF code, we now have in a large number of listed companies, in fact 26 out of the 40 SBF 120 companies examined this year by the AMF as part of its annual report, a board member, the chairman or a lead director, who is officially in charge of dialogue with shareholders, especially those not represented on the board. I know that the Institut Français des Administrateurs (IFA) is working to improve the quality of this dialogue, but one may wonder about its actual scope.
Its scope first of all; it is in principle restricted to corporate governance; it is clear that the interest of shareholders goes beyond simple governance issues and covers the company’s strategy and performance. While performance is essentially a matter for management, it can be considered that broadening the scope of exchanges to include strategy, while of course avoiding disclosure of insider information, would be useful.
Secondly, the communication vector chosen – individual exchanges with a director – also seems too limited, especially for small shareholders. The English structure of the Investor Forum, which makes it possible to organise a collective dialogue, seems attractive from this point of view, and we could take inspiration from it for companies with diversified shareholdings.
Finally, the transparency of this dialogue could be improved. The content of these dialogues and the action taken as a result are already, in principle, the subject of information from the Council, but it would be legitimate for them to be the subject, on a case-by-case basis, of broader communication.
These developments, which would encourage the establishment of a dialogue with the company as it evolves, would enable shareholders to express their demands within a structured framework and to provide appropriate responses at the right time. They would reduce the risks of misanalysis or market runaway.
My second point concerns the ESG dimension and the now decisive role of shareholders in speeding up the dissemination of its consideration in corporate strategy.
In contrast to the shareholder dialogue that I mentioned earlier, which is organised on a company-by-company basis, we are seeing the emergence of a shareholder commitment on the part of major investors around common themes deployed in relation to a group of companies. In particular, it provides the information needed for these investors to implement management strategies that take ESG criteria into account. This commitment can also be reflected in their votes at general meetings on the more or less ambitious ESG strategy defined by the companies.
The “Principles for Responsible Investment” (PRI), sponsored by the UN Global Compact, are a reference in this area and have now been adopted by all major asset managers and most major institutional investors. The signatories thus undertake, for example, to integrate ESG issues into their voting policy at general meetings, in particular by tabling or supporting resolutions that take these long-term considerations into account. Beyond the PRI, investor circles have formed around more precise and operational issues in order to influence general meetings. The Institutional Investors Group on Climate Change (IIGC) or the Climate Action 100+, which brings together very large investors, are examples of this. The Climate Action 100+ is particularly attentive to the policies implemented by 161 companies identified as “sensitive” in terms of climate risks. However, there are varying degrees of discrepancy between the intentions expressed through membership in one or other of these groups and the reality of the commitments. The censuses carried out by the Climate Majority Project or the Asset Owners Disclosure illustrate these discrepancies with, with regard to votes at shareholders’ meetings, very limited support for resolutions tabled by shareholders in favour of climate risk management. It is clear that supervisors cannot be insensitive to public commitments made by entities they regulate that are not being met.
The AMF (and the ACPR) will be all the more attentive to compliance with the commitments made since European positive law now incorporates the principle that institutional investors, asset managers and, more broadly, market participants must ensure the transparency of their shareholder engagement policy vis-à-vis the issuers whose equity they hold, either on their own account or on behalf of their clients. The amended SRD requires institutional investors and asset managers to develop and make public a clear engagement policy and to report annually on how they have effectively implemented it.
It is also interesting to note that the European co-legislators have taken advantage of recent legislative vehicles to extend these same transparency principles to other regulated players, including investment firms and, more generally, market participants that design and distribute ESG investment products. Such extensions, made in the margins of major reforms and in Level 1 texts that have not yet been published in the EU Official Journal, have attracted little attention from stakeholders during the negotiations, but now few regulated actors in Europe escape public accountability for their engagement and voting policies.
This brings me naturally to the role of proxy advisors in voting choices at general meetings.
The AMF is consistently in favour of the effective exercise of shareholders’ voting rights at general meetings. Just as recourse to credit rating agencies does not exempt investors from carrying out their own analysis of their credit risk, recourse to a proxy advisor does not absolve them of their responsibility and therefore of their own analysis of the resolutions put to the vote at general meetings.
Nevertheless, the AMF is aware of the usefulness of voting advice agencies in analysing the resolutions put to the vote. The services they offer help to reduce the cost of analysing and processing information on listed companies and help professional investors, especially those based far from the issuer’s country of listing or managing highly diversified portfolios, to fulfil their fiduciary and management duties.
For a long time, in the absence of a consensus on the role and real influence of voting advice agencies, the proper conduct and governance of these players fell within the realm of self-regulation. It was felt that the recommendations they issued were part of a contractual relationship with their clients and that regulation along the lines of that introduced for credit rating agencies would be inappropriate and excessive, since the ‘advice’ provided by proxy advisers was not used for regulatory purposes.
However, the growing importance of passive management and the high concentration of the proxy adviser sector have led to the voting recommendations issued by one or more agencies being given decisive weight in the adoption or rejection of certain resolutions. As a result, some practices have been criticised, often sharply, by issuers. For example, some voting advisory agencies have been criticised for a lack of real dialogue with issuers, a “mechanical” approach that ignores the specific features of French law and the French market, and analytical work that is tainted by conflicts of interest. Indeed, some of these agencies sometimes provide advisory services to issuers whose resolutions they assess at general meetings.
The AMF was one of the first regulators to outline the best practices to be followed by the agencies, opting for flexible legislation in 2011. Its Recommendation 2011-06 set out, for the first time, the principles of transparency in the agencies’ voting policies, quality of analysis, dialogue with the issuer prior to the general meeting, and disclosure of conflicts of interest affecting the agency.
European law was a timely successor to the French initiative, although the time frame for producing the European standard was not long enough. The SRD 2 Shareholder Rights Directive, proposed in April 2014 but applicable only since June 2019, contains an article dedicated to the transparency of voting advice agencies. Far from requiring voting advice agencies to register with a national authority or ESMA, as some would have liked, SRD2 requires voting advice agencies operating in the EU to publish their code of conduct, inform their clients each year about the exact content and reliability of their activities and manage any conflicts of interest transparently.
Without waiting for the clause on the review of these European provisions by 2022-2023, the French legislator entrusted the AMF with the task of reporting annually on the application of these provisions by voting advisory agencies operating in France through the PACT Act. It will do so from 2020 through its annual report on corporate governance.
While Europe is applying its new rules on voting agencies for the first time, but is opting for regulation based on transparency and an encouragement to refer to a code of conduct rather than on strict supervision of the profession, the debate remains lively in the United States, particularly since the 2017 corporate governance reform bill, which has still not been passed. Two months ago, the SEC recently clarified in a guidance document the responsibility of voting advisory agencies towards their clients in a strict sense (agencies are subject to sanctions if their recommendations and voting advice are false or misleading). There are opposing positions between those who call for strong action by the SEC to regulate this profession and those who fear that a strict framework would increase costs, affect competition and ultimately be detrimental to shareholders.
It is still too early to say whether the regulatory approach chosen by the EU will be only a first step, or whether it will be a lasting response to the debates raised by the use of voting advice agencies. For its part, the AMF will be keen to share its observations with the financial community each year, in an impartial manner, as required by law.