The Treasurer’s new proxy adviser regulations impose bizarre new standards that no financial markets participant should countenance.
Treasurer Josh Frydenberg’s pre-Christmas regulatory ambush on proxy advisers has repurposed Australia’s financial services laws to protect company directors’ hurt feelings and punish the government’s perceived enemies with extraordinary fines and red tape.
It’s a low point in performative policymaking and a dangerous precedent for those in capital markets who dare criticise incumbent management.
Ownership Matters is one of four proxy advisers in Australia employed by institutional investors to advise on resolutions at the annual general meetings of listed companies.
Importantly, our advice is just an input. No client is obliged to contract with us, or is a slave to our view.
We have held an unblemished Australian Financial Services Licence since inception and no client has ever made a complaint to the regulator about us. We accept the responsibility that comes with our role – the same duties that apply to other investment researchers (to avoid conflicts, maintain adequate resources and so on) apply to us.
However, the new regulations impose bizarre new standards on proxy advisers that no financial markets participant should countenance.
First, a condition of the new licensing regime (brought in on 52 days’ notice) is that proxy advisers must provide companies with a written copy of their advice on the same day it is given to clients.
This sounds benign. However, confidential conversations with clients must now be committed to writing and sent to listed companies. Just imagine if investment banks running the ruler over a target company were subject to a similar duty!
If we send a copy of our advice to an incorrect email address, we are now open to an $11.3 million fine. The new rules confiscate our intellectual property – they void copyright in our reports, prevent us from charging companies for them, and provide no restriction on what companies can do with them.
These outrageous intrusions into the property rights of private citizens might have been dreamed up in Pyongyang.
Second, the regulations bypass Parliament to insert a new general obligation of “independence” in the Corporations Act for all AFSL holders, but which only applies to proxy advisers. Even the Senate’s bipartisan scrutiny of delegated legislation committee has expressed concern at this flagrant disregard for parliamentary convention.
Frydenberg has suggested the obligation will require independence from institutional clients and is designed to avoid conflicts of interest. However, the list of entities that proxy advisers are banned from associating with do not even need to be their clients.
Scant evidence of lack of independence
The pernicious rules prevent association between proxy advisers and large superannuation funds, investment managers or “any other entity that makes decisions affecting the exercise of voting rights”.
Bizarrely this would prevent us seeking equity capital from any of these groups or, in certain circumstances, employing staff who had worked for or were in “professional networks” with these organisations.
It’s a set of gestures better aimed to prevent consorting between outlaw motorcycle gang members rather than nerds like us.
The evidence to address the apparent lack of independence among proxy advisers is scant. There have been only two complaints about proxy reports in five years and ASIC’s comprehensive investigation into the sector in 2017-18 turned up nothing.
And there are already strict provisions for licence holders that deal with conflicts. The Office for Best Practice Regulation, an elite commando force of boffins within the Prime Minister’s Department went even further – it thought there was “insufficient evidence of a conflict of interest” to warrant any action at all.
Clearly the target of these clumsy measures is the Australian Council of Superannuation Investors, whose proxy advisory service is owned by a network of industry funds, a sector on the nose with the government because of its trade union pedigree. The palimpsest of the regulatory package casts it as an uncontrollable woke illuminati, whose secret manifesto to cancel capitalism requires urgent curtailment.
What’s lost in the crossfire in this phony war? If ACSI’s voice is eliminated it will reduce competition in the sector from four firms to three. Changes will need to be made to the business model and product offerings of the remaining providers that imperil the already fragile economics of providing high-quality advice.
Cutting off proxy advisers’ access to capital and human resources won’t improve service quality in a sector the Treasurer hysterically claims can “materially impact investor confidence and the valuation of a company”.
Ownership Matters, if it receives a licence in the new regime, will likely benefit from its competitors’ misfortune. So why are we bothered about the changes?
It matters to us that Australia’s reputation for orderly and evidence-based policymaking for financial services licensees has been sullied. These measures abandon our principles-based AFSL regime that hitherto has promoted consistent standards across all actors, from hedge funds to investment banks. It intervenes in the operating model, ownership and human resourcing of a small sector whose main crime appears to be irritating company directors and chief executives.
If this can happen to us, who is next? Brave sell-side analysts and outspoken funds managers should draw the appropriate conclusion that in a rentier economy, criticism of the directors’ club carries with it undue regulatory risk.
Any participant in Australia’s capital market is now on notice that the Treasurer can and will shamelessly change the licensing rules to strangle their business without consultation. No evidence is needed for regulatory intervention, and no parliamentary oversight is necessary.
All that is required is a business model that provokes the narcissistic rage of crony capitalists, and a policymaker determined to appease a big business constituency and to wound their perceived enemies at any cost.
This article was first published by The Australian Financial Review and is reproduced with permission.