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Worries over the planned proxy rule changes in Australia

The Australian Treasury recently issued a consultation paper on changes to proxy advice that mirror some of the proposals issued under the US Trump administration. To us, the new rules are founded on a misguided notion that the proxy voting sector lacks transparency.

We believe that the rule changes would, if anything, undermine the rights of asset owners to vote as they wish and give companies undue influence on proxy recommendations and outcomes.  

We recently made a submission to the Treasury consultation outlining our concerns as to why this is not in the best interests of our clients or the market more broadly. We outline the key points of our submission below.

Proxy voting is a core element of our active ownership approach

We have long believed that it is our job as fiduciaries to make a stand where we see an issue which could detract from good governance, sustainability, and investor outcomes. Annual General Meeting (AGM) season (typically October to December in Australia) is a critical time to re-emphasise our stance regarding a board’s progress on ESG matters through engagement and the voting of proxies.

In order to vote proxies for our clients, we do our own internal assessments of boards and management with a comprehensive investment process which includes our actions taken in relation to voting for AGMs and shareholder resolutions. We supplement this with the input of external providers to provide additional insight to company financial accounts, AGM resolutions and assessment of directors who are up for re-election.

Unlike what is being suggested by the Treasury rules, we do not agree with the premise that institutional investors that use proxy advisors are overly influenced by the research provided by them.

The reality is that we frequently disagree with the views of our proxy advisors. In 2020, we voted differently to the proxy advice provided in 12% of resolutions. And where we did agree, it was often for different reasons than those stated in the proxy advisor report. Ultimately, our voting is undertaken based on an assessment in the best interests of our clients.

Sharing recommendations with companies in advance may compromise independence 

The Treasury has suggested a number of changes, one is that proxy advisors should provide their report containing the research and voting recommendations to the relevant company before investors.

We do not agree with this approach.

Directing the distribution of independent research recommendations to issuers in advance of its release compromises the expectation that this research will be independent of the issuer. 

We also do not want to see undue costs and time delays added to the process of proxy advisors. Independent researchers should be able to rely on a company’s public documents and meetings with company executives, without any requirement to provide them with draft research in advance. 

Increased costs from additional regulation will impact returns for investors. Given the Government and regulator focus on affordable, low-cost superannuation, we are concerned about the increased costs of proxy regulation.

The ASX is already established as a forum to enable issuers to provide continuous disclosure to an informed equity market. A company can make an announcement on its website or via the ASX and does not require the proxy adviser to do so.

Proxy advisors are already well regulated

Proxy advisors are in a competitive industry. Our preferred advisors engage regularly with ASX-listed companies and include the issuer’s views on AGM proposals. We also value the fact that our Australian proxy advisor has an Australian Financial Services licence (AFSL) as it relates to providing credible insights regarding the company’s financial accounts and AGM resolutions.

What we expect is for ASIC to continue to regulate the proxy advisors such that if a proxy advisor is found to not show professional conduct or independent research, then in a manner similar to other regulated entities, the license to operate is reviewed and remediation actions are taken.

To require additional licensing would be regulatory overkill. The best analysis is driven by excellent financial research and each analysis of resolutions at AGMs or EGMs always contains opinion about the company’s historical or forward-looking financials.

We also note that the ASIC review of proxy adviser engagement practices in June 2018 was extensive, and concluded that:

“voting allows shareholders to express their views on important issues as well as hold the Board to account for the company’s performance”.

This is central to why we have our own investment team and access to multiple proxy advisors who can add valuable and independent insight.

Inertia and increased influence of company directors on proxy recommendations

Finally, one of our key issues with this consultation paper is that it is focussed on the wrong issues.

The extremely low 4-7% ‘Vote Against Management’ average by shareholders for ASX company resolutions[1] highlights that inertia, exacerbated by the shift to passive investment management, is a bigger issue than a so-called lack of transparency from proxy advisors.

Our challenge as an institutional investor is to hold boards and management to account. This can only be done via independent research and good financial accounting insight. In 2020, we voted against management in 12% of resolutions[2], well above the ASX historical average. Our team also conducts over 1,000 meetings with company management each year, and our long history of constructive engagement between our investors and management teams places us in a strong position to be proactive and effect change.

Our biggest concern is that the implementation of the Australian Treasury’s change could instead exacerbate influence of company directors on proxy recommendations, the reverse of the consultation paper’s objectives.

We do not want to see any change that increases the ability of company directors to prevent independent scrutiny of their governance practices and behaviours.

 

Will Baylis is a Portfolio Manager at Martin Currie Australia. Martin Currie is the manager for the Legg Mason Martin Equity Income Fund, also available as an Active ETF (Managed Fund) ASX:EINC. Martin Currie is a Franklin Templeton specialist investment manager, and Franklin Templeton is a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any individual. Past performance is not a guide to future returns.

For more articles and papers from Franklin Templeton and specialist investment managers, please click here.

 

[1] Source: Martin Currie Australia, ASIC; as of 31 December 2020. Average against vote by resolution type by ASX 200 company shareholder, simple average of each type. 5% in 2016, 4% in 2017, 7% in 2018 (based on Figure 6 in ASIC REP 609 Annual general meeting season 2018.)

[2] Source: Martin Currie Australia. In 2020, for the 972 resolutions for stock holdings in portfolios managed by the Martin Currie Australia team, we voted against management in 116 resolutions.

 

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