No evidence has been presented to support the need for new proxy advice regulations. Rather, an army of investors have argued against them. So who do the reforms really benefit?
The Government is facing an uphill battle on proxy advice changes as industry stakeholders, including the Australian Council of Superannuation Investors, savage proposals that would force advisers to bend over backwards to satisfy the companies they review.
“These proposals have the clear potential to impact the independence of advice, depending on the obligations that are imposed on researchers and the veto powers that are given to companies,” ACSI said in its submission to Treasury last week (June 2).
“Sharing proxy research with companies in advance would be inconsistent with existing obligations under the Australian Financial Services Licensing regime.”
ACSI, led by Louise Davidson, the chief executive, and owned by the largest profit-for-members funds, has skin in the game – more than any other proxy adviser. Its existence is threatened by one of the proposals in the reforms, which would require advisers to demonstrate their independence from the organisations they advise.
“ACSI strongly opposes this proposal and sees no basis or rationale for it. Contrary to the stated aims of the consultation, this has the capacity to cause harm to the beneficiaries of our member funds, through increased cost and less effective risk management,” ACSI said.
While ACSI isn’t the most publicly vocal proxy adviser – the Ownership Matters Twitter feed puts paid to that suggestion – it is certainly one of the most powerful. ACSI has been happy to claim its share of responsibility for executive heads rolling at Rio Tinto and AMP, and recently indicated that it would recommend shareholders vote against directors who it believes are failing to act on climate change (you don’t have to look far to find plenty of those).
Backing ACSI’s position is high-engagement fund manager Martin Currie, which believes that Treasury’s proposal could “exacerbate the influence of company directors on proxy recommendations, the reverse of the consultation paper’s objectives.”
“To us, the new rules look to be founded on a misguided notion that the proxy voting sector lacks transparency. We believe that the rule changes would, if anything, undermine the rights of asset owners to vote as they wish and give companies undue influence on proxy recommendations and outcomes,” said portfolio manager Will Baylis.
ACSI also notes that “the five-day rule”, which would require advisers to provide their research to companies under review before their clients, was considered in the United States before being abandoned on the basis that it was unworkable. That doesn’t bode well for any attempt to import the rule, which has become one of the most divisive aspects of the reforms. Even the Americans are having their say, with the US-based Council of Institutional Investors (CII) – which collectively manages US$5 trillion – warning that the five day rule was dead on arrival.
“We are disappointed that the (consultation paper) fails to provide any context in its description of the “recent reforms” of proxy advisers in the U.S. Readers of the paper should have been informed that most institutional investors—the clients of proxy advice—did not ask for the U.S. reforms, did not want them, and do not believe they are needed to facilitate investors’ ability to obtain the information necessary to make informed voting decisions.”
But closer to home, former market darling iSignthis – still enjoying its years-long suspension from the ASX – believes the burden placed on advisers should be even more onerous by extending the “five day rule” to 21 days. iSignthis drew Treasury’s intention to the “secretive” Ownership Matters report on the company’s compensation arrangements that it believes was responsible for the loss of $750 million market capitalization in 2019.
“The damage inflicted by the misleading proxy advice regarding iSignthis impacted the bulk of our 10,700 retail shareholders and the transparent and fair operation of the market, and ultimately also influenced the ASX’s decision to suspend iSignthis. We also draw Treasury’s attention to the rise in “short seller” positions just before the publication of the Ownership Matters report.”
That report also saw Tim Hart, iSignthis chair, contact the Australian Institute of Company Directors to question whether it had a stance on proxy advice and offer his assistance in starting a “process to deal with this industry wide issue”.
“In speaking with other ASX directors, there is a growing concern over the conflict of interest that exists with the different services that Australia’s ‘Leading’ (sic) Proxy Advisors are engaging in,” Hart wrote.
“Because Proxy Advisors hold privileged positions providing, often binding, advice to shareholders on AGM resolutions, individual directors are loath to raise these significant concerns in a direct or public matter.”
But appearing before senate estimates this week, Cathie Armour, ASIC commissioner, revealed that the regulator had received only two complaints about proxy advisers in the three years since it released its last review of their activities.
It must be difficult to come up with a solution in the absence of a problem, and the suspicious among us might even dare to imagine that the proposed reforms have more to do with mitigating the power of industry funds than in repairing the (supposedly) acrimonious relationship they have with company directors.