Earlier this year, the Federal Government sought stakeholder input on whether specialist advisory firms known as ‘proxy advisers’ are appropriately regulated (Treasury Paper).1
Proxy advisers guide institutional investors – i.e. superannuation funds, pension funds, asset owners and other major investors – on how to engage with the companies in which those institutional investors invest. Typically, proxy advisers research such a company and give recommendations to institutional investors on how to vote on resolutions put forward at that company’s general meeting.
Concerns have previously been raised that Australia’s mandatory superannuation system, coupled with the influential nature of the reports provided to superannuation funds by proxy advisers, have given proxy advisers a high degree of influence over corporate governance in Australia. Superannuation funds are significant market players, owning 20% ($443.7 billion) of the Australian Stock Exchange on behalf of their members.2
The Treasury Paper outlined five key areas for reform of the proxy adviser industry, addressed in turn below. The overarching policy objectives of the proposed reforms were summarised by Treasurer Josh Frydenberg, who commented that:
“Super funds often rely on proxy advice to make decisions on behalf of millions of Australians who have invested their savings in listed companies. Australians deserve to know that the advice their superannuation funds are receiving is transparent, accurate and independent.”Josh Frydenberg, Treasurer
Disclosure of voting
The Treasury Paper sets out a proposed requirement for trustees of superannuation funds to disclose their voting patterns for each financial year, including whether votes were exercised in accordance with proxy advice received by that fund (if any). Of the five reforms proposed, this proposal is the least controversial, and a number of superannuation funds publish this kind of information voluntarily.
By far the most controversial, the second proposed reform requires proxy advisers to be independent of the superannuation funds to ensure that superannuation trustees can discharge their statutory and fiduciary duties to members free of any real or perceived conflicts of interest or other influence from proxy advisers (who do not owe the same obligations to members and may have different objectives to the trustees). This presents an interesting hurdle for proxy advisers (such as the Australian Council of Superannuation Investors, one of the major proxy advisers in Australia) whose boards of directors are selected from member superannuation funds.
Engagement and transparency
The third and fourth reforms propose to require proxy advisers to give an advance copy of their report on a company to that company, and also to share any response by the company with superannuation funds who receive their report.3
The Business Council of Australia (BCA), in its submission in response to the Treasury Paper, noted that institutional investor voting that is based on incorrect proxy advice can impact a company’s share price, prevent suitable board candidates from election and/or thwart significant corporate action. By requiring proxy advisers to engage with the company and explain its reasoning for not supporting a proposed resolution, companies may better be able to respond to proxy adviser and/or investor concerns prior to general meetings of their members.
These proposed reforms are generally consistent with the approach already taken in the US, but nonetheless has prompted considerate debate amongst Australian stakeholders. From our perspective, if these reforms are adopted, the scope of permissible engagement between companies and proxy advisers will need to be clearly defined to ensure that:
(a) companies do not have the opportunity to unduly influence proxy advisers, or effectively censor unfavourable reports through threats of litigation, consistent with ASIC’s detailed guidance on the avoidance of conflicts of interest in the preparation of investment research reports;4 and
(b) sell-side research prepared by brokerage firms to assist clients with the making of investment decisions, are not inadvertently captured by the new legislation, and remain unbiased and reflective of the professional judgement and expertise of the research analyst.
The final proposed reform requires proxy advisers to hold an Australian Financial Services Licence to provide any type of voting recommendation. Currently, proxy advisers do not need to be licensed to provide recommendations on matters not related to financial products, such as director remuneration, executive performance and changes to a company’s constitution. The proposed expansion of the licensing requirement promotes best practice across all of a proxy adviser’s service offerings, and in our view, improves the accountability of proxy advisers to superannuation funds and their members.
Help for directors
Proxy advisers have long been a “bugbear” of Australian directors for challenging board recommendations in “perceived instances of poor governance”. Addisons has helped countless organisations, big and small, in navigating potential governance issues before they become insurmountable problems. If you think you may have a corporate governance issue on your hands, please reach out to us so that we can help you as well.
1 Australian Government, the Treasury, Greater Transparency of Proxy Advice (Consultation Paper, April 2021).
2 As at 31 December 2020 and excluding superannuation funds that have four or fewer members.
3 This reflects the position expressed in ASIC Report 578 (June 2018) that consultation between a company and a proxy adviser can benefit shareholders if that consultation increases the quality of information contained in the proxy adviser’s report.
4 See ASIC Regulatory Guide 79: Research report providers: Improving the quality of investment research.
5 Michael Roddan, ‘Push to kneecap super proxy advisers’, Australian Financial Review (30 April 2021).