Proxy Fight in Australia
Mooted reforms to proxy legislation in Australia may put a muzzle on shareholders due to increased disclosure requirements between proxy advisers and fund managers.
The right to speak freely. It is the foundation of democracy and a market-based economy. But it is under threat right now if the Australian Government’s proposed changes to proxy reform are anything to go by. Treasurer Josh Frydenberg and his department are on a rampage.
Proposed changes include forcing proxy advisers to give listed companies a week’s notice before they send voting recommendations to clients (fund managers), plus, the research on which their decision is based. Also, proxy firms would have to give clients access to a company’s response.
But the most spirited proposal is a measure that would force proxy firms to be independent of super funds. That’s an instant farewell party for the Australian Council of Superannuation Investors (ACSI). ACSI advises funds that control about 10% (on average) of all top ASX200 companies. Problem is that ownership of the firm lies with 36 institutional investors (mostly local industry super funds) with assets of more than $1 trillion combined. Goodbye ACSI. Is independence the sole determinant of good advice?
Other players in the proxy adviser space include Ownership Matters, CGI Glass (a branch of the San-Francisco based advisory) and ISS—majority-owned by Deutsche Bourse Group. Mr Frydenberg wants to increase the transparency of these advisory firms in a misguided attempt to increase the transparency and accountability of proxy advice. Why? They are considered too influential when it comes to corporate governance in Australia. And we have a high degree of institutional investment in Australia owing to compulsory super.
A Driver’s Licence
The fact none of these advisory firms require a Financial Services licence is another point of concern for Treasury and company directors. Going forward, this might change. A Treasury consultation paper says there is “insufficient public information today to determine whether superannuation funds, in this area, are acting in a manner consistent with their legal obligations.”
Licencing aside, the proposed changes to the regulation of proxy advisory firms all add up to more costs, more headaches, and sadly, less incentive for funds to stick their neck out on crucial voting issues. We can see the cushy Australian corporate director club looking on with a wry grin. Superfund members and shareholders will start to bear the cost of this heightened transparency in the form of higher fees and higher expenses for corporate governance.
The Old Days
So just when it was looking like things were changing for the better on the ASX (growing shareholder activism), it appears the days of sleepy boards and nonchalance for shareholder rights will continue.
From our point of view, there is simply no evidence to support the grievances of company directors who believe they are shackled by dissenting proxy advisory firms. According to an ASIC review conducted in 2017, proxy firms recommended “against” votes in 12 per cent of resolutions put forward by ASX200 companies. Not all of them—12 per cent of them. And of the 12 per cent, only 17 per cent on average received a dissenting vote from shareholders.
Does this demonstrate a heavy-handed and unnecessary influence by proxy firms? We think not. There were also reports during the 2017 AGM season of large institutional shareholders who decided to vote against resolutions that were the subject of a ‘for’ recommendation by proxy advisers. This is consistent with representations made to ASIC by institutional shareholders that they do not follow proxy advisers’ recommendations automatically.
Further, a recent article in the Financial Review showed 96.2% approval for 7,500 non-executive director elections over the past decade. Only 6 candidates were defeated. And “no board of an ASX 300 company has been spilt following a second-strike vote, and of the 1321 resolutions proposed by ASX 200 companies in 2020, only 36 votes went against the company.” Yes, a grand total of 36.
Follow the Leader
It seems we are walking in the footsteps of US Securities Exchange Commission who last year introduced reforms requiring proxy materials be filed early to give companies time to respond to proxy recommendations and requiring proxy firms to disclose any conflicts of interest (like reforms introduced in Britain a year earlier).
Proxy advisers in Australia have obligations under the Corporations Act to ensure any financial services are efficient, honest, and fair, while they must not mislead or deceive in any activity. Let’s hope it remains that way.
Otherwise, we see shareholder rights being weakened, with a shaky and generic superannuation fund voting system to follow. A diversity of views is surely an essential component of good governance. If those views are cancelled then we are taking a step backwards, not forward.
Australia does not have any protections of free speech by law, but this does not mean it should reduce the ability of advisors and their funds to cast their opinion. The Member for Kooyong, please let market participants speak freely when it comes to corporate governance.
