Australia’s Move to Regulate Proxy Advisory Keeps the Industry Divided

The Australian government is considering tightening regulations on the proxy advisors who provide services to institutional investors and is seeking industry consultation. The move has divided the industry as a part of it sees the proposals as too harsh, while others are welcoming it.

Currently, only four proxy advisory firms are dominating the Aussie industry of institutional proxy voting solutions and the government wants more transparency in their operations.

“Collectively, superannuation funds own around 20% of the Australian Stock Exchange Stock Exchange A stock exchange, also known as a securities exchange or bourse represents is a facility where stockbrokers and traders can buy and sell securities.This includes shares of stock, bonds, exchange-traded funds (ETFs), or other financial instruments. By extension, stock exchanges can also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividendsStock exchanges have developed into a permanent fixture in the fin A stock exchange, also known as a securities exchange or bourse represents is a facility where stockbrokers and traders can buy and sell securities.This includes shares of stock, bonds, exchange-traded funds (ETFs), or other financial instruments. By extension, stock exchanges can also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividendsStock exchanges have developed into a permanent fixture in the fin Read this Term (ASX), worth around $440 billion, and the market for proxy advice in Australia is dominated by just four firms,” the consultation paper published earlier stated.

“It is important therefore that proxy advice is transparent and its quality and accuracy can be relied upon by investors and companies that are the subject of their reports.”

Need of the Hour

The paper highlighted that there is no knowledge of how proxy advice is formulated, provided, used and disclosed because of the limited regulations over the industry. In addition, it pointed out the methodologies vary from company to company.

The recommendations of the government include new licensing requirements for proxy advisers. Moreover, it wants proxy advisors to provide their research and voting recommendations to the company at least five days before supplying them to their clients.

Additionally, the Aussie government wants feedback on potential changes to disclosure requirements for superannuation funds that use proxy advice services.

“There is currently very limited regulation on how this proxy advice is formulated, provided, used and disclosed,” Treasurer Josh Frydenberg's office said in a statement earlier this month.

Will It Curb the Industry?

However, the proxy advisory companies are not happy with the government’s step. ISS, one of the four Australian proxy advisors, said that the consultation seems to have started with a ‘misguided notion’. Further, the company stressed that it maintains a high standard of transparency, quality, and independence when it comes to research and engagement with the companies.

Louise Davidson, the CEO of the Australian Council of Superannuation Investors, said that, if implemented, the proposed changes would directly impact its business structure.

“One part of the paper is clearly aimed at ACSI because we are the only proxy organization that is a membership organization, and our members are super funds,” Davidson said. “It is really unclear to us what part of the problem that part of the paper is setting out to solve.”

Supporters

A part of the industry is still favoring the government recommendations. In its response to the consultation paper, ASX-listed iSignthis said: “some Proxy Advisors operate under a moral hazard in Australia navigating the various services they offer to their clients.” The company is responding to the Aussie government’s consultation call.

“Claims by proxy advisors that their reports are not 'slavishly followed' ignores the reality that some fund managers are mandated by their clients to only follow proxy advisor recommendations,” iSignthis stated. Furthermore, it highlighted that fund managers split their votes according to which proxy advisor they are mandated to follow for specific clients.

The closing date of the consultation paper is June 1 and it will be interesting to see if Australia follows the path of the United States and the United Kingdom to further regulate the proxy advisory industry.