Josh Frydenberg’s regulations targeting proxy advisers a strange priority

This opinion piece was originally published in The Australian on February 6th, 2022.

The pandemic has taught us many things, not least of which is to expect the unexpected.

With the nation focused on the profound health, social and economic complexities that Covid-19 has presented, Josh Frydenberg found the time to target the proxy advice industry with his own pre-Christmas surprise.

The Treasurer’s new regulations that seek to determine who can own proxy advisers were announced eight days before Christmas, with no industry consul­tation or parliamentary scrutiny.

There are serious questions about the timing and wisdom of making this a policy priority given it could adversely affect the financial interests of superannuation fund members.

Proxy advisers play a crucial role in facilitating informed shareholder voting at listed company meetings on a range of financially material issues.

The work of the Australian Council of Superannuation Investors has focused on helping investors navigate material environ­ment, social and governance issues.

That’s because there is a financial impact when companies fail to manage ESG risk, such as when executive pay gets out of hand or where there are issues like those exposed during the financial services royal commission.

Attempts to hamstring advice that is independent of company directors undermines the financial interests of millions of investors and superannuation fund members whose money is invested in these companies. The new regulations targeting the proxy advice industry are not only a ­solution searching for a problem, they misrepresent current practice.

For the hundreds of AGMs that are held by ASX-listed companies annually, investors are confronted with huge volumes of complex financial information. Proxy advisers like ACSI provide cost-effective research and non-binding advice to help investors and fund managers sift through thousands of resolutions.

ACSI engages with companies and provides research and voting recommendations to strengthen accountability and transparency of corporate governance processes. ACSI has strongly advocated for better governance of companies such as AMP, Rio Tinto and Westpac. Organisations like ACSI help hold companies to account for events like the money laundering in banking that is alleged to have funded child sex abuse.

Controversially, these new rules go so far as attempting to regulate the ownership, governance and even professional networks of proxy advisers – a sig­nifi­cant overreach with no rationale.

Before these new regulations were announced, there were already strong legislative protections to support the provision of quality proxy advice. Superannuation funds are required to act in their members’ best financial interest and they make their own independent voting decisions. The advice ACSI provides is just that – advice. It’s up to investors how they use this advice, along with the other sources of information that help them make voting decisions.

No harm has been identified to justify the new rules, nor the speed at which these regulations were introduced.

The regulations come with absurd and disproportionate penalties. A single failure to provide a copy of a proxy advice report to the company on the same day it is issued to clients could attract a fine of up to $11.3m.

These penalties don’t add up, especially given the system is already working well.

The Australian Securities & Investments Commission has reported it had only three complaints about proxy advice since 2018. Even the government’s own Office of Best Practice Regulation, sitting inside the Department of Prime Minister and Cabinet, found the regulations were “not consistent with good practice” and that there has been a failure to demonstrate why the regulations were necessary.

When asked by Treasury, the overwhelming majority of stakeholders didn’t support the need for further regulation. Not even the Business Council of Australia and Australian Institute of Company Directors supported the most controversial aspects, which seek to regulate ownership, governance and professional networks of proxy advisers.

All this without the proper scrutiny of parliament and without even an exposure draft of the regulations. In short, the process has been lacking in transparency.

These regulations also go against international trends on how to regulate the industry, with no international precedent for mandating ownership of proxy advisers. International regulation of proxy advisers is more sensibly focused on codes of conduct or concerned with disclosure and genuine conflicts of interest. That is, the potential conflict created by relationships between the proxy adviser and the companies that are the subject of their advice, given the important role in providing advice that seeks to protect the assets of millions of investors.

It’s worth remembering that it was not shareholders, super fund members or proxy advisers that were criticised by the royal commission for wrongdoing.

ACSI is not against sensible regulation. But given there has been no actual harm established, it’s difficult to see how rushing through regulations that add red tape and seek to restrict advice that supports the financial interests of millions of superannuation fund members could be a priority in these uncertain times.

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