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Alan Deans, moderator, Listed@ASX: What are the circumstances that led to this reform process?

Daniel Smith, director, Pogonip Advisory: These actions came after the 2020 AGM season, when COVID was the singular focus of corporate Australia and investors. There were some fireworks, but it was not a particularly contentious AGM season. The consultation paper was unexpected for many participants in the market, given ASIC had performed a considered and detailed review of the industry in 2017 and 2018. It found some areas for improvement, but did not believe wholesale change was required. The government consultation has taken proxy advisers by surprise. 

Andrew Gray, director ESG and stewardship, AustralianSuper: There’s no problem here that needs to be resolved or any significant reforms required. As a large investor, we use proxy advisers as just one input into our voting decisions. There are no issues with regards to lack of independence or misuse of the advice. We’re very considered in the way we use it.

Listed@ASX: Does anything need fixing?

Maureen McGrath, general counsel – compliance and secretariat, Scentre Group: There are perceptions about proxy advisers’ level of influence. No-one is purporting there shouldn’t be proxy advisers and there shouldn’t be open and transparent engagement. But there are concerns about being able to engage with proxy advisers. We’ve always maintained good relationships, even though we agree to disagree on some recommendations. If there is a negative recommendation on a resolution, it’s important to be able to engage, even on a secondary level, to better understand what’s happening. Sometimes, the lower you get down your register, shareholders may not have the capability to do their own analysis, and they rely on proxy advisers. You need the ability to engage with your investors when you receive a negative recommendation.

Daniel: It comes down to the ability to have redress where there’s a difference of opinion. Accuracy is important. I can speak from personal experience, having sometimes got the facts wrong as a proxy adviser. It’s their duty to remediate factual inaccuracies in a timely fashion. Making sure there’s a proper mechanism to do that is really important. Differences of opinions, however, should be addressed differently. Another element is conflicts of interest in business models. Institutional investors are very familiar with service providers’ conflicts of interest. These need to be managed appropriately and communicated to clients or to the companies being covered. Clearly, conflict of ownership is a concern to Treasury. The Australian Council of Superannuation Investors is owned by industry funds. Proxy advice firm Glass Lewis used to be owned by two Canadian pension funds. Another consideration is offering consulting services or other ancillary services to the same companies that are subjects of the core proxy research. How that’s managed is crucial. These are not Herculean hurdles to surmount. 

Listed@ASX: What's the answer?

Andrew: I fundamentally disagree with Dan’s proposition proxy advisers’ ownership structure creates a conflict of interest. With ACSI, funds outsource the research function and come up with views on recommendations. Some of the federal government’s proposals, such as proxy advisers sending their reports to companies in advance for fact checking, we quite strongly support. There might be an exchange of opinion. The proxy adviser, at the end of the day, should stick with the opinion in which it believes. That process of engagement between proxy adviser and company prior to us getting the report is a good one, from a customer’s perspective. Major issues are thrashed out such that we get a well-resolved report.

Maureen: I support that from a company’s perspective as well.

Listed@ASX: Is time an issue?

Daniel: I think time is a massive issue. Producing research can become a factory. The timeline gets more compressed as AGM season progresses. If you look at AGM dates, about 45 per cent of companies that have a 30 June year-end have their AGMs in the last two weeks of November. Most companies also lodge their notices of meeting at the statutory minimum, 28 days prior to the notice of meeting. It creates a sprint at the very end. A solution to that would be to increase the statutory notice of meeting deadline from 28 days so all parties get more breathing room. 

Daniel Smith, Director, Pogonip Advisory 

"Time is a massive issue. Producing research can become a factory."

Listed@ASX: Maureen, what are your thoughts from the corporate side?

Maureen: Timing is an issue because typically what happens is companies release their annual reports and are required to hold their AGM within five months of the financial period ending. The main AGM season is in the second half of the year. Our AGM is in the first half of the year. Timing to engage can be tight. I know some proxy advisers don’t want to engage if your notice of meeting has been released, which can truncate the timeline. The proxy reports also have to be published within a period of time to enable the clients of the proxy advisers to read them and vote, within the timeline required. Having said that, a process to facilitate engagement between companies and the proxy advisers, particularly if there’s a difference in opinion, is quite a vital thing. At the same time, if there is a negative recommendation it’s quite crucial to have a second discussion and put your point of view to your investors.

Andrew: Our submission supported that principle, but we noted there could be timing issues. We said it was up to the proxy advisers to make the case. I wonder whether proxy advisers, companies and shareholders know what the resolutions are going to be before the release of the notice of meeting. Typically, there has been a process of engagement between the company, the shareholders and the proxy advisers on those issues prior to the release of the notice of meeting, going well back into the year. That could help manage the workflow.

Listed@ASX: It could be a two-stage process.

Andrew: Yes. As shareholders, we actively engage with companies during the year. So, when the remuneration report lands on our desk it’s typically not a surprise. By analysing the board, we also know which directors are up for re-election. We have a view on the board’s structure and effectiveness. A lot of the work has been done during the year to support our voting decision, rather than it all being done when the notice of meeting is released. 

Listed@ASX: Is it acceptable for proxy advisers to have a stated position on certain matters, for instance climate change?

Daniel: Proxy advisers’ views are informed by interactions with clients, companies, regulators, corporate governance codes and their individual experiences. The notion they solely represent their clients’ views fundamentally misunderstands the variance of opinions investors have. Try to get 50 investors into a room and see whether they can agree on a stock. Investors don’t hire proxy advisers to parrot their views back to them. They hire them for rigorous analysis and independent opinions. 

Andrew: Proxy advisers can form an opinion and provide that to their clients. So, if we ask whether climate change is something proxy advisers could be advising clients on, I say why not? The question is the frame or context. They should provide advice on matters relating to voting and drivers of investment value. They should provide advice on the board’s skills, which impacts how you should vote for a director. It could be the remuneration report doesn’t contain the right climate change metrics, and that impacts how you vote on the remuneration report.

Andrew Gray, director of ESG and stewardship, AustralianSuper

"The important climate change issues are now coming to a vote."

Daniel: Qualifications and in-house expertise matters. Proxy advisers typically have expertise on matters that come to a vote.

Andrew: The important point is climate change issues are now coming to a vote. So, proxy advisers need to develop expertise to fulfil their role. We’re seeing an evolution in what voting encompasses. That could be board effectiveness on climate change, climate change metrics in remuneration reports and climate change voting. Proxy advisers need to develop expertise in these matters to provide valuable advice. 

Listed@ASX: Is there a problem for them to get up to speed?

Andrew: We have a range of service providers, whether it be on proxy advice or other things. The extent to which we use and value those services depends how quickly advisers on various issues get up to speed on topics. It will unfortunately mean we value advice less if advisers don’t get up to speed quickly. Climate change is an important issue.

Daniel: Every proxy adviser is different and business models vary. Some proxy advisers have separate ESG analysis divisions, so they have already developed in-house expertise. It’s a question of each proxy adviser allocating resources internally to be able to handle these issues. 

Andrew: Clearly, there are resourcing requirements for proxy advisers. Whether they need to charge more for their advice is a question that needs to be addressed. As a user of advice, we’re willing to pay for things that give us value. Some proxy advisers are moving on this quite quickly.

Maureen: A question is whether it is acceptable for proxy advisers to have a stated position on certain matters. Andrew’s comments are right on the money. Companies report against any number of stakeholder requirements. If you are listed you are reporting against corporate governance principles, you also have in mind proxy adviser guidelines, which can be different. There are also the TCFD reporting guidelines, which can be different, as well as differing requirements of other ESG bodies in terms of what they expect. A company also has its own responsibilities. It’s reporting against its values, principles, purpose and vision. There are nuances everywhere and you can’t please everyone.

Andrew: Long-term investment outcomes are the anchor point for us in any matter relating to voting or, in fact, ESG more broadly. AustralianSuper’s purpose is to deliver investment outcomes. Companies, however, have a range of stakeholders. It’s the board’s function to listen to shareholders, knowing they might get a range of views. The board needs to weigh that up and make decisions in the best interests of the company. Proxy advisers look to their client base and tailor reports to their needs.

Daniel: Directors’ duties are to the company. They need to have a broader view than pleasing shareholders or proxy advisers. This means disagreements happen from time to time. Getting back to the government’s consultation process, there is space to facilitate more constructive engagement to drive better outcomes and more comprehensive understanding.

Andrew: We have many stakeholders, particularly on ESG matters. It gets back to the board saying, ‘we’ve listened to our stakeholders and this is our decision.’ It can’t be management by consensus.

Maureen: Absolutely.

Andrew: Yes. And good boards do that. We do see that all the time. But, we also see boards that feel pressured to get the proxy adviser recommendation because that drives some voting outcomes. We see it as a pressure point. 

Listed@ASX: Are there any issues proxy advisers should never advise on?

Andrew: Theoretically, they could advise on anything. We pay them to provide full opinions on any matters that have an influence on voting decisions that drive investment value. Nothing is off limits.

Daniel: Corporate governance, risk management and managing ESG risks within the context of risk management is proxy advisers’ bread and butter. It would be heavy-handed to prohibit them from opining on certain matters; but there are certain matters that are not really a good fit.

Andrew: We’re very clear proxy advice is valuable in terms of governance advice. But we use our in-house expertise on investment matters. Our role is to combine the two.

Listed@ASX: So, owners need to vote in accordance with their opinion?

Maureen: Yes, and investors we engage with would say that’s how it works in practice. Companies aren’t just engaging with proxy advisers. They’re engaging with their investors. And there’s two levels of engagement within this. The ongoing engagement at an investor relations point of view, as well as engagement by the chair and other directors on broader governance matters.

Maureen McGrath, general counsel - compliance and secretariat, Scentre Group

"Companies don't just engage with proxy advisers, they also engage with investors."

Daniel: Maureen raises a good point. At larger, domestic institutional investors, there are frequent touch points between boards and governance experts. But it becomes difficult for corporate representatives to communicate directly with investors when funds outsource more of the voting decision-making process to proxy advisers.

Listed@ASX: Do proxy advisers exercise too much power when it comes to voting?

Maureen: A number of investors say proxy advisers are doing the hard yards, in terms of the research. But they’re also making their own investment decisions based on various metrics. Some investors say they are one of myriad tools. From a company’s perspective, we have to get our voice out if we can’t respond to what we see as an inaccuracy or a difference of opinion. Then, there’s disproportionate influence. That factors in as well.

Listed@ASX: Do proxy advisers thoroughly understand the issues?

Andrew: They understand issues in their area of expertise. They’re governance experts, but not necessarily investors. Some proxy advisers will automatically vote against the next director up for re-election if the majority of the board is not independent. That’s a pure governance view. As an investor, we may not execute it that way if we think the board is operating effectively. But having proxy advisers raise that as an issue is valuable. It’s a flag for us to take a look and overlay our investment view. They provide a really good quality service, albeit from that governance lens. We note the limitations inherent in that and adjust for it.

Listed@ASX: What should boards or management do if a proxy adviser gets it wrong?

Maureen: Call it out.

Daniel: Call it out. And call it out publicly.

Andrew: As part of calling it out, they should talk to their major shareholders to ensure they haven’t got the wrong story from the incorrect advice. Daniel: First of all, the company needs to make sure it’s a proper mistake. If it is, and there isn’t a considered response by the proxy adviser, the company might want to consider its legal options.

Listed@ASX: Should the process be licensed?

Maureen: My understanding is proxy advisers carry AFSLs. They may be limited AFSLs, but typically they do carry licenses.

Daniel: I had the distinction of being the responsible manager for CGI Glass Lewis’s AFSL and, prior to that, ISS Australia’s AFSL. I can’t speak to either of their compliance processes now, but I can say back then the compliance procedures under the licensing regime applied across the entire research process. I feel it would be an easy and non-controversial approach to formally expand the licensing regime to cover the entirety of proxy advice. 

Listed@ASX: Dan, have measures been introduced in the US and the UK around this?

Daniel: In the US, new regulations were due to go into effect in December of this year, in advance of the 2022 northern hemisphere AGM season. But they are under formal review by the US Securities and Exchange Commission. It appears to be more about scoring points as opposed to effective regulation. But on the face of it they are attempting to address the same issues we see down here, including information accuracy, conflicts in business models and the ability for companies to review reports and have redress. A stewardship code is one element worth considering that has been adopted in other jurisdictions including the UK and Japan. This is similar to a corporate governance code, where there are best practice principles with which companies are required to comply or explain why not. There would be a set of best practice principles for investment managers and asset owners and their service providers, including proxy advisers, on the management of governance and stewardship issues including proxy voting. 

"A stewardship code is one element worth considering that has been adopted in other jurisdictions including UK and Japan."

Maureen: A code could draw out that proxy advisers look at a companies through a different lens than the board. We’ve spoken about the board acting in the company’s best interest, but that’s not a proxy adviser’s duty. There are quite distinct roles and responsibilities. A code could draw that to investors’ attention. However, offshore proxy advisers aren’t necessarily subject to standards set here.

Daniel: That’s concerning. It could lead to taking a heavy-handed regulatory approach. There would be a risk offshore-owned proxy advisers could offshore their operations. Both of the two main offshore-owned proxy advisers have domestic operations, but they do conduct at least part of their research process offshore. There’s a risk they could decamp offshore entirely, while still providing services to domestic institutions. That would push them beyond ASIC’s regulatory reach.

Listed@ASX: What about less organised shareholder activism, such as may occur with climate issues? Where’s the line between pure governance and something else?

Andrew: Our expectation is activists are going to become more involved across a range of issues. Our role will be to assess each shareholder resolution on its merits. We always bring it back to our endpoint: what is in our members’ best long-term financial interests? We’ll support a shareholder resolution that achieves that, and we won’t support ones that don’t. Proxy advisers will be well placed to advise on some resolutions, depending on their nature. They won’t be as well placed to advise on others because they are outside their sphere.

Maureen: Are climate matters handled by different divisions within proxy advisers’ operations?

Daniel: That depends on how each one organises its research writing process.

Maureen: Could it be some company analysis related to climate change is sent offshore?

Daniel: Correct. Using CGI as an example, there’s a dedicated team that conducts research on environmental and social-related shareholder proposals. That team is offshore and understands these proposals because there’s a global nature to them. But it relies on domestic analysts to understand the local context. That’s one approach to take. Others may embed climate change analysis into their core team. It’s important for each company to know how this works. If you’re having a conversation with lead analysts at CGI, they’re not the ones who are writing the proposal or the analysis for that shareholder proposal. Proxy advisers will also have a role providing opinions. But their core expertise is making recommendations in terms of for, against, abstain. Things start to get murky where they’re asked to opine on areas for which there’s not a vote. At least as it relates to climate change, proxy advisers need to develop competence quite rapidly to stay relevant.

Andrew: It’s more urgent than that. We already have half a dozen companies that have agreed to Say on Climate in Australia, of which some are very big, including BHP. Say on Climate is a movement that seeks to improve the way companies engage on climate change issues. Proxy advisers could be advising on this from the next AGM season. They need to provide good advice to stay relevant.

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