Together with the Swedish Corporate Governance Board, the Confederation of Swedish Enterprise have ongoing dialogues with the major proxy advisors present on the Swedish market. It is positive that proxy advisors are willing to engage but we remain concerned that proxy advisor recommendations still sometimes seem to ignore local and company specifics and best practices, write Maria Larsson and Elias Skog, corporate governance experts.
This proxy season, we have been glad to see that the proxy advisor ISS has not recommended against the discharge from liability of directors in Swedish companies only because they have shares with differentiated voting rights, despite the ISS benchmark proxy voting policy change from 2022 that caused serious concerns among Swedish stakeholders.[1] This is in line with what ISS communicated to us last year and clearly shows that ISS can be sensitive to local specifics.
As a matter of principle, we are deeply concerned that professional advisors make these types of unnuanced recommendations that neither consider local best practices nor company specifics.
However, we have also seen that ISS has in several cases recommended against the election of board members based only on their affiliation with owners of shares with multiple voting rights in the company. Due to applicable majority requirements for board elections, these recommendations have very limited effect in practice. However, as a matter of principle, we are deeply concerned that professional advisors make these types of unnuanced recommendations that neither consider local best practices (for example that multiple vote share structures are a common feature in Swedish listed companies) nor company specifics (for example whether the individual board member has acted in a way that is detrimental to the company). Prior to the 2024 proxy season, we communicated this to ISS, but so far, this does not seem to have had any impact on their board member election recommendations.
In our view, a much more appropriate proxy advisor approach would be to acknowledge the fact that multiple vote share structures are a longstanding feature of Swedish (and many other) capital markets and that absent additional governance concerns, there is no reason to recommend resolutions on the basis only of the existence of an established multiple vote share structure. A professional proxy advisor should not drive political agendas but should in each case ask itself if its recommendations are in the best interest of its clients and other shareholders. In that context, available empirical evidence does not support that dual class shares would be negative to the value development of companies – the experience is rather that this has served the Swedish market well. Relevant considerations when recommending against the election of a board member include whether the company and its investors would benefit from not having the specific individual on the board, what the alternative would be, what behavior or end-result is sought by the recommendation, and (importantly) whether this behavior or end-result is likely to be achieved.
We will for sure continue the dialogue with proxy advisors and hope and believe that their continued local engagement will contribute to securing responsible and knowledgeable proxy voting policy and recommendations in the future.
Recommending not to elect a board member only because of the existence of a multiple vote share structure seem to be a mean for the proxy advisors to attract customers rather than a recommendation to the benefit of the individual company and its investors (including the customers of the proxy advisors). This type of proxy voting recommendations do not build trust on the market, nor in the proxy advisor profession. Even though proxy advisors have an important role, and their recommendations have a true impact at voting at general shareholders meetings, the proxy advisor profession and services are today lightly regulated. Such light touch regulation may be fine, but only if proxy advisors act professionally, consider local and company specifics and take responsibility for their recommendations. If not, it is very likely that more rigid legislation and requirements be needed to secure that proxy advisors act responsibly.
We will for sure continue the dialogue with proxy advisors and hope and believe that their continued local engagement will contribute to securing responsible and knowledgeable proxy voting policy and recommendations in the future.
---
[1] Under the revised policy ISS stated that it intended to recommend against directors individually or against the discharge of (non-executive) directors for maintaining a corporate structure with unequal voting rights.