Fighting back in defence of their lucrative pay deals, Europe's company executives are targeting the investor advisory groups they blame for inflaming shareholder activism.

European CEOs are so angered by the rise of opposition to gold-plated executive payouts that they have taken the unusual step of pushing for more red tape, calling for regulation of the advisory groups who advise fund managers on how to vote on issues such as executive pay.

At the prodding of companies, the European Securities and Markets Authority (ESMA), a European Union body that seeks to align financial regulation across the bloc, issued a little-noticed consultation document in March.

The document outlines scenarios for state-level and EU-level regulation of advisory or proxy firms and discusses measures which it says would help ensure their reports are free from factual errors, avoid conflicts of interest and that they act in a transparent way.

Yet proxy agencies such as Pirc and Manifest say the measures could seriously curtail their ability to operate.

“We are under a lot of pressure. What companies want is the right to interfere in our recommendations,” said Sarah Wilson, chief executive of UK-based Manifest. “There is no proof of market failure here”.

Most chilling for the proxies is ESMA's belief that “even without clear evidence of market failure, some regulatory initiatives may be considered as necessary in order to prevent potential risks,” according to its consultation document.

Proxy firms aren't new but have gained a higher profile lately because of the prominence of the executive pay issue, with sky-high packages - often awarded for less than stellar performance - attracting resentment at a time of pay constraint and austerity elsewhere.

Proxies advise clients how to vote on resolutions put before shareholder meetings or AGMs. They often highlight deviations from accepted best governance practices, or note when executive pay levels are out of synch with industry norms.

Their influence is being boosted by calls from politicians for shareholders to be more active in guiding managers to ensure excessive pay is not condoned.

Also, growing interest in ethical investment on the part of retail investors, forces fund managers to beef up their oversight of corporate governance at the companies in which they invest.


The role of proxies could be further boosted if calls are heeded from some corporate governance advocates for fund managers to disclose how they vote at AGMs.

By issuing recommendations that shareholders reject pay plans from a raft of companies this year, they are credited with influencing a wave of protest votes on pay.

Historically companies could expect to have reward schemes approved nearly unanimously by shareholders, but this year the likes of Barclays, Credit Suisse and BP have seen large minorities oppose their plans.

More dramatically, CEOs at insurer Aviva and newspaper group Trinity Mirror Plc have stepped down after shareholder opposition to their awards.

With the UK government proposing to make votes on pay binding, rather than advisory as they are now - and EU regulation Commissioner Michel Barnier urging a pan-European law on binding pay votes - this trend of shareholder activism is threatening to constrain soaring executive payouts.

Yet many company bosses deny any broad investor dissatisfaction and instead blame proxies for fomenting discord.

Company directors say proxy agencies make their judgments on pay policies without understanding the challenges of retaining and motivating top managers.

DeAnne Julius, who sits on the boards of Swiss drugmaker Roche and US property group Jones Lang LaSalle , said this is partly because proxy firms don't listen to managements' points of view.

“Some of the advisor services really won't discuss their recommendation with companies and that's extremely annoying for companies,” she said.

Directors say many fund managers blindly follow the agencies' advice, leading to protest votes that don't reflect genuine, underlying investor dissatisfaction.


“There are active investors who are really concerned to make sure that people are properly paid and properly incentivised and they take an active role in talking to the remuneration committees to make sure the packages are correct, they are the bulk of shareholders,” said Tullow Oil Plc CEO Aidan Heavey.

“You do have shareholders who vote automatically and that's completely different,” Heavey added, speaking on the sidelines of his company's AGM where - despite a 19 percent rise in Tullow's shares in 2011 against a fall in the FTSE 100 index - 26 percent of investors refused to back the explorer's remuneration report.

However, proxy firms say they do listen to companies' points of view.

A spokesman for Pirc said the organisation sends companies a draft copy of its notes before publishing and takes account of any feedback. But he said a legal requirement to give management the right to include a rebuttal in proxy reports would severely hobble its ability to operate effectively.

Advisory bodies have a narrow window between companies beginning to issue annual reports and holding their AGMs.

Hundreds of companies follow a broadly similar timetable, which means a requirement to allow time for feedback would make it a challenge to produce notes a period far enough ahead of AGMs to be useful for clients.

Also, a requirement to allow companies to include their own commentary could be open to abuse, allowing a company to drag its feet in responding to an unflattering note, thus delaying the report and making it less useful to clients.

Some asset managers who use proxy agencies reject the claim that it was common for fund managers to automatically vote on the basis of proxy advice, saying shareholder votes against burgeoning pay packages reflect genuine investor concerns.

Karina Litvack, head of governance at F&C, said: “There has been an attempt to shoot the messenger.” - Reuters