Frydenberg’s nod and a wink to the executive class harms not helps investors

Josh Frydenberg’s attack on proxy advisers feels distinctly like a nod and a wink to directors and executives at the big end of town whose feathers get ruffled when these firms provide unpopular advice to institutional investors on how to vote on company resolutions.

It’s not the only helping hand the government has provided to big companies in recent months – as it follows on the heels of the watering down of the continuous disclosure regime. This in turn limits the ability for class action firms to chase companies that have been tardy with providing price sensitive information to shareholders.

Josh Frydenberg’s protection of the executive class is shortsighted.Credit:Jessica Hromas

Ultimately both these measures provide another point of erosion in the process of applying corporate checks and balances. This runs contrary to the enhancement of better informed and functioning capital markets.

There has been plenty of commentary about the government’s agenda of hobbling proxy advisers being an attempt to limit the power of the trade union based industry funds that dominate superannuation in Australia.

The proxy firms represent a small but important cog in the wheel of corporate accountability and governance.

They provide to their large institutional investor clients a detailed analysis of the merits of voting resolutions being put at shareholder annual meetings. Those clients are not required to take the advice and regularly don’t.

The overwhelming majority of resolutions put to shareholders for a vote at annual meetings are approved – there has been no avalanche of investor pushback that can be sheeted home to the influence of proxy advisers.

Proxy firms are not governance culprits armed with agendas that threaten the proper functioning of markets. For the most part, their voting recommendations are pretty tame – and to the extent they diverge from the board’s voting intentions it is most commonly in relation to executive remuneration reports, the appointment of directors because of corporate underperformance, poor conduct or problematic governance structures.

The upshot of having proxy experts apply their skills to challenges, for example, of excessive remuneration has played a part in reducing pay blowouts that has been a feature in other countries.

To the extent that these firms have called out governance weaknesses such as with Crown Resorts or cultural shortcomings (Rio Tinto), they are not welcomed by company boards.

Of course holding companies to account has resulted in their pushback. That is understandable self-interest.

But the practical effect of the government’s changes to proxy firms is to undermine their business model.

But for a government that has mandated Australian workers into high levels of superannuation, it is antithetical to propose regulation that in any way threatens to weaken disclosure or governance of the companies in which this superannuation is invested.

When it comes to the treasury’s consultation on proxy firms, the stated objective of toning up the rules is to create more transparency about the small number of firms that operate in the space.

Rio Tinto CEO Jean-Sebastien Jacques resigned following the Juukan Gorge cave disaster.Credit:Bloomberg

But the practical effect of the government’s changes to proxy firms is to undermine their business model.

Proxy firms have a limited time frame in which to act – in the few weeks between when a company announces its voting resolutions to the time shareholders need to furnish their voting intentions. The proposal to give companies five days to respond to the proxy firm limits the time they can undertake their analysis.

The government is proposing that before the proxy firms send their advice to their clients (institutional investors) they must first send it to the subject company for response. In turn that response must be made available to investors. In other words, the company gets a right to refute.

Stockbroking analysts also provide advice to shareholders on companies – which are usually accompanied by a trading recommendation. There is no onus on analysts to run their reports by the companies that are the subject of the report.

The reality is that brokers and proxy advisers do often have informal discussions with companies.

But the expert analysis that both these groups provide is a useful tool for investors to make informed decisions on companies in which they invest.

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