Directors would have you believe proxy firms are running the show. Photo 123rf
Directors would have you believe proxy firms are running the show. Photo 123rf
OPINION:
If there's one group of Australians who don't need protection from the government it's company directors and chief executives.
Yet the government is stepping in to help this well-heeled and well-connected group avoid scrutiny of how they're running their companies.
In a move harming investors at the expense ofexecutives and directors, the government plans to curtail the power of proxy advisor firms. These firms research companies' performance and governance and advise investors how to vote at annual general meetings. This often involves taking positions on remuneration resolutions and environmental, social and governance concerns.
Importantly, all of their advice on how to vote at an AGM is just that – advice. Investors who pay to receive their research are under no obligation to follow it and often don't. But proxy firms are influential enough to play a crucial role in Australia's share market. Ownership Matters, the well-regarded proxy firm headed by Dean Paatsch, explains their role.
"Investors should not give their trust recklessly," the firm said in its submission to the government arguing against the changes. "Capital markets serve us better when trust is earned, not assumed, and where it is tested regularly.
"We look to highlight the risks associated with companies making or presenting aggressive accounting judgements; where ropey earnings numbers might trigger windfalls for executives with poorly designed incentive structures and where these arrangements are overseen by complacent or poor performing boards."
Under the plan, proxy advisors will be required to give their research to the companies they're looking at before they give it to their paying customers. They would also have to give companies five days to respond to their findings and share the responses with their customers.
It threatens proxy firms' independence, because pre-publication of their research would allow companies to try to censor the reports, through harassment or threats of litigation.
Equity analysts who place buy, sell or hold recommendations on stocks don't have to submit their work to the companies they're researching before they give it to clients. That would be considered outrageous. Requiring proxy advisors to do so is equally so.
Additionally, proxy firms have only a few weeks between a company releasing the list of matters to be voted on and its AGM. Compressing that timeframe will hamper proxy firms' ability to do an effective.
If proxy firms do so much to help investors ensure companies are well run, and help make directors and executives accountable for their decisions, why would the government seek to hobble them?
The answer is a concerted campaign by the directors and executives, through their lobby groups, the Australian Institute of Company Directors and the Business Council of Australia.
They clearly don't relish close scrutiny of their performance, and particularly their pay; proxy firms' focus on executive remuneration has ensured the cosy director and executive cabal hasn't been able to push its pay up as excessively as their overseas counterparts. The Government is also unlikely to be impressed by proxy firms putting pressure on companies to outline their climate risks and disclosures. Scott Morrison and his cronies accept the reality of global warming grudgingly.
Treasurer Josh Frydenberg said the government was committed to increasing the transparency and accountability of proxy advice. Photo / Bloomberg
The government also doesn't like that proxy advisor The Australian Council of Superannuation Investors is owned by industry superannuation funds. These funds represent industry groups such as higher education, building and healthcare and are run by the unions. The government plans to block proxy advisors from having links to superannuation funds, a move motivated by ideology.
Directors would have you believe proxy firms are running the show. In reality, directors get their way most of the time.
In its submission opposing the changes, Ownership Matters says in its nine and a half-year history some 17,392 resolutions from ASX-200 companies were put to investors at company meetings. Just 352 of those failed to pass. In all that time, only six directors have failed to regain a board seat when it went to a vote.
Rather than influencing the outcomes of company meetings and elections, the proxy funds work by better informing investors and effecting change by liaising directly with companies, outlining where their governance and disclosures could be improved. For instance, many companies are informing the market about their vulnerabilities to climate change risk and their emissions positions thanks to pressure from proxy advisors.
If the changes go through, super funds will be less aware of the performance of companies they have invest in. Funds will be less informed when it comes to voting at annual meetings, and therefore do a poorer job for the investors they represent.
Introducing the change, Treasurer Josh Frydenberg said the government was committed to increasing the transparency and accountability of proxy advice.
But this is what proxy advice is all about – increasing transparency and accountability of companies and the people who run them.
If Frydenberg's plan goes ahead, investors will be the losers.
