Treasurer Josh Frydenberg recently declared proposed legislation for proxy advisers, aiming for more transparency around proxy advice.
The draft changes have suggestions such as requiring firms to have Australian Financial Services Licences (AFSLs) and to distribute their advice and research on firms they’re the subject of five days before their investor clients see it, as well as alert their clients of how to access company responses.
It has also proposed proxy advisers should be independent from super funds, if they happen to be their clients.
Treasury has kicked off a public consultation seeking stakeholder feedback on the draft reforms, including questions on super funds’ governance, independence, accountability and disclosures.
“There is insufficient public information today to determine whether superannuation funds, in this area, are acting in a manner consistent with their legal obligations,” the consultation paper stated.
But Vas Kolesnikoff, head of Australia and New Zealand at Institutional Shareholder Services Australia (ISS) commented the inquiry “seems to be premised on a misguided notion that proxy advisers do not operate transparently or engage with companies”.
The firm believes the “potential regulatory options outlined in the public consultation are a solution in search of a problem”.
“I think the government needs to look carefully to understand the industry and the issues why investors need a proxy adviser – in our case, it is because we are independent, global, have economies of scale to manage the huge workflow of covering all the companies which our clients are invested in,” Mr Kolesnikoff told InvestorDaily.
“Investors cannot get to all the companies that they are invested in, because it could be in the thousands – so they need a proxy adviser to assist them.
“In our case, our policies are publicly available on our website for all markets we cover and I personally engage with 150-200 ASX300 chairmen and boards annually, and we provide our research reports to companies on a complementary basis. So it is unclear, what added transparency someone could ask of ISS.”
He added asset owners and other investors have a “fundamental right” to choose proxy advisers, use independent research and implement voting policies appropriate to their individual stewardship needs, without being limited by the companies they own.
Why do companies need to screen independent reports?: ISS
ISS has also criticised the proposed five-day review and comment period, calling it an “unwarranted and inappropriate intrusion” that would be an “inoperable impediment to timely and effective investor stewardship and informed voting decision-making”.
The firm gives companies free access to final, published reports under its current practice and has insisted organisations already have opportunities to communicate with shareholders and to advocate against proxy adviser’s recommendations.
“Companies already have their share registers and they should be speaking with their investors. So the question is, why then do they need to screen an independent ISS proxy report which our clients commission and pay for?” Mr Kolesnikoff said.
The minimum time frame for lodging a notice of meeting by an ASX-listed entity is 28 days, which sets the agenda for what shareholders will need to vote on.
But institutional investors are generally required to cast their votes through custodians between seven to 14 days ahead of a meeting – leaving proxy advisers with 14 to 21 days to publish a corresponding report.
Mr Kolesnikoff has noted if advisers are required to provide their reports to companies five business days ahead of their clients, then there will be “insufficient time” before an annual meeting for a firm to prepare reports and distribute to clients to inform their votes.
“The greatest implications for ISS appear to be the attempt to narrow the timetable, which as noted above, is not feasible to lose a week,” he said.
“Broadly, I think the question needs to be asked where does this all stop.
“Independent research should not be silenced, as this is simply another source of information which institutional investors and asset owners pay for.”
ISS reportedly receives around one or two disputing submissions from companies a year.
It is one of the four main proxy advisers in Australia, alongside CGI Glass Lewis, Ownership Matters and the Australian Council of Superannuation Investors (ACSI).
ACSI has also blasted the draft rules, calling them a blow to shareholder rights and corporate transparency.
Spirit Super chair Naomi Edwards has added to the criticisms of the rules, saying they would “squeeze” funds between members’ desires and regulatory pressure to manage climate risk, against a government cutting down on their ability to cost-effectively do so through outsourced proxy advice.
Smaller funds without the internal capacity for climate risk management are especially susceptible, she said, which could potentially form another driving factor for the wave of mergers in the superannuation industry.
Proxy advice reforms overseas
As outlined in Treasury’s consultation paper, the Australian government appears to be following the movements of the US and the UK, where proxy advisers have been the subject of recent reforms.
The Securities Exchange Commission (SEC) has new regulations for firms set to come into effect from December, which include requiring advice to be made available to companies subject of their reports before or at the time it is provided to clients. Proxy advisers are also required to provide a mechanism for clients to view any written responses to their advice, before the relevant meeting.
In the UK, regulations were amended in 2019, forming disclosure requirements for proxy advisers such as reporting conflicts of interests, information about their research capabilities and how the research supports the advice and recommendations.
