Proxy advisers are reinventing capitalism. It has created a political challenge for the government

Capitalism is undergoing a reinvention.  

And this time it's not employees who are directly uprising and instigating change. It's the shareholders. 

Company directors are increasingly being taken to task by superannuation funds and other big institutional investors, on a broad range of issues from CEO pay and climate change to sexual harassment and money laundering.

While mum and dad investors were once the most outspoken voices at company annual general meetings, these days, super fund investors are also agitating for change.

Australian superannuation funds now own about 20 per cent of the Australian Stock Exchange (ASX), with shareholdings worth about $509.5 billion on behalf of their members.  

That means the votes these investors cast at AGMs matter. It has the ability to change outcomes. And it often does. 

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume.WatchDuration: 4 minutes 14 seconds4m 14s Super fund advisers are under attack from a raft of proposed regulations.(Nassim Khadem)

So how and where are these investors getting advice about how to vote?

There's a range of sources they can go to, but one of them is by using the advice of what's known as "proxy advisers". 

There are four proxy advisers in Australia — the Australian Council of Superannuation Investors (ACSI), CGI Glass Lewis, Ownership Matters and ISS — and they give big investors advice by way of written reports, as well as verbally. 

The advice given allows investors to make a decision on how to vote at AGMs, although it's not the only source of information they can use to make decisions. 

It played a big part in why, one week out from Christmas, Treasurer Josh Frydenberg stripped proxy advisers of their financial services licences.

"Australia has a highly concentrated proxy advice market, dominated by just four firms," Mr Frydenberg told ABC News.

"With more than $3 trillion in compulsory superannuation savings, fund members, investors and companies alike must be able to rely upon the independence, quality and accuracy of this advice."

Treasurer Josh Frydenberg has stripped proxy advisers of their financial services licences.(ABC News: Matt Roberts)

Under the Treasurer's new regulation, proxy advisers have until February 7 to apply for a new licence.

The granting of that licence comes with certain conditions which, if breached, come with hefty civil penalties. 

Mr Frydenberg said the changes would "close regulatory gaps and increase the transparency and accountability of proxy advice and the voting practices of superannuation funds".

"Superannuation funds rely on proxy advice to make decisions on behalf of millions of Australians who, through their superannuation, have invested their savings in listed companies," he said.

"Our reforms strengthen the integrity of our corporate governance regime, giving consumers and businesses greater confidence in proxy advice services and ensuring more consistent regulation across the financial services industry."

But Mr Frydenberg now faces a political battle.

Independent senator Rex Patrick, Labor and the Greens have all told ABC News that they will fight against the proposed rules when parliament resumes.

Senator Patrick said he will move a motion in the Senate to disallow these new regulations.

"Proxy advisors call out anomalous corporate activity and things like the overpayment of directors — understandably, they are an annoyance to company directors who would rather not have to deal with outside perspectives," he said.

"To my knowledge, there hasn't been a sustainable complaint against proxy advisors to ASIC."

Independent senator Rex Patrick says that, when parliament resumes, he will move a motion in the Senate to disallow the federal government's proxy advice regulations.(ABC News: Tamara Penniket)How the proxy adviser regulation came about

Proxy advisers have disrupted the state of play and some company directors — including Premier Investments chairman Solomon Lew and TechnologyOne founder and chairman Adrian Di Marco — have been vocal critics, airing concerns about their influence.

In 2017, corporate watchdog ASIC undertook a review of proxy advice. It found no regulation was needed and that shareholders should be free to exercise their right to vote.

But as the influence of superannuation funds has continued to grow, so too have the public and private complaints from company directors.

Over the past two years alone, there have been numerous high-profile cases of directors and/or key executives walking out the door off the back of vocal investor discontent.

It happened after Rio Tinto's destruction of the Juukan Gorge caves, it occurred after AMP promoted Boe Pahari to the senior head of AMP Capital despite him settling a sexual harassment case with his subordinate (he's since left the role), and it took place after failures at big banks including Westpac and CBA over reporting criminal and terrorism financing.

Juukan Gorge in 2013, left, and 2020. The destruction of the caves by Rio Tinto resulted in investor activism against the company and senior management walking out the door.(Supplied: Puutu Kunti Kurrama And Pinikura Aboriginal Corporation. Composite: ABC News)

While votes by investors usually don't result in a director being immediately thrown out of a company, a high-enough protest vote from super funds sends a clear signal that the people holding the biggest stakes in the company aren't happy. 

In April 2021, Mr Frydenberg announced a consultation that could lead to new regulation on proxy advice.

The Australian Institute of Company Directors (AICD) and the Business Council of Australia (BCA) had been getting complaints from individual directors about the accuracy of information given to investors by proxy advisers.

"The feedback we've had from listed [company] directors is they have very little time to reflect on the reports that the proxy advisors provide if they're provided at all in advance," AICD managing director Angus Armour told ABC News in June.

AICD chief executive and managing director Angus Armour says greater transparency is required when it comes to proxy advice. (ABC News: Daniel Irvine)

A Treasury paper suggested proxy advisers should be required to give the companies they're reviewing five days' notice of how they are advising shareholders to vote.

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It also suggested that super funds be required to make their voting records public, including where those votes were consistent with the advice of proxy firms.

The consultation occurred behind closed doors, with many of the submissions arguing there was no case for change. 

But in December, Mr Frydenberg announced he would strip proxy advisers of their license and the regulation being proposed now is far broader than what was in the April consultation paper.

New regulations could result in $11.3m fines for breaches

One key condition proxy advisers need to agree and adhere to in order to get their licence back relates to how and when advice is given.

The regulation states that they have to email a copy of their proxy report to the company involved on the same day that they give their client (the investor) the advice about how they should vote – whether that advice is verbal or in writing.

Another condition is a requirement that "proxy advisers be independent of their clients". This requirement is likely to cause players like ACSI some angst given its members are superannuation funds (although ACSI CEO Louise Davidson has long argued the advice they give members is independent). 

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The regulation suggests that the independent requirement "reduces the risk that one or a few investor clients could influence the voting decisions of competing investors" and that it also "reduces the likelihood that institutional investors will be able to determine or influence the adviser's approach to developing voting recommendations".

Failure to adhere to any of these conditions exposes proxy advisers to massive fines: $11.3 million at the corporate level for each offence and $1.3 million for individuals inside these firms, for each offence.

Independents, Labor and the Greens want to move to disallow the regulations

Senator Patrick described it as "disgraceful but unsurprising" that the Treasurer "timed the registration of this regulation in a break between sittings such that it has enduring effect before the Parliament has the opportunity to scrutinise it".

"On the first sitting day of 2022, I will lodge a disallowance motion asking the Senate to veto the regulation," he said.

Shadow Assistant Treasurer Stephen Jones indicated Labor would support a challenge to the regulations. The Greens have also said they would support a challenge.

"Labor is considering both the House and the Senate and will work with anybody who wants to reverse this regulation," Mr Jones said.

"There is zero public interest in what they [the government] are proposing to do. They've snuck this in on Christmas Eve.

"Clearly some of Josh Frydenberg's mates in the directors club have had a sook to him.

"It's the very worst of old school corporate. The new breed of entrepreneurs assume they operate in a world of continuous scrutiny and contest."

Shadow Assistant Treasurer Stephen Jones indicated Labor would support a challenge to the government's regulations.(ABC News: John Gunn)

Although the sector was given a chance to respond to the April consultation paper, the newly proposed provisions were not the subject of consultation.

The provisions' explanatory statement makes it clear that: "Stakeholder feedback on the consultation paper informed the development of these options and the options and the estimated regulatory burden have not been subsequently consulted on."

Proxy advisers say there's no basis for new regulations

Proxy advisers argue there is no basis for this regulation.

They point out that corporate watchdog ASIC has received complaints about just three proxy reports since 2018, out of the thousands of reports issued across the market during this time.

Ownership Matters co-founder and director Dean Paatsch — who has been a vocal critic of the government paying profitable firms the JobKeeper wage subsidy — said he was "disappointed that the laws have come out with such haste, and it's so poorly drafted it's impossible to work out".

Ownership Matters co-founder and director Dean Paatsch is "disappointed" in the laws drafted by the government. (ABC News: Michael Barnett)

Proxy advisers also argue that the government's changes are out of step with other countries such as the United States, which abandoned plans to regulate after the former Trump administration tried to introduce it.

 "These new rules could impact the ability for super funds to receive quality independent advice on the governance of Australia's largest companies," ACSI chief executive Louise Davidson said.

Australian Council of Superannuation Investors (ACSI) chief executive Louise Davidson says the government "provided no evidence for the need for regulation".(Supplied.)

She noted that "heavy-handed penalties if organisations or individuals don't comply" were made without consultation and Treasury's earlier April consultation paper "provided no evidence for the need for regulation".

"It is an unprecedented interference into the market, seeking to regulate how advisers should be owned and governed, with no international precedent or justification," she said.

"No harm has been identified to justify increased regulation of proxy advice. It seems these regulations were implemented in order to avoid scrutiny and parliamentary debate."

She argues that ensuring companies are delivering shareholder value is more critical now than it has ever been.

"These changes are not in the financial interests of superannuation fund members," Ms Davidson said.

CGI Glass Lewis senior vice-president and general counsel Nichol Garzon-Mitchell also expressed disappointment, saying the new regulations "run counter to the regulatory approach in most other jurisdictions".

CGI Glass Lewis senior vice-president and general counsel Nichol Garzon-Mitchell says the regulations "run counter to the regulatory approach in most other jurisdictions".(Supplied.)

"Impairing proxy advisers from generating revenue for their work-product and interfering with their relationships with their investor clients are not ways to promote a healthy system of corporate governance," she said.

Labor's Stephen Jones says the government is adhering to the expectations of the managers of capital (company directors).

But he says, "the owners of capital [investors] have a right to know what's going on".

In the past, there was no multi-billion-dollar supporter of that view. The growing influence of superannuation funds has changed that.

They are reinventing capitalism and whether you think that's a force for good or bad, it's created a political challenge for the government. 


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