Proxy adviser regulation: where to from here?
08/12/2017
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Guerdon Associates held a Directors’ Briefing in October with ASIC Commissioner, John Price, as guest. There was an open, constructive and informed discussion on proxy adviser regulation. While the Chatham House Rule does not allow us to convey much of the discussion, we can say that:

  • Further regulation of proxy advisers in Australia is off the table for now, but
  • ASIC continues to monitor this space, and is seeking factual evidence from issuers, investors and other stakeholders for regular reviews of proxy adviser reports.

Page 46 of ASIC’s Corporate Finance Report for FY17 explained its policy approach and roundtable earlier this year (see HERE).

Many readers may be aware of the Australian Investor Relations Association’s (AIRA) recent survey of issuers on their experience with proxy advisers and AIRA’s call for proxy advisers to adopt a code of conduct. In addition, AIRA is calling for regulation that proxy advisers be required to submit their draft reports to issuers before release to ensure they are factually correct (See HERE).

While Australia has adopted a wait and see approach, the US has initiated regulation. A Bill, H.R.4015 – Corporate Governance Reform and Transparency Act of 2017 (see HERE), has been introduced into the House of Representatives. Among other things, if enacted, the bill will require proxy advisers to share their voting recommendations with issuers before they are released to institutional investors. Issuers will have three days in which to review the recommendations, engage with the proxy adviser and seek to resolve any issues.

This is the third life of the bill as it was previously introduced as one part of omnibus legislation. As a standalone piece of legislation, it is likely to receive more focus from both houses. Guerdon Associates will follow its path in the US and keep you informed.

The Bill has been opposed by numerous investors, including the members of the Council of Institutional Investors (CII). In a letter written to the Chairman of the House Financial Services Committee Jeb Hensarling (see HERE), the CII declared that the Bill “appears to be based on several false premises, including the erroneous conclusion that proxy advisory firms dictate proxy voting results and that institutional investors do not derive or form their own voting decisions.” The letter went on to say that “the pending legislation… would weaken corporate governance in the United States; undercut proxy advisory firms’ ability to uphold their fiduciary obligation to their investor clients; and reorient any surviving firms to serve companies rather than investors.” The letter was signed by 45 investors and investment bodies.

If this Bill passes in the US, it would be a significant development and its consequences should be closely followed. While issuers, here and in the US, have their concerns about proxy advisers, most stakeholders would not want to see one or more proxy adviser firms regulated out of the industry as CII warns may happen.

We explained in our June newsletter (see HERE) that ISS is cross-subsidised by its corporate consulting business to issuers. Conflicts of interest inherent in this model were the basis for calls for more regulation in the US. However, the legislation seems more to focus on providing an opportunity for companies to influence recommendations prior to the advice being received by proxy firm clients, rather than tackling the conflicts of interest.

As CGI Glass Lewis is more of a pure-play adviser to institutional investors, it does not have the financial resources to compete in the same space as the cross-subsidised ISS. Regulation in the US that increases its costs and digs further into its already thin margins could see it leaving the industry entirely or having to adopt a conflicted model like ISS. Australian regulation could also see both ISS and CGI Glass Lewis using cheaper, and less informed, offshore analysts, and have less engagement locally. Ownership Matters, while it receives significant support from industry superannuation funds, also receives significant income from domestic and international investors affiliated with ACSI, and others including short sellers, for special governance research.

Lower quality reports, fewer or more conflicted proxy advisers, and less engagement could be an outcome from regulation – so this is a case of be careful what you wish for.

© Guerdon Associates 2021
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