Australasian IR group proposes proxy adviser code
The Australasian Investor Relations Association (Aira) has proposed a new code of conduct for proxy advisers and listed companies in an effort to address concerns over the way the two parties engage, according to Corporate Secretary sister publication IR Magazine.
Proxy advisers are ‘highly influential’ in the Australian market and it is in the interests of all parties to ‘address current criticisms,’ Aira says. The association says it favors a self-regulation approach where proxy advisers comply with the code or explain why they do not.
Proxy advisers offer advice to institutional investors over how to vote on shareholder resolutions. Investors often do not have the time or in-house expertise to consider all the resolutions put forward by companies where they hold a stake.
The industry hit the headlines in Australia last year thanks to a number of contentious votes. In one case, the departing chair of Mortgage Choice, Peter Ritchie, used a speech to lash out at advisory firms. Following recommendations against his board’s pay packet, Ritchie said ‘remote and closed-minded’ proxy advisers were ‘hurting Australia.’
Aira’s concerns about proxy advisers are similar to those voiced in other markets. They include the factual accuracy of reports; whether proxy advisers take a box-ticking approach to governance; and the potential for conflicts of interest within the industry.
In addition, Aira is worried about whether proxy advisory firms operating in the region are properly resourced. ‘There are concerns that external staff may not possess the depth of understanding necessary to produce the required quality of work,’ the association says in the proposed code.
Aira has put together its code for engagement after consulting with companies in Australia and New Zealand. It contains five principles:
• Proxy advisory research should be factually accurate
• Proxy advisory firms should be adequately resourced
• Proxy advisory firms should be provided with appropriate feedback
• Management of conflicts of interest
• Proxy advisory firms should report on a regular basis
In some cases, these principles would place responsibilities on both proxy advisers and listed companies. For example, proxy firms would be expected to offer companies the chance to review recommendations ahead of publication to check for factual errors, and companies would be expected to respond in one business day, unless a longer timeframe was agreed.
‘We are keen to promote our draft guidelines and will be encouraging all parties and the Australian Securities and Investments Commission (Asic) to adopt a version of them,’ says Aira CEO Ian Matheson. ‘Otherwise the issue is not going to go away.’
Matheson acknowledges that proxy advisers in Australia already hold the Australian Financial Services License, but says this does not cover all aspects of what they do. 'This makes it difficult for the regulator to go beyond the existing requirements,' he says.
Ownership Matters, a boutique Australian proxy adviser, pushed back strongly against the idea of a code of conduct when contacted by IR Magazine. Dean Paatsch, a director at the firm, says no further regulation is required because proxy advisers are already licensed.
He labels proposals for proxy advisers to submit draft reports to issuers and to avoid commenting in the media as 'Orwellian.' 'The Aira code will never see our signature on it,' Paatsch says.
Institutional investors, proxy advisers and listed companies met last week under the Chatham House Rule – which limits reporting on gatherings - at Asic to discuss how proxy advisers should be regulated and the approaches taken in overseas markets.
Europe has adopted a system of self-regulation. In 2013, the European Securities and Markets Authority decided that direct regulatory intervention was not required and encouraged the proxy advisory industry to develop its own code of best practice.
The following year, a group of proxy advisers developed the Best Practice Principles for Providers of Shareholder Voting Research and Analysis. Some of the global proxy advisers operating in Australia are already signatories to this set of principles.
Lawmakers in the US, by contrast, have proposed the Proxy Advisory Firm Reform Act, which would require proxy advisers to follow certain procedures and make disclosures about their methodology and resources to regulators.
In response to the proposed regulation in the US, Glass Lewis, one of the industry’s main players, said it was particularly concerned that the bill would require the release of draft reports to issuers and for advisers to meet with issuers about the recommendations.
These provisions ‘will infringe upon the firm’s ability to independently analyze the issues and to make unbiased voting recommendations to clients,’ Glass Lewis CEO Katherine Rabin wrote in a submission to the Subcommittee on Capital Markets and Government Sponsored Enterprises last year.