Frontis Governance answers to the consultation on Best Practice Principles’ revision (and explains why it is not a signatory)

Posted on December 28, 2017


The Best Practice Principles for Shareholder Voting Research Providers were launched in March 2014, following a public consultation and in response to an initiative of the European Securities & Market’s Authority (ESMA). The Principles are applied on a comply-or-explain basis, and may be concisely defined as the proxy advisors’ code of conduct (the longer name is due to the fact that not all the research providers issue voting recommendations). The comments of Frontis Governance to the first consultation are available on the website of the Best Practice Principles Group.

In October 2017, a Steering Group, including an independent Chairman and the 5 current signatories (Glass Lewis, ISS, Manifest, PIRC and Proxinvest), launched a new consultation to identify whether changes are needed to the Principles, especially taking into account the mandatory requirements for proxy advisors contained in the revised EU Shareholder Rights Directive, which will take effect in 2019. The consultation period ended on December 15th.

Frontis Governance complies with all the Best Practice Principles approved in 2014:

  • Principle 1 – Service Quality: Frontis Governance is an Italian proxy advisor based and focused on the domestic market. Frontis Governance’s corporate governance principles and voting guidelines are specific for the Italian market, written in Italian and publicly available on its website ( All researches published by Frontis Governance are written by senior analysts, and all ECGS researches are subject to the control of senior analysts of the network. A third level of control is performed by other ECGS partners and clients, who may directly contact the analysts for further clarifications or to express different views on specific items.
  • Principle 2 – Conflicts of Interest Management: the independence of Frontis Governance, and all the ECGS partners, is guaranteed by the mandatory prohibition to provide advisory services to listed companies included in their research universe. Any actual or potential conflicts of interest out of the control of Frontis Governance, as generated by the ownership structure of the client or by the client’s activity (i.e., clients proposing a resolution at a Meeting), are duly disclosed in the first page of the relevant proxy voting research and in the analysis of the specific resolution.
  • Principle 3 – Communications Policy: Frontis Governance has adopted a dialogue policy with issuers and media, which is publicly available (in Italian) on its website.

Nevertheless, Frontis Governance decided not to be a signatory of the Best Practice Principles as long as there is no clear opposition to proxy advisory firms to provide consultancy services to listed companies that are under their universe of analysis.

In our opinion, the best way to manage any conflicts of interest is to avoid them. Some types of conflicts of interest are not avoidable, as generated by the ownership structure or activities performed by clients, but all conflicts originating from the activity of the proxy advisor may and should be avoided. Indeed, almost all proxy advisors have eliminated such conflicts of interest by voluntarily renouncing to potentially significant revenues generated by advisory services provided to listed companies.

We do not believe that “Chinese walls” are an effective solution, as the proxy advisor’s analysts can easily identify those listed companies that hire their corporate services (at least, both services are based on the same guidelines adopted by the research firm). On the other hand, listed companies may decide to purchase the corporate services of the proxy advisor to increase the possibilities of a favourable voting recommendation. Furthermore, we believe that “comply or explain” rules are not strong enough to solve all the problems generated by conflicts of interest.

The possibility to offer advisory services to issuers may also represent a competitive advantage for a proxy advisor, which would be able to adopt aggressive commercial strategies significantly reducing the price of proxy researches thanks to higher revenues generated by the advisory services to issuers. Investors are surely interested in the quality of analysis, but the pricing of reports is still one of the main factors taken into account to choose the research providers, especially in markets where investors are forced by regulations or codes to vote at all general meetings, so that voting may be perceived as a mere matter of compliance.

In our opinion, allowing the possibility to provide advisory services to listed companies represents a clear distortion of competition, and the elimination of any competitive distortion should be a best practice in any industry. This principle is even more necessary considering that almost all the firms that provide voting recommendations have voluntarily self-regulated.

Click here for the full comments of Frontis Governance.

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