Regulation of Proxy Advisors – Our View
What is the issue?
In Australia, any organisation providing research that investors might use to buy and sell securities is rightly subject to regulation. There is a public interest in establishing minimum acceptable standards for investment research, so that securities markets are not unduly influenced by conflicts, shoddy practices and provider insolvency. Proxy advice, particularly where it impacts on the market for corporate control, falls squarely within this regulatory regime.
OM obtained an Australian Financial Services Licence (AFSL No: 423168) at inception because we knew that our analysis would be used by our wholesale investor clients as part of their investment decision making process. We satisfied the Australian Securities and Investments Commission (ASIC) of our solvency and competence to produce financial and governance research for sophisticated clients. We abide by ASIC’s Regulatory Guide 79, the same guidelines which govern research quality and conflicts of interest for all sell side researchers, independent experts and investment banks. OM supports this approach and abides by the law.
We are perplexed by recurrent calls about the urgent need to “regulate” proxy advisors in Australia, when there is a perfectly adequate regulatory regime already in place. Any firm providing voting recommendations on the full gamut of shareholder meetings is subject to the same standards that apply to all licenced investment research.
Continual demands to regulate proxy advisor practice by the Australian Institute of Company Directors, numerous corporate lawyers and associated shills, is the simple derivative of a failed campaign led by the extreme right wing of the US corporate lobby against the US proxy advisory industry.
In OM’s view it is misguided and contrived to transplant a uniquely US conflict to the Australian environment. Notwithstanding the presence in Australia of two large US-domiciled proxy advisors, Australia is different because:
· The AFSL system is already a perfectly adequate regulatory regime;
· There is a more competitive market for domestic proxy advice than offshore; and
· Most sophisticated investors apply a commercial filter to their voting decisions rather than a ‘back office’ approach which follows advisory recommendations.
Unlike the US, in Australia there is no compulsion for any wholesale investor to vote their securities. No one is forced to buy proxy research. If research is not of good quality then a provider ought not to expect their work to have much influence or commercial success.
OM’s experience is that research quality is kept high by the expectations of clients, not by regulatory oversight.
We believe that our approach to engaging with issuers regularly and without limitation or charge, employing only skilled and educated staff onshore, and providing copies of our proxy analysis to issuers without charge is the right way to go.
However we defend our competitors’ rights to do things differently. We are untroubled that there is a market for badly prepared proxy research, so long as there is no compulsion to follow it. Provided that there is a free and competitive market for proxy advice, good research will prevail over bad. Wholesale investors are capable of identifying quality research, regulators do not need to do it for them.
The existing regulatory regime already addresses the corporate lobby’s constant peenging about proxy advice. An AFSL could be cancelled if:
· Error-ridden reports were published that misled investors
· Quality fell below the minimum standard as a result of failing to meet issuers, or
· Conflicts of interest unduly impacted on research recommendations.
OM doesn’t believe that there is any need to establish a “Code of Conduct” for proxy advisors in Australia. The AFSL regime is enough. Behavioural codes generally favour incumbents and provide additional barriers to entry to new market players who may not have the resources to compete with practices stipulated. In particular we oppose demands by companies to receive our reports 48 hours before publication for “fact checking”. Not only would this propose a higher operating standard (and cost) on proxy research than any other form of investment research, this approach is unnecessarily censorious and an unwarranted intrusion of the rights of private citizens to contract with each other for the provision of a legal service.
We suspect the complaints made by many corporates about the poor quality and practices of some proxy advisors are really complaints about shareholders having followed their recommendations. Whilst those issuers who believe their shareholders are poorly served are welcome to refer them to OM, we don’t think that the State has a role in regulating voting behaviour. In a free market each actor bears the consequences of their own decisions: sophisticated investors should be free to make their own mistakes.