Scope of Proxy Advisors to issue general voting guidelines

Sharon Pinto, Manager,


The right to vote on decisions of the Company is one of the most significant rights of the investors. Proxy advisors are entities that enable shareholders to function this right effectively. They undertake research on corporate governance practices across various entities and formulate their policies in order to establish benchmarks of the best practices. Based on the said benchmarks, the proxy advisors also provide voting recommendations to the client investors. SEBI had formulated a working group[1] for determining issues relating to proxy advisors in November, 2018 and reviewing the existing provisions of SEBI (Research Analysts) Regulations, 2014 (‘SEBI Regulations’), that govern proxy advisory entities in India.

We have in our previous articles deliberated the concept of proxy advisors and their role in corporate democracy[2] as well as analysed the above-mentioned report of the working group[3] [4]. In recent times, there has been huge hue and cry regarding the certain voting recommendations put forth by proxy advisors. As the advisors have significant influence over institutional investors and may thus affect the voting results, it is necessary to understand the legal ambit of such guidelines and recommendations issued by these entities.

In this article we have discussed the scope of proxy advisors while ascertaining the legal validity of their opinions. The guidelines issued on re-appointment of ID have been discussed in a separate article.

Scope of Proxy Advisors

  1. International practices


Investment advisors are required to be registered with the United States Securities and Exchange Commission (‘SEC’) under the Investment Adviser Act of 1940 and Rules[5] made thereunder. Rule 204A-1 of the said Act has prescribed that the investment advisors establish, maintain and enforce a written code of ethics that, at a minimum, includes:

“(1) A standard (or standards) of business conduct that you require of your supervised persons, which standard must reflect your fiduciary obligations and those of your supervised persons;

(2) Provisions requiring your supervised persons to comply with applicable Federal securities laws;

(3) Provisions that require all of your access persons to report, and you to review, their personal securities transactions and holdings periodically as provided below;

(4) Provisions requiring supervised persons to report any violations of your code of ethics promptly to your chief compliance officer or, provided your chief compliance officer also receives reports of all violations, to other persons you designate in your code of ethics; and

(5) Provisions requiring you to provide each of your supervised persons with a copy of your code of ethics and any amendments, and requiring your supervised persons to provide you with a written acknowledgment of their receipt of the code and any amendments.”

Institutional Shareholder Services (‘ISS’) is a registered investment advisor which provides general proxy voting guidelines[6] on various resolutions put forth at the meetings of investors. However, the following disclaimer forms part of the document:

“The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies.”

Similar guidelines and policies have been issued by Glass Lewis & Co.[7] stating that these proxy voting guidelines are grounded in corporate governance best practices, which often exceed minimum legal requirements. Accordingly, unless specifically noted otherwise, a failure to meet these guidelines should not be understood to mean that the company or individual involved has failed to meet applicable legal requirements.

  1. Australia

Proxy advisers in Australia hold Australian financial services (AFS) licenses for only a portion of the services they provide – giving advice to wholesale investors on votes that relate to dealings in financial products. Providing voting recommendations on other matters (such as director elections and remuneration reports) does not require an AFS licence.

Further, as per the provisions of Section 912A of the Corporations Act, 2001 proxy advisors shall:

  • do all things necessary to ensure that the financial services are provided efficiently, honestly and fairly;
  • have adequate arrangements in place for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken in the provision of financial services;
  • have adequate resources (including financial, technological and human resources) to provide the financial services and to carry out supervisory arrangements;
  • maintain the competence to provide those financial services.

ASIC in its ‘Review of proxy advisor engagement practices’[8] has stated that a draft report shall be provided to the Company for fact-checking or where clarification is sought from the company, proxy advisers should endeavour to provide sufficient time for the company to consider the request and respond. Further, if it is intended that a draft report will be provided to the subject company, proxy advisers may wish to consider doing this in a controlled way, for example, without communicating recommendations or opinions that would be included in the final report. This may reduce disagreements between proxy advisers and companies as to whether errors reported by companies relate to fact or opinion. In case proxy advisors propose to recommend ‘against’ recommendations, ASIC has recommended that they shall notify companies of such recommendations and explain the reasons for those recommendations, to assist companies in understanding concerns held by the proxy adviser and responding to investors in the context of those concerns.

Further, proxy advisors are recommended to disclose the following in their reports:

  1. the nature, extent and outcome of engagement with the subject company;
  2. a summary of the subject company’s view on a particular issue where that view is different from the proxy adviser’s, or any additional information that has been provided by the company as a result of engagement.

At present, there is no prior engagement of the proxy advisors with the client. Similar provisions have been stated under SEBI Regulations and procedural guidelines which are applicable to proxy advisors operating in India, which state that the report shall be provided to the company and the client at the same time.

However, as per the consultation paper issued by The Treasury in April 2021[9], it has been recommended that the proxy advisors in Australia shall provide the report to the corporate entities prior to issuing of the same to clients. Further, communication with the company prior to issue of report in order to diminish any factual errors or mis-interpretation has also been proposed.

  1. Europe

The discussion paper on proxy advisory industry[10] issued by European Securities and Market Authority (ESMA), state that European proxy advisors generally tend not to develop their own guidelines but follow client’s policies or general recommendations. The voting policies and guidelines prepared are based on the relevant corporate governance standards. In the majority of cases these policies are usually formulated through a bottom-up process where information is collected from a diverse range of market participants (including issuers) through multiple channels. This policy can be fully adapted to local circumstances in a given country, or can incorporate more general beliefs about what constitutes good governance. Corporate governance codes, listing rules, company law, local regulations, new market trends, practices and academic research are used to create a set of guidelines against which corporate disclosures can be benchmarked. Moreover, it is a common practice for proxy advisors to integrate feedback from clients and, if available, issuers.

It further states that, certain proxy advisor may hold roundtables with various industry groups or other experts are also a way of receiving information and hearing different perspectives. Some proxy advisors are open for discussion about their policies and guidelines throughout the year while others are only open for discussion after the general meeting session. Proxy advisors, have to make sure voting policies and guidelines are sufficiently flexible to be applicable to the circumstances of each jurisdiction, sector and issuer. There may be issues arising on the accuracy, independence and reliability of the ultimate voting recommendations/proxy advice.

  1. United Kingdom

Proxy advisors that have their registered office or head office in United Kingdom or European Economic Area or in Gibraltar or provide proxy advisor services through an establishment located in the United Kingdom, are governed by the Proxy Advisors (Shareholders’ Rights) Regulations, 2019[11].

Following are the some of the provisions prescribed under the said regulations:

  • Where proxy advisors provide services in accordance with a code of conduct, they shall disclose the following:
  1. a reference to the code of conduct, by means of which any person may readily view it;
  2. a report on the manner in which the code of conduct has been applied; and
  3. in case of any deviation from any of the recommendations contained in the code of conduct, a statement which specifies the recommendations concerned, explains the reason for departing from them, and indicates any measures adopted instead of them.

Further, where the proxy advisors where no such code of conduct has been adopted, the proxy advisors must provide a clear and reasonable explanation for not doing so.

  • The proxy advisors are also required to provide the following disclosure w.r.t. assurance about accuracy and reliability of information:
  1. the essential features of the methodologies and models applied for the provision of those services;
  2. the main sources of information used for the provision of those services;
  3. the procedures put in place to ensure that firm’s research, advice and voting recommendations are of an adequate quality and are prepared by staff who are suitably qualified to prepare them;
  4. whether national market, legal, regulatory and company-specific conditions have been taken into account, if yes how;
  5. the essential features of the voting policies applied for each market;
  6. whether there is a dialogue with the company which is the object of research, advice or voting recommendations, or with persons who have a stake in that company, if yes, the extent and nature of the dialogue; and
  7. policy regarding the prevention and management of potential conflicts of interest.
  • Functioning of proxy advisors in India

Proxy advisors are governed by SEBI Regulations. The entities functioning as proxy advisors or research analysts are required to obtain a certificate of registration from the Board under these regulations. The regulations have stipulated the following w.r.t. contents of the report published by the advisory firms:

  1. Research analyst or research entity shall take steps to ensure that facts in its research reports are based on reliable information and shall define the terms used in making recommendations, and these terms shall be consistently used.
  1. Research analyst or  research  entity that  employs  a  rating  system  must  clearly  define the meaning  of  each  such  rating  including  the  time  horizon  and    benchmarks  on  which  a  rating  is based.
  2. If a research report contains either a rating or price target for subject company’s securities and the research analyst or research entity has assigned a rating or price target to the securities for at least one  year,  such  research  report  shall  also  provide  the  graph  of  daily  closing  price  of  such securities for the period assigned or for a three-year period, whichever is shorter.

Further, the procedural guidelines issued by SEBI for proxy advisors[12] states that the report of the proxy advisors shall be shared with its clients and the company at the same time. The timeline for receiving comments from the Company may be defined by the proxy advisors and all comments/clarifications received from the company, within timeline, shall be included as an addendum to the report. It also states that if the company  has  a  different  viewpoint  on  the  recommendations  stated  in  the  report  of  the  proxy advisors, then proxy advisors, after taking into account the said viewpoint, may either revise the recommendation in the addendum report or issue an addendum to the report with its remarks, as considered appropriate.

Similar to the regulatory provisions in USA, the proxy advisors registered in with SEBI shall abide by the code of conduct prescribed under Regulation 24 of SEBI Regulations.

As the views of proxy advisors are based on the best corporate governance practices and research thereon, they are required to clearly  disclose  in  their  recommendations the  legal requirement  vis-a-vis higher  standard  they  are  suggesting if  any, and  the rationale behind the  recommendation  of higher standards.

Legal position of guidelines issued by proxy advisors

  1. Research oriented

Proxy advisors undertake extensive research of the corporates to determine and set benchmarks. As evident from the global scenario and the working of proxy advisors in India as discussed above, one can opine that such guidelines are formed on the basis of the research undertaken by the said entities.

2.Interpretation of law

The said guidelines are a manifestation of the best governance practices that the companies may strive to achieve, which may at times exceed the prescribed legal requirements. They form the basis of opinions of the proxy advisory firms and are specifically the views of the issuing firms. Thus, the opinions of the advisory firms may be subject to other interpretations.

3.Generality of policies

Due to the generality of the guidelines issued, certain factual or practical factors may not be considered if the said guidelines are applied to the agenda items of various companies. The case to case specific factors, company or director backgrounds, etc may not be considered while applying the policies and hence may not depict a comprehensive view of the decision of the company.

4. Lack of overview by regulator

Since, these guidelines are not subject to approval of regulators, they are solely the opinions of the proxy advisory firms. Hence, a deviation from these guidelines cannot be construed as non-compliance of the prescribed laws. There is thus a need for including a statement to the said effect to establish a comprehensive standing of the recommendation or guidelines issued.

Safeguards against misleading statements

The procedural guidelines[13] issued by SEBI state that in case the proxy advisors have provided their recommendation based on higher standard, the rationale and such higher standard along with the legal requirement shall be clearly stated in the report published. Further, they shall provide their to the clients and the company simultaneously and are required to add as an addendum to their report, the comments and clarification received by the company in case of difference of opinions.

The report of the Working Group stated above recommended that if the proxy advisors have a different interpretation from the company and the same is not on the basis of factual errors, the proxy advisors are not obligated to publish both view-points, in case the company has enough resources to publish their response.

In case of any dispute arising between the proxy advisor and the corporate, which is a violation of the code of conduct prescribed under the SEBI (Research Analyst) Regulations, 2014, the same may be referred to SEBI. However, the same shall not be a means to refute the interpretation of the proxy advisor, rather only cases of misuse of power in violation of the said code of conduct can be reported to SEBI. However, there is no statutory requirement prescribed for including a disclaimer in the report of the proxy advisor stating that the views mentioned in the report are solely of the advisory firm and there may exist other interpretations as the said report is not sanctioned by any regulator.


It is necessary that the investors take an independent view bearing into mind the scope of the guidelines while considering the voting recommendations of the proxy advisors. They must also be aware of the scope of policies issued by the advisory firms. While the concept of proxy advisors acts as a tool for strengthening corporate governance and enabling investors to take sound investment decisions, there is a need for establishing better safeguards for portraying a clear picture to the investors so that they may formulate independent views.














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