Proxy voting agencies monitor companies for institutional investors, flagging up governance issues such as pay or directors' independence and advising the shareholders how to vote. But the effect is increasingly to recreate the block votes of the old trade union movement, even turning small minorities into a majority.
Manifest, the Association of British Insurers, Pirc and others all comb accounts on behalf of clients and warn them if bonuses seem high, directors have served too long or even on social responsibility issues. But while some passively pass on the information to investors to act on, some are more active and dictate how their clients vote.
Pirc, for instance, has always been an aggressive activist for corporate change and is used by many public-sector pension funds. At Marks and Spencer's last annual meeting it tabled a resolution for the early exit of chairman Sir Stuart Rose. Yet Pirc itself has no significant shareholding in the retailer and a resolution can be added to the agenda only if backed by a sufficient number of investors with sufficient shares.
The proxy agency thus formed 100 companies to hold one M&S share each and then borrowing the qualifying stock from one of its local authority clients. The 100 companies are there ready to buy single shares in Pirc's next targets.
But there is no regulation of these agencies and, despite their ability to amalgamate huge holdings in a company, they are exempt from disclosure requirements or concert-party rules. And because all the agencies follow similar governance agendas, each ticking the same boxes, separate proxy groups act as one, combining clients' votes into an even greater force.
By activating investors to take stands on matters they might otherwise have accepted, using clients' shares to vote as a unit, and polling votes that might otherwise have been dormant, the proxy agencies have mustered substantial opposition to several boards, putting pressure on directors in private discussions or voting against them at public meetings. Amassing the diverse vote has resulted in remuneration reports being rejected at some major companies.
Company chairman and investor relations departments may think they communicate adequately to their investors but if the decisions on voting shares are taken by proxy agencies such discussions are useless. Some companies are becoming concerned. A new code for institutional investors is currently being drafted and GlaxoSmithKline has told the authors these agencies ought to be included.
There is a strong case for saying shareholders should tell companies if they have outsourced decision-making to a proxy group and forcing the agencies to reveal their client lists. More transparency might also expose the true agendas of some agencies.