Explainer Series: Proxy voting and proxy voting advisers
Greg Liddell, Director - Responsible Investments, BetaShares
On December 16th 2021, the Federal Government introduced an amendment to regulations covering the provision of proxy advice and the disclosure of proxy voting by institutional superannuation funds. This article looks at proxy voting practices in Australia and the role of proxy advisers.
What is Proxy Voting?
The ownership of a share in a company gives the shareholder the right to vote on company matters, typically at the company’s annual general meeting (AGM). Because few shareholders attend AGMs in person, voting is done by completing a proxy form or ‘card’, which instructs the company’s secretary, or an appointed proxy solicitor, on how the shareholder wants those shares to be voted at the meeting for each of the various resolutions.
Where originally the system was paper based, practically all proxy voting is now done via electronic proxy voting platforms which link company share registries with shareholders, custodians, and proxy voting advisers. Shareholders vote on a range of matters including the approval of financial reports, the election of non-executive directors, the approval of takeovers and mergers and the ratification of the appointment of auditors.
In some jurisdictions, particularly the USA, shareholders can propose resolutions. The extent to which these are binding on boards and management varies from jurisdiction to jurisdiction. Australian law does not allow shareholders to propose advisory resolutions, hence shareholder resolutions need to be framed as resolutions to approve changes to the company’s constitution.
History of Proxy Voting in Australia
The first company shareholder meeting in Australia was to elect the initial directors of the Bank of New South Wales in February 1817. However, for most of Australia’s corporate history minority shareholders were disengaged from the governance of the companies they invested in, and prior to the 1990s few minority shareholders took an active interest in voting proxies. Company boards and management were left to run businesses with little input from or regard to minority shareholders.
A number of things changed that situation.
Firstly, there were several highly publicised company failures which highlighted the risks of poor corporate governance. These included Polly Peck and the Maxwell/Mirror Group in the UK, and later Enron and WorldCom in the USA and HIH in Australia.
Secondly, a number of institutional fund managers, most notably Peter Morgan at Perpetual, were prepared to be openly critical of poorly performing boards and encouraged the active voting of proxies to address deficiencies in corporate governance. This was arguably the real genesis in this country of what we now refer to as active ownership, engaging with companies and voting proxies to encourage good governance practices and long-term value creation for shareholders.
The final change leading to the growth in proxy voting by minority shareholders was the growth in responsible investment, leading to the formation of the Principles of Responsible Investment (PRI), sponsored by the United Nations, in 2006. In Australia, industry superannuation funds were early signatories to the PRI, and fund managers wishing to market to those funds soon followed suit.
An important milestone in Australian proxy voting was the 2009 Productivity Commission Report on Executive Remuneration. Following the global financial crisis there was considerable concern expressed by shareholders, the media, and the public about the apparent disconnect between the level of executive remuneration and worker salaries and company performance. The Commission’s report ultimately led to the ‘two strikes’ rule which can force an entire Board to face re-election if the advisory vote on the company’s remuneration report receives a ‘no’ vote of more than 25% two years in a row.
In 2011, the first year of application, 108 companies received a ‘first strike’, of which ten companies subsequently received a ‘second strike’ in 2012. This led to spills on three boards.
While originally intended to address concerns in relation to accountability for executive remuneration, the advisory vote on the remuneration report has become a mechanism that allows minority shareholders to express dissatisfaction with the performance of company boards and executives. As time has passed, minority shareholders have become increasingly willing to use the advisory vote on the remuneration report to voice their opinion on issues which come under the broad heading of ‘social licence to operate’. This includes for example, the behaviour of banks and insurance companies brought to light by the Royal Commission into Financial Services, the destruction of indigenous heritage sites, and poor conduct such as sexual harassment and discrimination.
What is a Proxy Adviser?
The role of proxy adviser grew out of the demand from asset owners and fund managers for research and advice on proxy voting issues.
Many AGMs typically take place in a short period of time in the second half of the year. Australian fund managers and institutional asset owners need to make decisions on voting with regard to hundreds of companies and thousands of resolutions in a six-week period in October and early November, known as the ‘proxy season’.
Proxy advisers play an important role in informing shareholders whether a company is acting consistently with best practice and making recommendations on how to vote on each proposal. They also facilitate voting through electronic voting platforms and can establish principles-based or rules-based proxy voting policies that determine default votes on various proposals tailored specifically to align with the values of the asset owner. In Australia, the leading proxy advisers are ISS (formerly Institutional Shareholder Services), CGI Glass Lewis, Ownership Matters, and the Australian Council of Superannuation Investors (ACSI), which provides services to most of the large industry superannuation funds.
As the influence of minority shareholders has grown, the relationship between companies and proxy advisers has become increasingly fractious. The Australian Institute of Company Directors has long expressed concerns over the influence of proxy advisers and been a strong advocate for increases in regulation over their operations. As far back as 2011 an AICD report stated:
“…a significant majority of company directors believe that proxy advisers are improperly influential. They believe too much responsibility has been outsourced by institutional investors, making proxy advisers essentially de facto decision makers.”
Despite the concerns of company directors, few formal complaints against proxy advisers have been lodged with the Australian Securities and Investment Commission (ASIC), and none have been sustained.
December 2021 Regulation Changes
On 17 December 2021, the Federal Government released the Treasury Laws Amendment (Greater Transparency of Proxy Advice) Regulations 2021. This regulation has four main components:
It defines proxy advice as a financial service and requires proxy advisers to have a commensurate Australian Financial Services License (AFSL) by 7 February 2022
Commencing 7 February 2022, it requires proxy advisers to provide a full copy of their recommendations to companies the same day they are provided to investors
Commencing 1 July 2022, it requires proxy advisers to be independent of their institutional clients
Commencing 1 July 2022, it requires institutional superannuation funds to publish greater detail in relation to their voting records including, for each proxy voted the actual vote (i.e. ‘for’, ‘against’ or ‘abstain’) and whether the vote was consistent with the recommendation of the company’s management.
The practical impact of these changes varies.
Some proxy advisors also provide advisory services to companies, a potential conflict of interest which is not addressed by the regulation. Others derive a revenue stream by providing copies of their published client reports to companies for a fee. By requiring them to provide their reports to companies for free, advisers may lose revenue, impacting their business model.
Secondly, the changes expose proxy advisers to potential civil penalties of up to $11.3 million for the company and $1.3 million for individuals, which are very material given the relatively modest revenues generated by proxy advisory businesses in Australia.
Finally, the requirement for proxy advisers to be independent of their clients will likely only impact one of the major proxy advisers. ACSI is owned by its industry fund clients and hence the changes may force them to revise their ownership structure.