Proxy advice reforms ‘flawed’ and ‘will not improve’ investor outcomes

Analysis conducted by research house Morningstar argued against Treasurer Josh Frydenberg’s comments that the regulation will encourage greater transparency and accountability of proxy advisers.

“In Morningstar’s view, these changes are flawed as they place undue pressure on a sector that has been effectively highlighting corporate issues, helping institutional clients identify weaknesses and mitigate risks, and ultimately improving investor outcomes,” Morningstar ESG analyst, Erica Hall, wrote in the new report.

The reforms, set to kick off next month, will require proxy advisers to have an AFS licence to provide advice to institutional shareholders, to simultaneously share corporate governance advice to shareholder clients with the companies they are providing advice on and to be independent of their institutional clients by 1 July 2022.

In the report, Ms Hall argued that the reforms “appear to change little” for corporate governance but will impact the operations of the industry itself.

“The new regulation is broad and dictates who can and cannot be employed by any proxy adviser,” it read.

“If you have worked for a superannuation fund or fund manager, it could be difficult to satisfy independence requirements to enable you to work for a proxy-adviser firm.

“No justifications are given for these restrictions, saving ensuring independence. Ironically, no such restrictions apply to the employees of our public regulators and regulated entities, where shifting between public and private-sector employment occurs with some regularity.”

Late last month, the Australian Council of Superannuation Investors (ACSI) criticised the reforms for not being in the interests of millions of super fund members.

“Due to ACSIs unique operating structure – their board is made up of a subsect of its members who are also their clients – ACSI will falter under these reforms unless it can find a new operating model that is legally compliant with its extended AFSL requirements,” Morningstar’s report continued.

“None to date have been put forward.”

Ms Hall added: “Proxy advisers can be akin to the pebble in the shoe of a company, painful and difficult to ignore. Changes in regulation may prevent the pebble from lodging in the first place.

“Skewing the balance of power in favour of companies, as these regulations seem to do, is not necessarily a positive outcome for shareholders.”

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.