On 27 June 2018 ASIC published a report on proxy adviser engagement practices during the 2017 annual general meeting season. The report is the culmination of an intense, and sometimes antagonistic struggle to have, or resist, more proxy adviser regulation (see HERE and HERE). This is ASIC’s conclusion.
The report covers observed conduct and “suggests” (but will not be regulating) practices that can be adopted by companies and proxy advisers.
On the basis of earlier reports, ASIC provides an overview of its observations on:
- the engagement policies of the major proxy advisers in Australia
- the 80 proxy adviser reports where an ‘against’ recommendation was made in relation to one or more resolutions considered at a meeting held during the 2017 annual general meeting season, and
- other information voluntarily provided by the proxy advisers on their engagement practices and activities during the 2017 annual general meeting season.
Basically, the report says that engagement is a good thing. No problem there. It also sees both sides (i.e. issuers and proxy advisers) improving their engagement practices by encouraging:
1. Proxy advisers to
- clearly explain and make available their engagement policies and voting guidelines,
- endeavour to provide sufficient time for companies to respond to requests for clarification or fact-checking of reports,
- be transparent in their reports about engagement with companies
- and promptly consider feedback in relation to factual errors in their reports,
2. Companies to
- actively seek out information about the engagement practices of proxy advisers,
- engage proactively with proxy advisers outside of peak periods,
- release notices of meeting to the market as early as possible,
- ensure disclosure is clear and not overly complex
- and continue engaging directly with investors regarding voting decisions.
A longer list of recommendations is summarised towards the end of this article.
In drawing its conclusions, ASIC relied on earlier work regarding the instances when proxy advisers recommended against a board supported resolution (see HERE). Of the 80 proxy adviser reports supporting “against” recommendations ASIC reviewed, it found engagement with companies who were the subject of the reports occurred in 65 cases. In 11 cases, the proxy adviser offered to engage but the company declined or did not respond. In two cases, the company requested engagement but the proxy adviser declined (this included when the proxy adviser was unavailable to meet). In two cases, there was no contact with the company at all.
In other words, the absence of engagement was not the proxy advisers’ fault.
ASIC also reiterated earlier findings (see HERE) based on data provided by three commercial proxy advisers in relation to their voting recommendations in the 2017 AGM season:
- There were 148 ‘against’ recommendations out of 1,125 resolutions (13%) put forward by ASX 200 companies, with a 17% average vote against these resolutions.
- Resolutions that attracted ‘against’ recommendations received a lower average ‘for’ vote. However, the average ‘against’ vote for resolutions attracting at least one ‘against’ recommendation was not sufficiently significant to alter the outcome of the resolution (in terms of the resolution being passed or a strike being achieved on the remuneration report).
- There were also reports during the 2017 AGM season of large institutional shareholders deciding 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, but make their own voting decisions.
That is, any one proxy adviser, by ASIC’s reckoning, cannot swing a vote to a significant number of “no” votes to make a difference. The implication is that if you have upset two or more advisers to recommend against you, you probably deserve it.
ASIC makes a number of recommendations to proxy advisers and companies.
For proxy advisers:
- It is up to the individual proxy adviser as to how it wishes to strike a balance between the sometimes competing priorities of engaging with companies (including fact-checking), maintaining independence from companies (including preventing receipt of non-public information and avoiding undue influence), and managing timing constraints in their engagement policies.
GA Comment: So, if companies cannot get a look-in, it’s the proxy adviser’s call, according to ASIC.
- Proxy advisers should clearly explain and make available their policies in relation to engagement to ensure there is not a gap in expectations from companies regarding what engagement will take place. Engagement policies should be easily accessible, for example, published on the proxy adviser’s website
- Likewise, voting guidelines.
- Where a draft report is provided to the subject company for fact-checking or where clarification is sought from the company, proxy advisers should endeavour to provide sufficient time for the company to consider the request and respond. It behoves companies to make sure they have provided the proxy adviser contact details.
GA Comment: When doing this, keep in mind that proxy advisers work almost around the clock during proxy season, so a company contact should be available beyond core working hours.
- If it is intended that a draft report will be provided to the subject company, proxy advisers may wish to consider doing this in a controlled way, for example, without communicating recommendations or opinions that would be included in the final report. This may reduce disagreements between proxy advisers and companies as to whether errors reported by companies relate to fact or opinion.
GA Comment: This, also, is a sore point. Most proxy advisers recommendations on remuneration matters are based on belief or opinion. While recommendations are almost always in accord with proxy adviser guidelines, the guidelines are not based on any valid finance, economic or behavioural research as to what is actually effective. Most guidelines, and therefore recommendations, are opinions based on belief. No one actually wins arguments about religion. And so it is for most proxy adviser recommendations. In this regard, it would have been useful for ASIC to recommend proxy advisers base guidelines recommendations on factors proven to impact risk adjusted long term returns.
- Proxy advisers should notify companies of any ‘against’ recommendations and explain the reasons for those recommendations, to assist companies in understanding concerns held by the proxy adviser and responding to investors in the context of those concerns.
- Proxy advisers should be transparent in their reports about their engagement with companies who are the subject of their reports and any changes made to their reports as a result. Proxy advisers may wish to consider disclosing in their reports the nature, extent and outcome of engagement with the subject company, and a summary of the subject company’s view on a particular issue where that view is different from the proxy adviser’s, or any additional information that has been provided by the company as a result of engagement.
- Proxy advisers should also promptly consider feedback in relation to factual errors in their reports and take steps to rectify any substantive errors as soon as possible.
- Understand proxy adviser engagement practices of proxy advisers
GA comment: ASIC is right, companies have surprisingly little knowledge of proxy adviser engagement requirements. Keep in mind that Proxy advisers are also tired and grumpy in the September, October and November AGM season. Best to see them another time if it can be helped.
- Release notices of meeting to the market as early as possible – proxy advisers are subject to timing constraints such as voting deadlines and need to ensure their clients have adequate time to consider their advice.
GA Comment: we are not sure this will help much. Proxy advisers have a rigorous timetable. They typically will not consider disclosures until they in effect have to, rather than repeat work after additional releases have been made after the NoM.
- Ensure disclosure to the market is fulsome, clear and not overly complex .
GA Comment: ASIC may not fully appreciate the extent that disclosures have to address the myriad of nuance in proxy adviser guidelines. Some companies my appear to be saying the same thing 4 times, but really they are saying 4 things slightly differently.
- continue engaging directly with investors regarding any voting decision – shareholders are ultimately responsible for making a decision on how they wish to vote
- in relation to ‘against’ recommendations, seek to understand the concerns underlying the recommendation through engaging with the proxy adviser and their voting policies in responding to those concerns.
GA comment: This is practically difficult when it just becomes matters of opinion with no scientific foundation. In this regard, companies may need to consider upping the ante with conclusive objective research that counters opinion or belief.
- Companies should also ensure that confidential, price-sensitive information is not selectively disclosed to proxy advisers during engagement.
- If a subject company discovers a matter that is materially false or misleading in a proxy adviser report, the company should notify the proxy adviser of the matter promptly and seek a correction and consider whether it would be appropriate to respond to the matter by way of an ASX announcement or other communication to investors.
This report appears to be the final instalment in the most recent anti-proxy adviser battle. It is, however, unlikely to be the end of the war. We expect new and disruptive technologies within 5 years will again open up new battlegrounds. In the meantime, the good fight may not be between contrary beliefs underpinning AGM vote outcomes, but in trying to ensure beliefs and guidelines are replaced by rational, evidence based research underpinning each recommendation by either board or proxy adviser.
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