The influence of proxy advisors and ESG rating agencies on companies and investors

By Professor Anna Tilba, January 2024What really impacts the voting decisions of FTSE 350 companies? Professor Anna Tilba, Professor of Strategy and Governance, explains.

Last year, the results of our research into the influence of proxy advisors and Environmental, Social and Governance (ESG) agencies on the UK's top listed companies were published. 

This new research, undertaken in collaboration with Morrow Sodali, was commissioned by the Financial Reporting Council to shed light on the influence and impact of proxy voting advisors and ESG rating agencies on actions and reporting by FTSE 350 companies, as well as their effect on investors, including asset managers and asset owners.  

These advisors and agencies provide institutional investors with research, data, and ratings, as well as voting recommendations for companies’ annual general meetings (and other special meetings). The aim was to examine how investors’ stewardship and behaviour is affected by those recommendations and ratings. This includes understanding where, and in what circumstances, engagement takes place among companies, investors, and proxy advisors/ESG ratings agencies. 

As the academic lead for this project, we aimed to address critical questions surrounding the recommendations and ratings the advisors/agencies provided. The study delved into the resulting impact on FTSE 350 companies' behaviour, reporting, governance policies, and so-called 'tick box' behaviour. Additionally, it examined the engagement processes and outcomes over the past two years among FTSE 350 companies, investors, and proxy voting/ESG rating agencies. 

The research spanned from October 2022 to March 2023, during which we obtained and analysed survey responses, conducted interviews and roundtable discussions, and examined AGM resolutions and voting outcomes. 

Our findings challenge conventional assumptions about the clear-cut and direct impact of the recommendations and ratings provided. While acknowledging the influence of these advisors/agencies on behaviour and voting decisions, the analysis reveals a more nuanced perspective, as observed from voting patterns and interviews with investors. For example, while there’s some evidence of correlation between negative voting recommendations and voting outcomes in FTSE 350 companies, it appears to be less extensive than is sometimes asserted. A vote of 20% or more against a resolution relating to director elections or remuneration occurred in only half of cases where one or both of ISS and Glass Lewis had made such a recommendation in 2022, although this increased to 77% of cases when both did so. 

The study also aimed to reflect the diverse range of perspectives expressed by companies, investors, proxy advisors, and ESG rating agencies during the extensive research process. We found that while investors were generally satisfied with proxy advisory services, companies were less confident in proxy advisors’ quality of service.  

The research serves as a crucial contribution to ongoing dialogue and will inform discussions on governance policies, practices and engagement strategies. The Business School hosted the launch of this report on 10 July during the EFAG Sustainable Economy & Accounting for ESG Impact Symposium. Following its publication, the United Nations Principles for Responsible Investment is also now looking to examine proxy voting advisory practices.