Arnold Bloch Leibler’s Jeremy Leibler says more regulation needed for proxy advisers

Arnold Bloch Leibler partner Jeremy Leibler says proxy advisers rely on ‘keeping the market in the dark’.

ABL's Jeremy Leibler. Picture: Jenny Evans

Proxy advisers have a business model which relies on “keeping the market in the dark”, and should face regulation tailored to their unique and powerful role, according to prominent lawyer Jeremy Leibler.

Responding to a federal Treasury consultation paper on greater transparency in proxy advice, Mr Leibler, a partner in national law firm Arnold Bloch Leibler, says the industry should be required to show evidence that they are independent from the institutional investors they advise.

They should also have to demonstrate that they have sufficient resources, qualifications and expertise to advise investors.

“We have witnessed numerous examples over the years of advice provided by proxy firms which contains factual errors, offers little more than a box-ticking approach to recommendations and an obstinate refusal to engage with the companies, which are the subject of their reports,” he says in the submission, a copy of which has been obtained exclusively by The Australian.

“Of particular concern is the inherent conflict of interest, whereby proxy advisory firms provide corporate consulting services to companies at the same time as advising shareholders how to vote on those same companies in relation to structuring their remuneration reports.

“Proxy advisers’ concern about the consultation process is to be expected as any form of regulation will be a threat to the viability of a business model that is founded on keeping the market in the dark.”

The nation’s proxy advisers, including firms such as ISS, CGI Glass Lewis, ACSI and Ownership Matters, have strongly rejected the need for specific regulation.

Ownership Matters, for example, said a proposed requirement to provide draft reports to companies before publication “would propose a higher operating standard (and cost) on proxy research than any other form of investment research”.

Principal Dean Paatsch said no one had bothered to identify specific harm from proxy advice – no clients of the advisers had complained, no investors had said they were misled or deceived, and no systemic errors had been detailed.

“No meeting resolution that might have failed because of dodgy research even cracked a mention,” Mr Paatsch said.

But Mr Leibler says proxy advisers wield such a level of influence over the Australian market – more than any other category of researcher – that they should be held to a high standard, “whether they liked it or not”.

“Take, for example, proxy advisers’ recommendations to block the re-election of Mortgage Choice co-founder Rodney Higgins to the board in 2016, because he had been with the company for too long,” he says.

“This nonsensical recommendation highlights the inability of proxy advisers to consider each company’s unique situation on its merits.”

There were many examples, he says, of protest votes against remuneration reports, which were often encouraged by proxy firms as a way of “punishing” directors on issues that were separate to remuneration, or because the advisers fundamentally misunderstood the industry in which the company operated.

As advisers to ASX-listed companies, Arnold Bloch Leibler saw this issue being contemplated well before it reached the floor of the annual meeting.

Clients were conscious of proxy advisers’ “sensitivity” to remuneration and the power they could wield with a recommendation to vote down executive remuneration frameworks.

Mr Leibler says proxy advisers were likely to vote down anything that was considered “out-of-market”, including internationally competitive remuneration policies.

“We have seen examples of institutional shareholders telling companies that while they understand the rationale for such remuneration packages, they feel compelled to vote against them, in line with proxy advice,” he says.

“These institutions are often frustrated by the situation but simply don’t have resources themselves to justify a vote which is out of line with the proxy advice.

“The resolution to many of these issues is a more robust licensing system that is fit for purpose for the proxy industry, so that regulators are not left standing idly by as proxy firms hijack our markets with undue power and influence.”

Submissions to the consultation paper close on June 4.