Guerdon Associates’ views on government’s proposed regulation of proxy advisers
07/06/2021
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Submissions to the federal government’s latest proxy adviser enquiry closed Tuesday 1 June 2021 amid a flurry of media coverage which, based on our estimate, was heavily weighted towards the arguments supporting proxy advisers from institutional investors and the proxy advisers themselves. The arguments for greater regulation from issuers and their various representative bodies remained unchanged from prior attempts, except for referencing new regulations in the US and UK as a reason for action. Unfortunately for their arguments, the day submissions closed the Biden administration instructed the SEC not to enforce Trump era regulation requiring proxy advisers to provide issuers research prior to their clients receiving it. Proxy advisers and institutional investors arguments were not dissimilar to prior arguments, relating to the absence of any problems regulation would solve, and higher costs for institutional investors.

Along with many other organisations, Guerdon associates submitted a submission to the Australian Treasury on the matters contained in its Consultation Paper on “Greater Transparency of Proxy Advice” released in April. We summarised issues in the paper in our May newsletter (see HERE).

Guerdon Associates’ submission indicated that:

  • The disclosure of trustee voting and the rationale for that vote is a sound principle for the improvement of transparency for member interests. If such a proposal was to be implemented then it should apply equally to all asset owners, superannuation funds and entities that hold interests on behalf of others and vote on issuer resolutions. There is no logical reason to carve out only a component of the capital markets for this disclosure.
  • Superannuation funds should not be prevented from investing in, or owning, a proxy adviser.
  • Proxy adviser disclosure of conflicts of interest, required under their AFSL license, be rigorously enforced.
  • Logistically, it is not possible for proxy advisers to provide their reports to companies 5 days before providing them to their clients unless quality standards are set lower, or proxy firm resourcing and the pricing to be met by institutional investors is to be set higher.
  • There is no consideration for proxy advisers changing their position between sharing a report with issuers and delivering the final version to clients. They should not be beholden to issuers if they change their position, particularly if new facts become apparent from engagement.

In order to assess the extent that an institutional investor has an independent mind, and does not engage proxy advisers for “robo-voting”,  we see no harm, and reasonable benefit from a standardised stewardship code whereby an investor be required to disclose the source of proxy advice, recommendations received, and its own vote. In addition, consistent with high standards set by many European investors, a summary of reasons for not supporting an issuer’s resolutions be provided.

We also saw no reason that an issuer’s response to proxy advice cannot be supplied direct to the proxy adviser’s client via the same channel or platform provided by the proxy adviser. CGI Glass Lewis already provides this service (for a fee). How it would probably work is that the proxy adviser releases its report, the issuer responds within 48 hours, and the proxy adviser delivers the issuer’s response via the same channel, perhaps with their own amended report. The institutional investors could then view the proxy advice and issuer response side by side. Any factual errors by a proxy adviser will be more obvious. It will encourage higher standards by proxy advisers, as well as proxy firm engagement, but not mandating either a standard or engagement. Standards and engagement should improve via competition between proxy advisers.

Guerdon Associates’ full submission including responses to the Treasury’s questions on each option can be found HERE.

Readers might also like to review the submission of the Australian Council of Superannuation Investors (ACSI). The proposals in the Treasury paper are to a large extent targeted at the way in which the industry superannuation funds efficiently and cost-effectively source proxy advice as members of ACSI. ACSI’s submission can be found HERE.

© Guerdon Associates 2021
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