Proxy advice may increase costs: Dimensional

If proxy advice reforms go ahead, they will risk compromising the independence of proxy advisers and are likely to increase costs which may ultimately be passed onto Australian “mum and dad investors”, according to Dimensional Fund Advisers. 

It its submission to Treasury about proxy advice reform, the key point of contention in the Treasury paper was “Option 3”, which would require proxy advisers to provide reports containing their research and voting recommendations to the relevant issuer (ASX-listed companies) before they were distributed to the proxy adviser clients. 

“In view of the potential costs and delays associated with ‘Option 3’, we believe that requiring proxy advisers to provide their reports to issuers before distributing them to their clients is unnecessary, because it runs the risk that proxy advisers will lose their independence, is likely to increase costs for proxy advisers and their clients, and would cause undue delays in proxy adviser clients receiving reports that could have very negative potential consequences,” the submission said. 

The firm’s view was that requiring proxy advisers to distribute their research and voting recommendations to issuers in advance of publication to clients was unnecessary. 

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“In our experience, the data we have received from the multiple proxy advisers we use has been high quality, and generally, we have not observed material errors in the proxy analysis we have received,” it said. 

“Further, we believe an important reason to use research from proxy advisers is that they are independent from influence of the issuers that they are reporting on. 

“Requiring proxy advisers to provide reports to the relevant issuer before they are distributed to clients creates the risk that proxy advisers may lose this independence.” 

It said higher fees could result from the changes if proxy advisers had to provide their reports five days before making it public as those days would have to come from the 10 days that advisers usually had to produce their reports or the 10 days that clients had to review the reports. 

“If proxy advisers are required to produce their reports on an even more compressed timeframe, we believe that this may negatively impact the quality of these reports and will require more resources, which will lead to additional costs for proxy advisers,” it said. 

“These costs are likely to be passed on to proxy adviser clients and ultimately borne by end investors.” 

The Australian proxy reform examination underway was similar to one in the US, where in late 2019 the Securities and Exchange Commission (SEC) proposed that proxy advisers provided their research and recommendations to the companies they reported on before sending them to the asset managers who pay for the research. 

Dimensional said it lobbied against those changes and managed to secure significant amendments, which included: 

• Proxy advisers only had to provide companies with a copy of their research report at the same time as it is provided to their clients of the proxy adviser, so that companies had an opportunity to identify factual errors or issues; 
• Proxy advisers would also notify clients if they were advised by a company that it intended to file a response to the reports; and 
• Proxy advisers would include a hyperlink that allowed investors to access the written views of the company regarding the advice once the company’s response was available.