Proxy Advisors in Portugal

The development of the capital market has fostered the use of proxy advisors, following a trend that dates back to the 1980s. These entities have proved to be a way of meeting a market need and a genuine solution for corporate representation for those who wish to exercise their voting rights and thus ensure their representation in a company’s share capital.

Proxy voting offers several advantages: it encourages active shareholder participation in companies; it reduces information‑gathering costs thanks to the specialization and experience of these consultants in various corporate matters; it provides access to a wide range of services; it saves investors time and resources; it removes certain regulatory requirements; and it can even increase share value as a result of more active shareholder involvement.

However, there are also disadvantages: the risk of error or negligence in recommendations; lack of transparency and the costs associated with this outsourcing service; the absence of effective mechanisms for reacting against proxy advisor actions; limited market competition; the emergence of conflicts of interest and misaligned incentives; and the possibility of significant or excessive influence.

The current solution in the Portuguese Securities Code significantly tightens the disclosure and transparency duties imposed on proxy advisors. Despite some gaps, the legislature has sought to address shortcomings regarding transparency in advisors’ recommendations and the disclosure of conflicts of interest, which are increasingly common.

At the level of investor involvement in corporate investment policies and strategies, Article 26‑I(2) of the Securities Code requires institutional investors and financial intermediaries to disclose annually how they have applied their engagement policy. This disclosure must include a general description of voting behavior, an explanation of the most important votes and a description of the use of proxy advisors.

That obligation strengthens the accountability of investors and intermediaries, and promotes greater public scrutiny of decision‑making, reinforcing oversight of general‑meeting resolutions where proxy advisors vote on behalf of institutional investors.

There are still implementation challenges, as mere publication of information does not in itself guarantee effective and responsible participation by investors, capable of countering short‑termism in companies while aligning the interests of investor, advisor and company.

Even so, any short‑term perspective in corporate decisions that stems from using proxy advisors is a disadvantage attributable solely to shareholders, since fiduciary duties toward the company lie with them, not with proxy advisors, who merely follow guidelines previously set by investors.

Regarding Article 26‑I(2) of the Securities Code, it is debatable whether the disclosure duties truly ensure meaningful investor engagement or are merely a formality without real impact. We question whether these transparency obligations lead to more active and informed participation or, on the contrary, simply discourage investors given the laborious process of compiling and publishing the information.

Article 26‑K(2)© of the Securities Code requires financial intermediaries that provide portfolio‑management services for third parties to issue a report to the institutional investor with whom they have agreements on investment strategy and execution. That report must include information on the use of proxy advisors for engagement activities and on their securities‑lending policy.

Although this rule reinforces the need for a transparent approach aligned with investors’ best interests, there is a risk that such reports become overly technical or vague, making them hard for investors — especially those with limited financial literacy — to understand.

Turning to the proxy advisors themselves, Article 26‑L of the Securities Code requires them to publish annually (on their website) their code of conduct, the methodologies used, main information sources, quality‑assurance procedures, qualifications of those involved, national market conditions, and relevant legal and regulatory specifics, so as to guarantee the reliability and integrity of their voting advice and recommendations. They must also detail their voting policies and dialogue with the companies analyzed and other stakeholders.

One of the issues that has received most attention is the prevention and management of conflicts of interest. Proxy advisors must identify and disclose to their clients any potential or actual situations that could affect the preparation of their studies, opinions or voting recommendations, and must specify the measures adopted to mitigate or eliminate those conflicts.

In our view, as noted earlier in this article, this provision is a step forward in regulating proxy advisors’ activity by enabling accountability of the entities involved in voting decisions. In contravention terms, this interpretation falls under Article 389(1)(f) of the Securities Code. It is up to the regulator to monitor the quality of the information disclosed and to assess the practical (not merely theoretical) effectiveness of these obligations, ensuring they provide real protection for investors, companies and confidence in Portugal’s financial market.

Finally, regarding certain decisions in which proxy advisors intervene — such as ESG measures — it should be noted that small and medium‑sized enterprises often lack the human and technical resources for informed decision‑making, given the size and complexity of model and rating analyses.

Proxy advisors therefore exert great influence on the adoption, discussion and implementation of these measures. The absence of an ESG vision, strategy and parameters on the part of each institutional investor leaves it to consultants to analyze the general specifics and indices that issue recommendations and guidelines in this area.

All these factors should prompt reflection on whether proxy advisors genuinely possess the necessary knowledge, experience and resources to analyze these policies at an international level. This issue carries even greater weight given the scarcity of firms in the market able to offer proxy voting services to investors and companies alike.

Disclaimer

This publication or document contains general information and is not intended to be comprehensive nor to provide legal or tax advice or services. It should not be acted upon, relied upon, or used as a basis for any decision or action that may affect you or your business. Professional legal advice should be requested for specific cases. We do not undertake any continuing obligation to advise on future legal amendments or of the impact on the conclusions herein. Prior results do not guarantee a similar outcome. The contents of this publication or document may not be reproduced, in whole or in part, without the express consent of GFDL Advogados.