Apparently borrowing a page from the regulatory playbook of the U.S. Trump Administration’s SEC, the Australian Treasury has asked for comment on a series of “reforms,” including mandating that proxy advisors clear their advice with Australian companies before delivering it to their institutional investor clients. The policy would disenfranchise investors, giving them less time to consider their votes on important governance matters and threatening the integrity of the research they pay for. This bad idea was abandoned in the U.S. after widespread opposition last year, and makes no more sense in the Australian market. Treasury’s other proposed options also pose potential threats to the independence, timeliness, and cost-effectiveness of proxy advice.

Glass Lewis’ clients depend on us for timely, expert, and independent advice to assist them in voting shares on behalf of their clients and beneficiaries in a cost-effective way. Because some of the regulatory options put forward in the Treasury’s Consultation would threaten proxy advisors’ ability to serve this critical role for their clients, we encourage asset owners and managers, as well as other stakeholders, to read the Consultation and weigh in with the Treasury by the June 1, 2021 comment deadline.

Overview of the Consultation

The Treasury seeks stakeholders’ views on regulatory options in three areas –

  • “[I]mproving independence of proxy advisers for the purposes of ensuring superannuation funds are held to the highest standards of governance and transparency.” Specifically, Treasury seeks comment on two options –
    • Option 1: “Improved” disclosure of superannuation fund trustee voting, including “[i]f proxy advice is received, . . . whether the voting actions taken were consistent with the proxy advice.”
    • Option 2: “[P]roxy advisers would be required to be meaningfully independent from a superannuation fund they are advising to ensure that proxy advice is provided to and used by superannuation funds on an ‘arm’s length’ basis.”
  • “Facilitating engagement between companies and proxy advisers.” Under this heading, the Treasury seeks comment on two options –
    • Option 3: “[P]roxy advisers would be required to provide their report containing the research and voting recommendations for resolutions at a company’s meeting, to the relevant company before distributing the final report to subscribing investors. For example, a period of five days prior to the recommendation being made publicly available would give enough time for both the company and proxy adviser to comment and for the proxy adviser to amend the report in response if warranted.”
    • Option 4: “[P]roxy advisers would be required to notify their clients on how to access the company’s response to the report. This could be through providing a website link or instructions on how to access the response elsewhere.”
  • “Require suitable licensing for the provision of proxy advice.” Treasury proposes one option in furtherance of this objective –
    • Option 5: “[P]roxy advisers would be required to obtain an AFSL for the provision of proxy advice. The purpose of the license would be to ensure that proxy advisers are making assessments on issues that have a material impact on the conduct of business in Australia with appropriate regulatory oversight and the necessary care and skill required.”

Analysis

We recognize that the Consultation merely aims to “assess the adequacy of the current regulatory regime and help develop reform options that would strengthen the transparency and accountability of proxy advice.” At the same time, we are concerned about the lack of any identified evidentiary basis for the proposed regulatory changes. While transparency, independence, and competence are all important attributes of proxy advice, the Consultation lacks any evidence of problems in these areas that it is trying to address.

  • The Consultation notes that “there are only four main proxy advisers operating in Australia,” which the Treasury asserts gives these proxy advisors “a high degree of influence in the outcomes of company resolutions.” In fact, in 2018, ASIC, the Australian securities regulator, undertook a detailed, multi-year consultation and field study of the operation of proxy advisors in Australia and concluded that empirical evidence “appears to suggest that concerns regarding the extent of influence of proxy adviser recommendations on the voting outcomes of company resolutions is overstated.”
  • The Consultation cites international developments, referencing in particular the U.S. SEC’s recent proxy advisor rulemaking and the UK FCA’s proxy advisor regulations. But, as further discussed below, even the divided SEC abandoned its proposal to require company pre-review of proxy advice as part of its controversial rulemaking. Nor does the UK FCA mandate advance review of proxy advice. In fact, like many other countries, the UK FCA’s approach builds on the 2013 recommendation of the European Securities and Markets Authority (ESMA) for the proxy advisor industry to develop a code of conduct, to be applied on a comply-or-explain basis. This model, now operationalized through the Best Practices Principles Group and its Best Practices Principles for Shareholder Voting Research, is increasingly looked to in a number of jurisdictions, but not discussed in the Consultation.
  • Finally, the Treasury notes that “[b]usiness representative groups have raised the importance of companies being able to engage with proxy advisers.” As ASIC found, however, “the policies of all the proxy advisers appear to reflect . . . a willingness to engage with companies and make a copy of their report available to companies either prior to or after publication [and] a willingness to receive feedback from companies in relation to potential factual errors and to correct material factual errors.” In fact, companies had the opportunity to engage in at least 95% of the cases of “against” recommendations ASIC studied across the four main Australian proxy advisors.

Turning to the Treasury’s proposed solutions, Option 3 presents the most obvious concerns. Company pre-review of proxy advisor recommendations threatens to impair proxy advisor independence and the time institutional investors have to consider proxy advice, engage with companies, and determine how to vote.

This issue was thoroughly explored as part of the recent U.S. SEC proxy advisor rulemaking. After a divided SEC proposed company pre-review of recommendations, institutional investors expressed significant concern that the practice would risk compromising their ability to obtain proxy advice based on their selected policies and submit their votes, as well as imposing significantly increased and unnecessary costs. As the Council of Institutional Investors put it: “We believe the proposed company review and feedback period and notice requirements will substantially detract from the timeliness of the final publication of the research reports and, as a result, will likely be highly disruptive to institutional investors voting of their shares.” The logistical challenges and costs of administering these processes would be exacerbated by the intense seasonality of the proxy advice business. This is especially true in more fluid situations, such as M&A and contested director elections, in which proxy materials may be frequently amended up to the time of the meeting. Mandatory company review and feedback at some times of the year and in some circumstances simply may not be workable.

The proposed recommendation also threatens a key attribute institutional investors look for in a proxy advisor – independence. Many investors questioned why the government would mandate that a third party review advice they have contracted for, and paid to receive, before they can even see it. In addition, by mandating both company pre-review and the promotion of company responses, the Consultation’s options would give company management two opportunities to try to influence the work of or even retaliate against proxy advisors who recommend against their proposals. (As a dissenting SEC Commissioner succinctly explained, the proposed rules were “a tax on firms who recommend that shareholders vote in a way that executives don’t like.”) Many investors complained to the SEC that the previously objective advice they paid for would now be potentially skewed or conflicted. As a prominent U.S. institutional investor put it during the SEC rulemaking process: “While proxy advisory firms should, and do, have procedures in place to mitigate any potential conflicts of interest, I can conceive of no conflict of interest more insidious than the one created by a Proposal that would grant a company that is the subject of proxy voting advice the right to review and provide feedback on that advice.”

In fact, as in the U.S. rulemaking, Option 3 would create the arbitrary result that Australian proxy advisors would be mandated to share their research reports with companies before issuing them, while investment research report providers are from doing the same thing. As commentators have noted, ASIC Regulatory Guide 79 (“Research report providers: Improving the quality of investment research”) specifies that research reports go first to clients and that any fact-checking with a product issuer before it goes to clients must be “done in a carefully controlled way (e.g. without communicating the recommendations or opinions also contained in the report).”

Company pre-review may be the most problematic option put forward, but it is not the only one that raises concerns. While a full discussion of the other options is beyond the scope of this blog post, we note the following with respect to some of those options –

  • Option 1: Improved Disclosure of Trustee Voting – While disclosure of voting is an established and accepted practice in Australia and a number of other jurisdictions, the Treasury seeks comment on extending disclosure requirements to whether the fund received proxy advice, who provided that advice, and “whether the voting actions taken were consistent with the proxy advice.” No explanation is provided for why these disclosures would be useful to fund members or how these disclosures would work. Investors often subscribe to more than one proxy advisors’ reports. In addition, a significant majority of Glass Lewis’ clients have their own custom voting policies and Glass Lewis’ “advice” is specifically tailored to that client based on its unique policy. Disclosure of whether a particular institutional shareholders’ voting actions were consistent with custom advice it received would not be comparable to other shareholders’ voting records and more misleading than informative. Other jurisdictions, such as the UK through its Stewardship Code, have framed proxy voting disclosure requirements in a broader and more principles-based manner, allowing investors to choose how to present the information in a meaningful way in accordance with industry norms.
  • Option 2: Demonstrating independence and appropriate governance – The Consultation suggests that a proxy advisor, at least for a superannuation fund, must be independent of that fund so that proxy advice is provided “on an ‘arm’s length’ basis.” While conflicts avoidance and disclosure is an important attribute of proxy advice, this has never, to our knowledge, been held to mean that a proxy advisor must be independent of its clients. (Glass Lewis itself was previously owned by two institutional investors, who were also its clients.) In fact, the notion that proxy advice must be provided “on an ‘arm’s length’ basis” would seem to call into question the routine practice of an institutional investor’s own staff providing advice on proxy matters.
  • Option 4: Make Materials Accessible – While it is not clear exactly what the Treasury has in mind here, we question the need for a new regulation on this topic in light of current ASX mechanisms and past and current market practices. As ASIC noted in its 2018 report, companies that disagree with proxy advice have always been able to “respond to the matter by way of an ASX announcement or other communication to investors.” In addition, in 2019, Glass Lewis introduced the Report Feedback Statement (“RFS”), through which companies that purchase Glass Lewis’ research reports can opt to have a statement responding to Glass Lewis’ research transmitted to Glass Lewis clients through its client and voting platforms. The Report Feedback Statement provides a unique opportunity for corporate issuers and shareholder proposal proponents – the subjects of Glass Lewis’ research reports – to submit feedback about the analysis of their proposals, and have comments delivered directly to Glass Lewis’ institutional investor clients. Even if there were a basis for regulatory intervention, any regulation on this topic should not be so prescriptive as to inhibit developing market practices.

Next Steps

The Consultation is only open for a short 30-day comment period. We strongly encourage the investment community to express its views to the Treasury by the comment deadline of June 1, 2021.

Comments can be submitted electronically to MCDproxyadvice@treasury.gov.au.