Proxy advice shake-up’s real target is shareholder social activism

Source: Financial Review

By: Gabriel Radzyminski

Whether we realise it or not, most Australians have an interest in the ability of shareholders to hold the directors of the companies we own to account. For most of us, this is through our superannuation or pension products.

In short, we believe new regulations the Treasurer Josh Frydenberg recently enacted on proxy advice will severely restrict proxy advisory firms from providing advice to their clients that may be at odds with board voting recommendations. They also establish the principle of regulating against contrary views.

Like some in the asset management industry, we considered the proposed changes to be “a solution in search of a problem”. We consider the current Australian Financial Services Licence (AFSL) regime fit for purpose.

The government, some outspoken directors and CEOs, and the director lobby groups have couched the new regulations as being about improved transparency, accountability and eradicating errors. This seems to us like Orwellian “newspeak” and “doublethink”.

It is not a stretch to imagine government extending the regulations in future to regulate environmental groups who advocate in favour of shareholder sponsored resolutions.

Despite repeated claims, the proposed changes do not represent what is considered global best practice. Similar reforms were proposed in the US by the Trump administration. Those reforms were widely derided by most stakeholders, before being abandoned without being implemented.

The government’s own financial regulator, ASIC, concludes that whatever influence proxy advisers might have, shareholder voting remains overwhelmingly favourably disposed towards, and supportive of, boards.

Given this, it might be worth considering what corporate Australia and the government might be really worried about.

Proxy advisers have emerged in recent years as important and influential participants in how our listed companies are governed. Proxy advisers provide advice to their institutional clients on how they should vote on company resolutions at general meetings.

Most resolutions relate to the election (and re-election) of directors. The vast majority pass, with voting that would be the envy of despots and tyrants around the world. Resolutions are rarely contentious, except when they are.

For example, following the Hayne royal commission, some directors of leading banks and insurance companies resigned or withdrew their candidacies after concluding they would not be re-elected. Rio Tinto Ltd’s chairman resigned over the destruction of Juukan Gorge following shareholder pressure. Shareholders, some advised by proxy advisers, were instrumental in these events.

Another important resolution is the vote on a company’s remuneration report. This has often been a lightning rod, particularly with the “two strikes” rule, which can lead to board spills. Investors widely accept that “two strikes” has been instrumental in reigning in the most egregious corporate compensation plans. It has forced genuine engagement with shareholders and those who advise them, typically proxy advisers.

To the extent proxy advisers had an influence in these matters, we think most Australians would likely agree it was a good thing.

In recent years, there has also been an increasing incidence of non-financial shareholder resolutions being proposed. These typically relate to environmental or social issues. In the past, such proposals garnered very little support. Recently, investor support for such proposals has grown.

Last year, Exxon Mobil, one of the world’s largest companies, faced investor opprobrium when a small shareholder, Engine No. 1, proposed the appointment of four new directors. Three of Engine No. 1’s candidates were elected, with the support of the world’s largest asset management firms and proxy advisers. That came as a shock to many.

We believe outcomes like these might well be the unspoken problems corporate Australia wants solved by the new regulations.

For example, since it would be practically difficult to repeal the “two strikes” rule, perhaps it is seen as easier to rein in those who advise on remuneration votes.

The new regulations impose a raft of new draconian AFSL conditions on licensed proxy advisers. There remains, for now, an existing carve-out from the AFSL regime for those not in the business of providing proxy advice. This carve-out allows, for example, environmental groups to lobby and campaign on resolutions they consider important.

However, it is not a stretch to imagine government extending the regulations in future. For example, to regulate environmental groups who advocate in favour of shareholder-sponsored resolutions.

In our opinion, the new regulations are a retrograde step.

Australia has for decades had a world-leading legal and regulatory framework that protected and upheld shareholder rights. Many of these laws and regulations were born of previous corporate scandals and disasters.

Unfortunately, the proponents and supporters of these new regulations want to chisel away at shareholder rights, directly and indirectly, to ensure directors can be protected and shielded from any genuine accountability to their owners.

Australia recently, perhaps narrowly, avoided another attempt to reign in shareholder rights, with the government’s attempt to allow virtual-only general meetings. In the end, reason prevailed, but similarly flawed arguments were made by many of those who support these new proxy regulations.

If not repealed, the new proxy adviser regulations risk setting our country on a slippery slope that will have more far-reaching, long-lasting and adverse consequences than most realise.

Gabriel Radzyminski is Managing Director and Chief Investment Officer of Sandon Capital. Disclosure: Sandon Capital sometimes lobbies major proxy firms, but does not subscribe to any proxy advisory services.

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