Proxy-advice reforms flawed

The recently announced proxy advice reforms are flawed due to the way the laws were enacted, the policy motivations behind them and the changes themselves, according to Morningstar’s analysis.

The changes, which according to treasurer Josh Frydenberg were aimed to encourage greater transparency and accountability of proxy advisers, had placed the undue pressure on the sector instead.

The analysis stressed that, for example, the main proxy advisers in Australia had already Australian financial services (AFS) licenses, but without notice, they were revoked by operation of law.

“Proxy advisers have until 7 February, 2022, to obtain a new one. The conditions on which the new AFSL will be granted are more onerous and far-reaching than those for the previous AFSL. If proxy advisers do not agree to those conditions, then they have no new licence and no business after 7 February,” Morningstar said in a report.

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Under the new regime, proxy advisers would need on the same day share their advice to institutional shareholders clients with the specific companies they were advising on. However, according to the study, in many cases proxy advisers were already providing their advice to both the clients and the companies, just not on the same day.

“However, note the sanctions attached to noncompliance: Civil penalties of $11.3 million and $1.3 million could be sought by Australian Securities and Investments Commission to proxy firms and individual advisors, respectively, who deliver their advice late,” the report read.

Following this, the independence requirements for proxy advisers would mean that those business models did not currently meet the independence requirements would need to either restructure the way they operated or disbanded and those that exited the industry would likely move in-house and the additional costs would ultimately be borne by the superannuation members via higher fees.

“In our view, these reforms appear to change little on the corporate governance front but have ramifications to the operation of the industry itself,” it said.

“There are four major proxy advisers operating in Australia: ISS; Glass Lewis; Australian Council of Superannuation Investors, or ACSI; and Ownership Matters. Due to ACSIs unique operating structure —their board is made up of a subsect of its members who are also their clients—ACSI will falter under these reforms unless it can find a new operating model that is legally compliant with its extended AFSL requirements.”

The firm further stressed the new regulation would also indicate who can and cannot be employed by any proxy adviser which would make it difficult for someone who had worked for a superannuation fund or fund manager to satisfy independence requirements to enable you to work for a proxy-adviser firm.

“No justifications are given for these restrictions, saving ensuring independence. Ironically, no such restrictions apply to the employees of our public regulators and regulated entities, where shifting between public and private-sector employment occurs with some regularity,” it said.

The research house also questioned the manner of the reforms’ enactment, which had added “to the sense of unease” as the reforms were not passed through the Parliament.

The analysis also stressed that that although some similarities in regulation changes with the US existed, Australian changes went much further.

“These changes whether intentional or not, act as barriers, making it more difficult to operate a proxy advice business. This has implications for active ownership, which primarily entails proxy voting and engagement, growing in significance as an investment tool,” the report said.

“It allows shareholders to lend their voices to issues that they believe must be addressed in order to secure long-term investment performance. It has therefore become a core component of sustainable investing, and it challenges the status quo.”