In a consultation on the directive on corporate governance, the Swiss stock exchange SIX has requested by the end of July 2017 an official opinion on an amendment to the information and transparency regulations in cases where companies make use of proxy advisors. spoke to corporate governance and board compensation experts Michael H. Kramarsch and Dr. Jan Dörrwächter.
What exactly does the proposal by the Swiss stock exchange entail with regard to proxy advisors?
Michael H. Kramarsch: Following the Minder initiative and thus the increased importance of proxy advisors for the Annual General Meetings of listed companies in Switzerland, Swiss regulators are now particularly interested in the practices, independence and conflicts of interests of proxy advisors – above all ISS.
Jan Dörrwächter: First of all, the aim is to improve transparency. Where proxy advisors provide commercial advice to investors on how to vote at the Annual General Meeting of a listed company and at the same time provide consulting services to that company, this information should be included in the company's annual report, alongside details of the fees paid.
Where do conflicts arise?
Jan Dörrwächter: First and foremost, there is a conflict of interest between providing services relating to voting rights and at the same time advising the companies affected by those votings.
Michael H. Kramarsch: Looking at the broader perspective, proxy advisors have now established themselves as shadow regimes in the area of corporate governance. The consequences of not following proxy advisors' checklists can be significant. As a result, the countries´ regulations on governance are becoming less important for companies. I believe this even has constitutional implications, because the state is de facto being pushed aside from the regulation of corporate governance.
How important are proxy advisors for the market?
Jan Dörrwächter: Investors follow the recommendations of proxy advisors either directly or indirectly, using them as the basis for building their own opinion or simply following them without further scrutiny. Research shows that about 30 to 40% of the voting rights exercised at Annual General Meetings are significantly influenced by proxy advisors.
Is the Swiss stock exchange's proposal practicable, and would it be effective?
Michael H. Kramarsch: Yes, I believe so. It doesn't demonize proxy advisors. It recognizes that they are a necessity in the modern capital market. But at the same time it recognizes that they are not, as is often assumed, some sort of body certifying the correct functioning of governance. They are companies providing services for companies that are very important for the capital market, whose activities should be available for public scrutiny.
Dr. Dörrwächter, in your latest article in the journal Die Aktiengesellschaft you show that not all proxy advisors are prey to this conflict of interests.
Jan Dörrwächter: We currently have a global duopoly, with two major providers dominating the market: ISS, with a market share of around 70%, and Glass Lewis/Ivox. Glass Lewis does not provide consulting services to companies as a matter of policy. However, ISS is expanding its portfolio of services to including consulting on governance and compensation issues. That obviously leads to conflicts of interest both when it comes to exercising voting rights and providing advice to companies. Plus, in Germany, the supervisory board cannot rely on non-independent advice of this type in order to be indemnified from liability.
Does the proposal by the Swiss stock exchange take this into account?
Jan Dörrwächter: Proxy advisors that do not simultaneously provide consulting services to listed companies are excluded from the regulations. That is a practical and adequate solution.

Mr Dörrwächter, Mr Kramarsch, thank you very much!
* Photo by ?? Claudio Schwarz | @purzlbaum on Unsplash
Author Dr. Jan Dörrwächter

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