This is the submission of the Business Council of Australia (BCA) in response to the Treasury Consultation Paper Greater transparency of proxy advice, released in April 2021 (the Consultation Paper). The Consultation Paper followed the Treasurer’s announcement of proposed reforms to the regulation of proxy advisers on 30 April 2021.

This announcement indicated that the consultation process would consider reforms that would require proxy advisers to:

1. Obtain an Australian Financial Services License (AFSL) for the provision of proxy advice;
2. Provide their research and voting recommendations to the company that is the subject of their report at least five business days before providing it to their clients;
3. Notify their clients how to access the company’s response to the report; and
4. If their client is a superannuation fund, be independent from their client.

The BCA strongly supports proposals 1, 2 and 3. The fourth proposal is unlikely to be necessary if the first three are implemented. In particular, the BCA strongly supports the two proposals to require engagement by proxy advisers with companies and enable their clients to be provided with the companies’ responses. These are modest and necessary changes that will enhance the operation of financial markets by introducing higher standards of accountability for proxy advisers and, most importantly, improve the quality of the service they provide to investors. They will update the regulatory regime governing proxy advisers to better reflect the significant role they play in the economy. 

These changes will be to the benefit of shareholders and markets more broadly. Ultimately, the company and company directors have strict obligations to act in their best interests of shareholders and provide accurate and timely information. Similar obligations should also apply to those who advise shareholders. These obligations should work in tandem to drive higher standards of accountability for all parties who have responsibilities to shareholders.

The consequences of incorrect proxy advice can be far-reaching because of the consequential loss it can cause. It can affect confidence in a company by large shareholders that adversely impacts its share price. It can change the outcome of voting at meetings by preventing the election of suitable candidates to company boards or, more significantly, prevent a significant corporate action from being undertaken such as a takeover or restructure.

The proposed reforms will assist in better enabling shareholders to make fully informed decisions. They will not diminish the freedom that proxy advisers currently have to make recommendations to their clients as they see fit. Moreover, the priority reforms supported by the BCA are consistent with reforms recently introduced in comparable jurisdictions, with the agreement of proxy advisers. Such reforms will update Australia’s system of regulation to keep pace with international best practice, which we currently lag.

Key points

• Proxy advisers are an important part of Australia’s corporate governance system and provide a valuable service for investors.
• They are part of a system that imposes obligations of accountability and transparency on companies. Similar standards should apply to proxy advisers as apply to all other participants in financial markets.
• The BCA strongly supports Options 3 and 4 in the Consultation Paper to require engagement and transparency between proxy advisers and companies and to require proxy advisers to make materials accessible to companies, in order to address concerns regarding factual accuracy.
• These reforms will be to the benefit of the shareholders that proxy advisers represent, as they will ensure a transparent, two-way flow of information with companies, to enable shareholders to make fully informed decisions. They will not in any way limit the freedom that proxy advisers currently have to make any recommendations they deem fit.
• Importantly, these reforms represent the existing practice of many proxy advisers, including under codes of conduct in other jurisdictions that proxy advisers have voluntarily signed up to. They also reflect recent developments in the regulation of proxy advisers in the United Kingdom and the United States.
• Currently, proxy advisers are not subject to any obligation to provide their advice, research or recommendations to companies. This allows inaccurate reports to be provided to shareholders, with little or no opportunity for companies to respond to inaccuracies. This can result in proxy advisers making recommendations that negatively impact the value of companies, or influence shareholder votes based on misconceptions. This also often results in companies having discussions with shareholders about information from proxy advisers without having access to the information themselves. 
• These reforms should also be accompanied by stronger measures to require proxy advisers to disclose and manage any actual or potential conflicts-of-interest, in line with best practice in other jurisdictions.
• BCA members do not believe it should be necessary for proxy advisers to be independent of funds, as independence itself will not necessarily improve the quality of proxy advice. Provided that proxy advisers are required engage with companies and act in a sufficiently transparent manner, they should not be prevented from maintaining their current ownership arrangements.
• The proposed reforms outlined in this submission are modest and measured changes that will improve the quality of proxy advice and benefit shareholders and companies alike. They do no more than ensure that Australia’s system of regulation keeps pace with best practice elsewhere.

Read the submission here