Extract from ABC News
When Rio Tinto destroyed a culturally significant cave in Western Australia's Juukan Gorge containing 46,000 years of human history, its board initially didn't appear to understand the gravity of the situation.
Even after the company held a review into the catastrophe, not one single person was sacked — at that stage — for the failures.
The boss of the Australian Council of Superannuation Investors (ACSI), whose members are mostly big superannuation funds in Australia and collectively own about 10 per cent of most of the big, listed companies, was livid.
"It was just a terrible, terrible
tragedy for both the local traditional owners but for all Australians,"
says ACSI CEO Louise Davidson, reflecting back on discussions she had
with Rio more than a year ago.
"We were really keen to work with Rio Tinto to say, 'well, how are you going to show appropriate contrition, appropriate accountability for what has occurred, and make sure that you can write those wrongs so that you have a social licence to operate in Australia?'
Subsequently, in September last year, the company announced its CEO Jean-Sebastien Jacques would resign "by mutual agreement" and that two other senior executives would also be leaving.
In March this year Rio Tinto's then chairman, Simon Thompson, took responsibility for the disaster and also announced he intends to stand down.
ACSI is not the only investor that had frank conversations with Rio's board at the time and whose pressure resulted in the departures. But it is a particularly big player given the growing might of Australia's $3 trillion superannuation industry.
Australian superannuation funds now own about 20 per cent of the Australian Stock Exchange (ASX), shareholdings worth a total of about $440 billion.
With such a big stake, they are having a far bigger say on how companies deal with governance issues, from the Rio Tinto Juukan Gorge disaster, to the lack of gender diversity on boards, big CEO pay packets and the failure of many corporates to address climate change.
Proxy advisers face new regulation
But it's not the super funds that are under pressure over how they publicly agitate and, at times, vote against the re-election of directors at company annual general meetings.
It's the advice they get from proxy advisers like ACSI – that helps them make decisions on how to vote — that's now under question.
The federal government wants to regulate proxy advisers, saying there's limited transparency in how they formulate their advice and how that advice then gets used by investors to cast votes.
Treasurer Josh Frydenberg in April announced consultation that could lead to new regulation on proxy advisers.
A Treasury paper suggests proxy advisers should be forced to give the companies they're reviewing five days' notice of how they are recommending shareholders should vote.
It also suggests that super funds be required to make their voting records public, including where those votes were consistent with the advice of proxy firms.
The Treasurer suggests that "there is currently very limited regulation on how this proxy advice is formulated, provided, used and disclosed" and that "given the influence of proxy advisers on the conduct of businesses listed on the ASX, Treasury will consult on measures to help facilitate greater transparency of proxy advice."
The proposed changes are backed by corporate lobbies such as the Business Council of Australia and the Australian Institute of Company Directors.
But they are strongly opposed by Australia's four main proxy advisers: ACSI, Ownership Matters, Institutional Shareholder Services Australia and CGI Glass Lewis.
How investors can 'strike' against re-election of company directors
When institutional investors decide to vote against the re-election of a company director, they often rely on the advice of proxy advisers to help them make their decision.
Sometimes the votes are simply protest votes: this happened in May in relation to Rio Tinto's remuneration report.
Investors
were angry about the long-term bonuses awarded to Mr Jacques, former
iron ore boss Chris Salisbury and former corporate relations chief
Simone Niven, despite their involvement in the destruction at Juukan
Gorge and the response afterwards.
But their vote was non-binding and Mr Jacques walked away with a 20 per cent pay increase of about $13 million in 2020.
Other times, the votes of institutional investors, as well as retail investors, can result in what's known as a "strike".
A 'two-strikes' law was introduced in 2010, following recommendations made in the Productivity Commission's 2009 Report on Executive Remuneration.
Its purpose was to hold directors accountable for what was seen as exorbitant executive salaries and bonuses.
Under the law, a 'first strike' occurs when a company's remuneration report receives a 'no' vote of 25 per cent or more by shareholders at the company's annual general meeting.
The 'second strike' occurs when a company's subsequent remuneration report also receives a 'no' vote of 25 per cent or more.
When a 'second strike' occurs, the shareholders will vote at the same AGM to determine whether all the directors will need to stand for re-election.
If this 'spill' resolution passes with 50 per cent or more of eligible votes cast, then a 'spill meeting' will take place within 90 days and directors will be required to stand for re-election.
Data from proxy advisory firm Ownership Matters shows that in 2019 and 2020 there were 50 strikes (25 in each year) cast by retail and institutional investors against the re-election of company directors.
But it notes that while strikes and spills have taken place, in almost a decade none of the proposals put up at annual general meetings have resulted in directors being turfed out.
In its submission to Treasury, Ownership Matters analysed resolutions put to annual general meetings held by ASX 300 companies between July 2011 and December 2020.
It showed that 7,426 resolutions to elect board-endorsed directors were passed, with 96.2 per cent in favour.
It says only six candidates were defeated (five because of takeover activity) and just 38 candidates withdrew their candidacy before the meeting results were tallied, many for routine causes such as job changes.
Ownership Matters director Dean Paatsch says a resolution that frequently comes at company AGMs is whether the executives have actually earned the pay that's been delivered to them in the prior year.
Some of the outspoken critics against proxy advisers include billionaire retailer Solomon Lew.
In December, Mr Lew lashed out at proxy advisors and shareholders after 48.5 per cent of shareholders in his retail company Premier Investments delivered the company a 'first strike' over its decision to issue dividends and executive bonuses while receiving JobKeeper payments.
Mr Lew said he believed that the strike had been driven by some proxy advisors and that "it's completely unclear to me how it can be justified".
Other big names to call for greater regulation on proxy advisers include Wesfarmers chief executive Rob Scott and Harvey Norman chairman Gerry Harvey, whose company remuneration reports have both been at threat of, or faced, strike action.
In 2019, Ownership Matters and CGI Glass Lewis recommended Harvey Norman shareholders vote against the re-election onto the board of chief executive Katie Page, in favour of shareholder activist Stephen Mayne.
They didn't succeed, and in fact at the time knew there was no chance of succeeding given Mr Harvey had a 31 per cent controlling stake, and the estate of co-founder Ian Norman controlled 16.5 per cent.
But the recommendations were made to send a message to the company that proxy advisers were not happy over its governance.
Mr Paatsch says, while company directors don't like getting messages like this, it is what Parliament intended when it introduced the two-strikes rule.
He thinks Treasurer Josh Frydenberg is being too heavily influenced by business lobbies on this issue.
"Many business groups like the Business Council of Australia, the trade union for Australian CEOs, and the Australian Institute of Company Directors, the trade union for non-executive directors, don't like proxy advisors," he says.
"And it seems to be that is a constituency that the Treasurer has decided to manage."
The argument that the regulation is ill-founded is one that a spokesman for Mr Frydenberg rejected, reiterating that its proposed regulation was about boosting accountability and transparency of proxy advisers.
But Mr Paatsch argues what is being proposed is an extraordinary type of regulation.
"It's a dark cloud for the freedom to contract. And it's really disrespecting the intellectual property of a private business.
"I mean, what's next? Should we be asking journalists to send their copy to companies five days before they're allowed to publish it? It really makes no sense."
Mr Paatsch says a myth is being perpetuated that proxy advisors are "cancelling capitalism", but that the vast majority of resolutions that come before an AGM are passed with flying colours.
"In the years following a first strike on remuneration reports, we've seen that the average vote 'against' [a company director's re-election] falls by over 20 per cent.
"That's [evidence of] identifying an issue early and leaving shareholders who make up their own mind to resolve that issue with the company."
He also notes: "Dissent in capitalism is a good thing.
"Criticism is a good thing. And we should be promoting people's entitlement to actually give that feedback," he says.
"It's weird, frankly, that the government has picked this proposal out of the many things to do on that list and elevated it to be a top priority.
Are superannuation funds 'independent of' proxy advisers?
One of the Treasury paper's suggestions for regulatory change is to require proxy adviser to be "meaningfully independent from a superannuation fund they are advising".
This, the paper argues, could "ensure that proxy advice is provided to and used by superannuation funds on an 'arm's length' basis".
But Ms Davidson says that very proposal would make it impossible for ACSI to continue its work.
"Personally, I would have thought there might have been other corporate governance priorities to be looking at, such as employment, such as finalising the implementation of the banking royal commission recommendations, many of which still have not been addressed."
Ms Davidson says while they work closely with their superannuation fund members, the advice that ACSI provides to them is developed independently.
"We do a lot of internal research or research with external parties on various issues … and that research goes to inform the issues that we focus on in our discussions with companies.
"Our discussions with companies then go to inform what would be our voting advice that we would provide to our members: Do we think that they should support the passing of a remuneration vote, for example.
"One of our focuses, of course, is on executive pay and making sure that that stays within the bounds of reasonableness."
Their members then go through their own process to decide whether or not they're going to follow that voting advice.
"Some of them get advice from other proxy advisors, as well as from us," she says.
Debby Blakey heads $60 billion health and community services super fund HESTA.
It holds big stakes in large publicly listed companies and is one of many large investors holding board directors to account, both at company AGMs as well as outside of them.
Ms Blakey points to AMP's initial decision to promote Boe Pahari to the head of AMP Capital as an example of an issue they were angry about and that they worked to reverse, in sync with a number of other investors.
Mr Pahari has since left the company. But he had been promoted despite apologising and having part of his pay docked after settling a sexual harassment case brought by his former subordinate Julia Szlakowski.
"Promoting someone to the position of CEO who had been involved in that sexual harassment issue really had concern for us because what was being disclosed publicly differed so greatly from the action that they took," Ms Blakey says.
"And the result, of course of those engagements, not just by HESTA, but very broadly, was that AMP made some decisions about how they did actually have to make changes to meet community expectations."
That included the resignation of AMP's then chairman David Murray.
HESTA has also been active in voting against company directors when there's not enough women on their boards, and she says many times boards will act before the meeting to rectify the situation.
"Companies with gender diversity of board level will perform better," she says.
"And actually, it's very often that directors will get the message and will [before the AGM] make a decision about the appropriate composition of their board."
She also notes that, in terms of the advice they get from proxy advisers, it's just one of many sources they use to make a decision about how they vote.
"Rather than having to do deep analysis on every single vote, we choose to get advice from proxy advisors like ACSI, we also have engagement partners that give us input, and we also obviously have asset managers.
"There's often very strong alignment in terms of how the asset manager ACSI, other engagement partners and our own internal team will see situations, but at times, they are not that simple. And at times, they're very diverse views and HESTA will navigate that."
She says the objective is in terms of using ACSI and others for advice is to enhance the future retirement outcomes for all Australians.
Call for greater transparency on proxy advice
But
AICD managing director Angus Armour says there's little transparency
about how investors come to make decisions, and sometimes the math
behind the advice on remuneration reports has errors.
"The feedback we've had from listed [company] directors is they have very little time to reflect on the reports that the proxy advisors provide if they're provided at all in advance," he says.
"And when they pick up errors of fact, whether it's the math or whether it's content, there's really very little opportunity for them to respond, and very little engagement on the other side to reflect these concerns."
He says while proxy advisers have to have an Australian Financial Services License to give financial advice, that may not apply to the advice they give on governance issues.
"We're looking for a basic set of standards around accuracy, around engagement, around managing conflicts of interest that you would expect from any actor in financial markets," he says.
In 2017, corporate watchdog ASIC undertook a review proxy advisers. It found no regulation was needed and that shareholders should be free to exercise their right to vote.
But Mr Armour says proxy advisers would not sign up to a voluntary code of conduct suggested after the ASIC review and that's why the government has had to step in.
Jeremy Leibler is a lawyer at Arnold Bloch Leibler who advises company directors, including Premier Investments boss Solomon Lew.
"I'm not suggesting for a moment that every recommendation that a proxy advisor makes is wrong," Mr Leibler says.
"That's not the case — many, many times, they get it right. But it's the disproportionate unchecked power that they have in dispensing that advice that is the problem and that what the government is trying to address."
Mr Leibler is also concerned that at times the advice given by proxy advisers is not in the interest of the company or its shareholders.
He notes he recently acted for an an ASX-listed company that was looking to hire a new chief executive and looked offshore. He would not name the company involved.
"They found a senior executive in the United States who was extremely qualified, and they progressed through negotiations," he says.
"The remuneration structure that they needed to offer had to be competitive. But when push came to shove, they [company management] formed the view that the proxy advisors were not going to understand the structure.
"The company lost out, not because their board was not sufficiently equipped to make the right decision and hire top talent … but simply, they were intimidated by the prospect of a first strike, and a second strike on the remuneration report that would be driven by these proxy advisors."
He says it is crucial that institutional investors and superannuation funds can more clearly demonstrate that they are exercising their own independent judgement when it comes to how they how they vote.
"I think for that to really be effective, it necessarily involves a transparent disclosure of how they voted, and the recommendations that they've received," he says.
"The disclosure of conflicts of interest by proxy advisors is absolutely critical. And I think generally having proxy advisors, subject to a proper regulatory regime of accountability, would go a long way."
In the United States there's recently been push back against Trump-era regulation that some argue gives companies too much influence over the independent research proxy advisers provide.
But a spokesman for Treasurer Josh Frydenberg told ABC News the Treasury consultation follows recent reforms in the United Kingdom and United States that aim to "strengthen the oversight of proxy advice, with a focus on transparency, accountability and independence."
HESTA's Ms Blakey hopes whatever the Treasurer decides, it doesn't stop investors like super funds being able to freely seek advice.
Advice, that she argues, allows them to make informed decisions in the interests of working Australians.
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