Harvey Norman episode exposes the darker side of proxy wars

A neat business model or extortio­n? Without regulation, we’ll never know.

Harvey Norman founder Gerry Harvey and chief executive Katie Page. Picture: Richard Dobson

Harvey Norman’s annual general meeting in Sydney this week is the perfect backdrop to explain why the Morrison government needs to better regulate an increasingly powerful group of corporate players whose behaviour affects the retirement savings of millions of Australians.

Understandably, most people don’t follow the nooks and crannies of capitalism. Such as the fact that proxy advisory firms are the most unregulated gatekeepers in corporate Australia. And that’s the way they want it to stay. They have maintained this status­ by lobbying government and pretending this is a niche issue of no concern to mainstream Australians. They even resisted a self-regulatory code.

But as the old saying goes, sunshine­ is the best disinfectant. And while increasing regulation is usually misguided, sometimes care­fully targeted laws can let the sunlight in. This is the impetus for Scott Morrison and Josh Frydenberg to better protect small shareholders in Australia’s biggest companies.

Proxy advisory firms advise big shareholders, often institutional investors such as super funds, on how to vote on shareholder resolutions, often voting on their behalf. At Wednesday’s Harvey Norman AGM, proxy advisory firm Ownership Matters recommended that its clients vote against the re-election to the board of Katie Page, the most experienced retail director in the country. The same firm recommended clients vote for activist and inexperienced motor­mouth Stephen Mayne to be appointed to the board.

Stunts and distractions don’t serve shareholders. Page was re-elected with 90.8 per cent of the vote. Mayne has now failed in all 50 of his 50 attempts to get a board seat. A vote against the company’s remuneration report brought on a spill motion that was also destined to fail at the founder-led and controlled firm.

And that is why this episode exposes a darker side of the proxy wars that go well beyond this fiery Harvey Norman AGM. For every sensible move by a proxy firm to improve corporate accountability — such as scorching Westpac’s woeful board over the foreign transactions scandal — there is also an overriding and over­zealous push by some proxy advis­ory firms, on behalf of their super fund clients, to press-gang every company into a cookie-cutter corporate governance model.

A founder-led firm such as Harvey Norman is their worst nightmare. If they can whip founder Gerry Harvey and his sassy chief executive wife into submission, proxy advisers have a greater shot at subduing far weaker chairs who lead equally supine boards in corporate Australia.

This is not a left v right battle — though Mayne’s gender diversity agenda became one heck of a woke joke. This is about power and control. And the audacity of gatekeepers when few laws apply to them.

This power grab to turn corpor­ate Australia beige comes at a cost. Research by Sam Fer­raro, co-founder of Global Found­er Funds Management and a PhD candidate at RMIT University, shows that where a founder remains­ actively involved as chief executive, chairman or director, the company enjoys, on average, higher returns on capital, higher dividend payout rates as a ratio to assets and a healthier ratio of cash to assets. In fact, corporate Australia could do with more chief executives who have founder-like qualities.

The one-size-fits-all corporate governance commandments will stifle entrepreneurship. Companies should be free to try different corporate governance models to see which one works best. Harvey Norman has always gone its own way. Shareholders who don’t like its model are free not to buy or to sell their Harvey Norman shares. It’s called the Wall Street Walk.

Predictably, The Australian Financi­al Review’s Joe Aston said Harvey should roll over to proxy advisers or privatise. Aston neatly highlights the problem — more and more firms are privatising to avoid inflexible, monolithic corporate governance dik­tats. That leaves retail share­holders out of the new main game. Between the 1990s recession and the end of the mining boom, the value of unlisted equity has soared to 250 per cent of GDP while listed equities remain unchanged, about 100 per cent of GDP.

Beyond Harvey Norman, the push by proxy advisory firms to dictate a set number of women on boards, a certain number of independent directors, along with other predetermined factors, is being done at the cost of securing the best skills on boards. Westpac’s board ticked all the boxes but didn’t provide the skill set to deal with the current scandal.

We should never legislate against silly voting recommend­ations by proxy advisers, but there is a clear need to ensure that these powerful players in corporate Australia are transparent and competent, follow fair processes, provide accurate analysis to clients­, and manage conflicts of interest far better than many do right now. The claim that it is enough for proxy firms to have an Australian Financial Services Licenc­e doesn’t address issues arising from their business model.

A sharper focus is needed because­ proxy advisory firms play a crucial role, and will continue to do so well into the future, advising mostly superannuation fund manag­ers and other big investors without the time, resources or skills to analyse their investments and decide how to vote at AGMs.

The power of proxy advisers skyrocketed when US laws require­d large investors to vote at AGMs, including of overseas listed companies. Their influence has been further bolstered in Aust­ralia because their super fund clients­ continue to grow fat and powerful under our compulsory super system.

At the end of the June quarter this year, 50.9 per cent of the $1.8 trillion in super­annuation investme­nts were invested in equities, 22.4 per cent of those in Australian listed equities. Super funds and proxy advisory firms will become more formid­able if the Morrison government goes ahead with increased super contributions of 12 per cent.

Some proxy advisory firms have created lean, mean businesses that churn out tick-a-box ­voting reports. And the swift and guaranteed growth of the super fund industry that relies on these reports raises serious concerns around the resourcing, compet­ency and accuracy of the hundred­s of reports proxy advisers write along with their voting recom­mendations.

When coupled­ with the tendency of some investment funds to accept such reports holus bolus, rather than write up an internal report explaining to superiors why they will vote differently at an AGM, the risks with substandard proxy advisers is exacerbated.

To attract even more fees, proxy advisory firms have moved into other areas with some offering corporate advisory services, creating another set of problems. The Weekend Australian has been told of occasions in recent years when a proxy firm has recom­mended a no vote against a company’s remuneration report at an AGM, and then suggested advisory services to the same company so that it might be better placed to secure a yes vote at the next AGM.

A neat business model? Or extortio­n? We don’t know because there are no laws that mandate some sunlight on this suspect situation. And boards won’t talk because that might make their company a bigger target.

The other problem is that proxy advisory firms are not required­ to check facts, fix errors, or hear a company’s perspective before making influential votin­g recommendations to their clients, recommendations that affec­t the investments of all shareholders well beyond their client base. In other words, proxy ­advisers can ambush companies, affecting our investments in listed companies.

Some proxy advisory firms complain they are too under-resourced to do this, or logistics don’t allow for it. If a banker or a financi­al adviser tried that excuse they would be laughed out of town as self-serving and arrogant.

In a smarting, not smart, intervention last week, Ownership Matters’ Dean Paatsch said he was concerned that the Harvey Norman brouhaha had descend­ed into a debate about regulation. He should be. His firm’s nonsensical overreach served to raise many other questions about the practices of proxy firms well beyond the brawl with Harvey Norman. And better regulation has nothing to do with “silencing dissen­t”, another zany and defensive retort from Paatsch. Laws don’t silence financial advisers, or auditors, or directors; they do ensur­e competence and transparency, and expose conflicts.

In the US, the Corporate Governance Reform and Transparency Act of 2017 is working its way through congress, and the Securiti­es and Exchange Commission proposed new rules this month to better address competency, transparency, processes and conflicts in the proxy advisory industry. Britain introduced rules to better regulate proxy advisers in June, and so did the EU.

So how have these gatekeepers avoided similar moves in Australia? Lots of lobbying chutzpah, and the good fortune (for them) that previous governments have not wanted to help out the big end of town. But that’s not the point about more effective regulation of proxy advisory firms. Nor is it about protecting their clients­.

The killer argument for better regulating proxy advisers is, as congress and the SEC recognise, to protect small retail investors from behaviour that harms their investments. As SEC commissioner Elad Roisman said in July: “These Main Street investors who invest their money in funds are the ones who will benefit from (or bear the cost of) these advisers’ voting decisions. In essence, I believ­e it is our job as regulators to help ensure that such advisers vote proxies in a manner consistent with their fiduciary obligations and that the proxy voting advice upon which they rely is complete and based on accurate information.”

In other words, the Prime Minister and the Treasurer should be acting to safeguard the retirement savings of quiet Australians.