Ill-advised attack on proxy advisers

by | Oct 12, 2011 | Business

Company directors are not well served by a stinging campaign by their lobby group today against proxy advisers. It’s a thinly disguised attack on free speech.

Every year, boards expend hundreds of millions of shareholders’ dollars in advertising, marketing, proxy solicitation, public relations and other assorted consultancies. They get their message across.

They have been a force for good – another voice in the pluralist life of Australian corporate democracy … and one to be encouraged.

Proxy advisers, by comparison, are a tiny and little-known industry, who provide advice to super funds on the likes of executive pay, mergers and acquisitions and other things on which shareholders are entitled to vote.

Yet the Australian Institute of Company Directors kicked off a campaign today via judicious press leaks to discredit the one niche profession whose job it is to monitor directors and their decisions on behalf of shareholders – that is, proxy advisers.

“We don’t know the quality of the people they use to assess them (proxy advisers), we don’t get an opportunity to talk to them. They don’t talk to us about why we are doing what we are doing, and yet they are the ones who are making a recommendation on a tick-the-box method,” David Crawford is quoted today.

This is David Crawford, the chairman of Lend Lease and Foster’s who, incidentally, has talked with proxy advisors on a number of occasions.

No one begrudges Crawford the right to have his say – and this was, to be fair, an old quote dredged up once again. The rub, however, is that Crawford has been perhaps the most vociferous critic of proxy advisers since the proxy service ISS recommended a “no” vote on the Foster’s remuneration report in 2009.

Having him spearhead the launch of a campaign whose central claims are that super funds shouldn’t “outsource” their decision making to proxy advisors because proxy advisers were too powerful and didn’t know what they were talking about … well, that tends to undermine the cause somewhat.

Why are they too powerful? Why do super funds listen to them if they have “no or low understanding” of the business? It’s a non sequitur: if proxy services didn’t provide useful advice, the funds would surely ignore them.

Apparently not, according to AICD chief executive John Colvin:

“However, a number of company directors believe that, because many institutional investors are outsourcing their analysis of companies to proxy advisers due to their own resource constraints, the advisers are too influential and have become de facto decision makers.

“There is also some concern about the adequacy of resources and expertise being brought to bear by proxy advisers, given the power they hold” says Colvin, without providing any evidence for this supposed excess of “power”.

In grand contrast to the opulent CBD offices – with their glittering harbour views – inhabited by the host of bankers, lawyers, marketers, advertisers, RCs and myriad other advisors who suck hard on the shareholder teets, the tiny brigade of proxy advisers work in far more humble environs. Most are modestly-paid analysts who believe in their work.

The AICD report itself, knocked up by Mercer, is not too bad. Although it is flimsy in terms of both sample size and evidence to support its apparent cause.

Of the 1000-plus directors of Top 200 companies, some 66 directors were canvassed. They were self-selected. It’s a fair bet that the majority of directors would deem proxy advisers – like any other consultants – as a fact of life, and to be treated accordingly. Like the press perhaps.

As far as shareholders go, generally, the advent of proxy advisers – who do, it should be said, have some influence on funds managers’ voting decisions – has been a beneficial thing. The  likes of ISS, CGI Glass Lewis and the Australian Council of Super Investors (ACSI) have shone the light on excessive remuneration and important corporate decisions which have often run counter to the best interests of shareholders.

They have been a force for good – another voice in the pluralist life of Australian corporate democracy … and one to be encouraged.

The lobby groups too are entitled to their say, of course, as they are also entitled to be shown up at the very first whiff of bullying a minority group.

Perhaps the AICD would like to point out a single case where a proxy adviser had led to the destruction of shareholder wealth. Our phone is on the ready.

For the cases when boards and their lawyers, bankers, “independent experts” and other assorted hangers-on have participated in billion-dollar blunders are legion.

Foster’s blowing up $6 billion in its disastrous foray into wine – that’s just one which springs so effortlessly to mind.

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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