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Proxy advice reforms savage investor outcomes: Morningstar
Josh Frydenberg’s unilateral changes to proxy advice regulation look increasingly unjustifiable. The question that remains is why they were forced through in the first place.
The changes, rammed through in late 2021 using regulations powers, will make it nearly impossible for the Australian Council of Superannuation Investors (ACSI) to operate with a requirement that it be independent from its clients. It will also place an onerous regulatory burden on the backs of all proxy advisers in the form of civil penalties of up to $11.3 million if they fail to provide their research to both companies and clients on the same day.
“Proxy advisers can be akin to the pebble in the shoe of a company, painful and difficult to ignore. Changes in regulation may prevent the pebble from lodging in the first place,” Erica Hall, ESG analyst at Morningstar, wrote in a report titled ‘Changes in Australian Proxy Advice Regulation will not Improve Investor Outcomes.’
“Skewing the balance of power in favour of companies, as these regulations seem to do, is not necessarily a positive outcome for shareholders. Changes have been brought in the name of improving governance, but it is hard to see how watering down proxy advisers’ ability to operate will improve investor outcomes.”
And as Hall notes, it may be difficult to satisfy the independence requirements to work for a proxy advice firm if you have previously worked at a super fund or fund manager, with no justification given for the restriction save “ensuring independence” (The cynics among us might wonder why the same requirement also isn’t applied to business and politics, where the revolving door between the Liberal Party and the Big Four will apparently keep revolving until the heat death of the universe).
But the issue that towers over the reforms themselves is how they were implemented – without consultation, or the debate in the Senate that was afforded to Your Future Your Super (and thousands of other pieces of legislation). Not only does this sow further distrust within the superannuation industry, still on the backfoot from YFYS, but makes it difficult to take the reforms seriously as a good faith measure aimed at doing what it says on the tin.
“The manner of the reforms’ enactment adds to the sense of unease,” Hall writes. “They were not passed through parliament but rather as regulations to existing statutes. Proposals were not offered for public comment. No parliamentary oversight was possible, as the normal processes were sidestepped in favour of quick reform.”
“The justifications provided-namely improved governance and accountability-stand in stark contrast to the reform process’ own lack of transparency and accountability.”
The reforms will also hurt companies, who will now have to deal with “swaths of internal advisers knocking on company doors, demanding answers” rather than a handful of proxy firms, while super funds will likely be forced to pass on the higher costs of maintaining those teams to members.
As other journalists have noted, the report marks a rare foray into what is an increasingly political issue. But as Hall notes, without the work of proxy advisers, many of the biggest problems in Australia’s corporate landscape would have gone unfixed. AMP was not blindsided by Boe Pahari’s private misbehaviour – executives already knew about it – but by the public response to it. Rio Tinto executives might also have escaped the Juukan Gorge debacle with light pay cuts.
“These changes, whether intentional or not, act as barriers, making it more difficult to operate a proxy advice business,” Hall writes. “This has implications for active ownership, which primarily entails proxy voting and engagement, growing in significance as an investment tool.”
“It allows shareholders to lend their voices to issues that they believe must be addressed in order to secure long-term investment performance. It has therefore become a core component of sustainable investing, and it challenges the status quo.”
