Proxy advisers under scrutiny (again) – call for submissions to Australian government
10/05/2021
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The Australian government is threatening proxy advisers with more regulation.

On Friday 30 April, the government released a Treasury Consultation paper, “Greater Transparency of Proxy Advice” (the paper), with the following objectives:

“Given the influential role of proxy advisers in corporate governance in Australia and the high degree of institutional share ownership, this consultation is designed to help assess the adequacy of the current regulatory regime and help develop reform options that would strengthen the transparency and accountability of proxy advice. Additionally, …….., it is critical that the voting rights attached to the members’ superannuation assets are managed to maximise the retirement savings of Australians and for the sole purpose of retirement benefits.”

Submissions are being sought.

Here is a summary of the key issues for consultation and our preliminary observations.

Independence between superannuation funds and proxy advice

The paper indicates the government considers there is scope to improve transparency and superannuation fund member engagement by ensuring trustees provide simpler and clearer information about how funds exercise their voting rights. While some industry funds (and other institutional investors) disclose their voting,  disclosure on voting practices is inconsistent across the industry, and rarely includes proxy recommendation information received and acted upon by industry funds.

Some would suggest this inconsistency is due to the absence of an Australian stewardship code. This is not addressed in the paper.

The paper also suggests that the role of proxy advisers in advising and interacting with trustees may not always be appropriate and transparent. It suggests that the proxy advisers may have broader objectives than the fiduciary obligations of trustees and questions whether superannuation funds should be jointly involved in determining their voting positions as may be the case with ACSI.

The government, therefore, is considering whether there is a need to enforce meaningful independence between industry superannuation fund trustees and proxy advisers.

Submissions are being sought on two potential avenues for regulation:

Option 1: Improved disclosure of trustee voting:  superannuation funds would be required to disclose more detailed information about their voting policies and actions for each financial year, including how votes were exercised, whether any advice was received from a proxy adviser, who provided the advice and whether the voting was consistent with the proxy advice. 

Option 2: Demonstrating independence and appropriate governance: proxy advisers would be required to be meaningfully independent from a superannuation fund to ensure that proxy advice is provided to, and used by superannuation funds on an ‘arm’s length’ basis.

Trustees could also be required to disclose how they implement their trustee obligations and duties around independent judgement in the determination of voting positions.

Observations at this stage include:

  • While improved transparency of voting policies and outcomes would benefit fund members, it should be consistent for all institutional investors.
  • It is not clear why industry funds should be prevented from pooling resources to obtain proxy advice in an efficient and cost-effective way. The proxy advice is one source of information that may be used to inform their voting decisions.
  • It would potentially set a misleading precedent to require trustees to disclose that they did or did not act in accordance with the advice received. It may only be one piece of information to inform their decision-making and the outcome may just be coincidental.
  • It is not clear why ACSI is being singled out for independence arrangements when other bodies such as AIRA, the BCA, the AICD (that are, like ACSI, formed by members to effectively pool resources, lobby and promote common interests) are not to be treated in the same way?
  • If one of the objectives is to promote increased efficiency and member returns, how will this measure achieve that, given the potential need for each industry fund to build internal resources to do their own voting research?

Facilitating engagement between companies and proxy advisers

Proxy advisers are not required to engage with issuers on their research, report and recommendations.

Many companies and groups like the BCA have regularly expressed concern that companies are not able to present their views to the investors who receive the proxy adviser reports, including when a company may disagree with some of the research or recommendations in the reports. The government considers companies should have the opportunity to engage and point out factual inaccuracies and convey additional context or information to the proxy adviser that may impact the final voting recommendation. Currently CGI Glass Lewis provides this facility, but not the other proxy advisers.

The paper suggests that having proxy advice accompanied by the company’s response to that advice, or a simple direction on how to find it, would simplify accessing and contrasting information and perspectives.

Treasury is therefore seeking stakeholder views on: 

Option 3: Facilitate engagement and ensure transparency: proxy advisers would be required to provide their preliminary report to the company before distributing their final report to their subscribing investors. For example, a period of five days prior to the final report and recommendations would give time for the company to comment and for the proxy adviser to amend the report in response if warranted.

Option 4: Make materials accessible: proxy advisers would be required to notify their clients on how to access the company’s response to the report. This could be through providing a website link or instructions on how to access the response elsewhere.

Observations at this stage include:

  • Australia has one of the shortest proxy seasons in the OECD that makes it difficult for engagement during this period. It is easy to see either poor quality preliminary reports being prepared to get out to issuers within the very short time available, or the need for proxy advisers to increase resourcing. The latter would raise costs for their subscribers (the institutional investors and industry funds), reducing returns for their clients.
  • There does not seem to be consideration of the final advice. This may vary significantly from the draft a company receives, especially given that the draft is likely to be of poor quality. Proxy advisers may stick to their current timetable and resourcing and send the junior analyst’s draft version to the company while it is in the queue awaiting the senior proxy adviser staff member’s review. Hence company resources may be devoted to correcting the proxy advisers’ errors, assisting in their work, while not having a great deal of influence on the final recommendation.
  • If this proposal was to proceed, consideration would need to be given to the costs and benefits of extending the statutory reporting period.
  • There is a concern around the selective engagement in the period that could lead to breaches of companies’ continuous disclosure obligations.

Require suitable licensing for the provision of proxy advice

Proxy advisers provide advice on a range of company matters, much of which does not require specific licensing – only a subset of proxy adviser activities is currently subject to the AFS Licensing regime. The paper states that making assessments on issues like the appropriateness of executive remuneration, the performance of a director and their re-election, and the outcome of a change in the company’s constitution all require a high degree of expertise.

Treasury is seeking stakeholder views on:

Option 5: Ensuring advice is underpinned by professional licensing: proxy advisers would be required to obtain an AFSL for the provision of proxy advice. The purpose of the license would be to ensure proxy advisers are subject to appropriate regulatory oversight and operate with the necessary care and skill required.

Professional licensing is probably a worthwhile consideration. Some proxy advisers purport to have forensic accounting skills with reports disputing some accounting treatments and reporting. In addition, some proxy advisers undertake tailored research for use by short sellers and others involved in transactions that rely on this advice (which BTW, may in itself present a conflict of interest if the same adviser was recommending advice in regard to proxy voting).

However, whether ASIC (or any other agency) is up to the task of adequate regulation enforcement will need to be addressed.

Some other, unstated, matters

There is a range of other issues that need a light shone on them and have not been covered in the paper.

The paper did not cover in any depth the questions of advocacy and proxy advice.

The first concern is that proxy advisers may undertake customised research to assist a client advocate for a specific outcome. The client may be, for example, a short seller, or a superannuation fund lobbying for regulatory change.

To what extent do some clients provide a significant annual fee in addition to standard proxy advice for “specials”? Does this influence the standard proxy advice in a way that is to the benefit of the client paying the proxy adviser high fees for custom work?

Another matter that may be of concern is the extent to which proxy advice may be used to generate sales of a proxy adviser’s corporate advisory services. Some incorporate opaque scoring systems that are not transparent, and appear to simply serve the purpose of selling additional services.

Submissions on the Consultation paper must be lodged by 1 June. Guerdon Associates will be lodging a submission and will publish it in due course.

The government consultation paper can be seen HERE.

© Guerdon Associates 2021
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