Taking care of business: Frydenberg flounders on proxy adviser laws

For a wannabe future prime minister, it was a hugely embarrassing defeat for Josh Frydenberg yesterday when he failed to persuade a single Senate crossbencher to support his hair-brained attempt to kneecap Australia’s fledgling proxy advisory sector.

The media coverage has been comprehensive in documenting the treasurer’s Senate humiliation at around 11.45am yesterday, ranging from this package in The Age/SMH, Jennifer Hewett in the AFR and, of course, the most vicious corporate poison pen of them all, Joe Aston in the AFR’s Rear Window column.

Working with the Greens, it was independent South Australian Senator Rex Patrick who put up the disallowance motion which passed 29-25 and killed the treasurer’s new regulatory regime which only came into place on Monday. After all that huffing and puffing, the new rules lasted just three days.

If Frydenberg wishes to return to the fray, preferably using legislation rather than regulation, he now must wait at least six months, so it will be interesting to see if the reform lasts as an official Coalition election policy. It should go the way of Labor’s 2019 franking credits policy and be scrapped. For good!

If the treasurer had any self-awareness and humility, he would acknowledge defeat, dump the policy and promise to never again try to reach in and destroy the business models of small governance outfits which independently service Australia’s institutional investors by providing voting advice ahead of corporate AGMs.

Given the increasing degradation of Australia’s political class, maybe someone should set up a voting political advisory practice which writes reports and makes recommendations about the policies and candidates contesting our state and federal elections.

The Josh attempt to kill off proxy advisers at the behest of his personal law firm, Arnold Bloch Leibler, would certainly count against him when assessing whether he or independent Monique Ryan offer the best choice for the voters of Kooyong in the upcoming federal election.

It will be interesting to see whether the leadership of the Business Council of Australia and the Australian Institute of Company Directors, along with high profile individual members, will continue to fly the flag for such a heavy-handed regulatory intervention.

As the AFR’s economics editor John Kehoe pointed out on Wednesday ahead of the vote, Frydenberg prioritised the interests of directors ahead of shareholder-led capitalism in a “reform package” which was also criticised by the Office of Best Practice Regulation.

We got a sneak preview of how the new regime would have worked from Brisbane-based Technology One which fired off two angry announcements to the ASX on Tuesday supposedly correcting errors in the proxy reports published by both Ownership Matters and the Australian Council of Superannuation Investors (ACSI).

Technology One founder and executive chair Adrian Di Marco has been remarkably thin-skinned about proxy adviser criticism over the years and tore into ACSI and Ownership Matters via the ASX announcements platform even though both were recommending a vote in favour of the company’s remuneration report at the upcoming AGM.

Former Crikey media writer turned AFR gossip columnist Myriam Robin set Di Marco straight in this Rear Window item today. Thankfully, proxy advisers will no longer be forced to provide copies of their reports to the listed company at the same time as it is sent to paying institutional investors, for fear of facing the treasurer’s proposed maximum fine of $11.3 million for such an atrocity.

One of the benefits of all this controversy is that investors may now come to better value the work of proxy advisers, which generally prefer to keep copies of their reports away from small investors or the general public.

I’d prefer a publicly funded model where the government chips in some industry funding via ASIC so that all proxy reports could be made available to the general public a day or two before the AGM. This would better inform retail investors and ensure more comprehensive media coverage of governance issues at public companies.

Some of the best work by the proxy advisers is not just the routine pre-AGM voting recommendations, but when they set their research teams onto specific governance areas, such as the wide rorting of the federal government’s $88 billion JobKeeper program, or systematic capital raising rip-offs during the early days of the COVID crisis.

A personal favourite was this 39 page 2008 report by Risk Metrics (currently trading as ISS but with some of its then team now working at Ownership Matters) looking into the appalling governance which took hold inside the various listed infrastructure vehicles created by the likes of Macquarie, Babcock & Brown, and Allco Finance Group before the GFC.  

This report was enormously powerful at the time in ending the hugely conflicted model of having externally managed listed infrastructure funds. The likes of Macquarie Airports and Macquarie Infrastructure Group soon transitioned to an internally managed model rather than ripping out tens of millions of management, advisory and under-writing fees from captured listed vehicles they created.

Given our paternalistic system of compulsory super, virtually every working Australian finds themselves exposed to the Australian share market. It is for this reason alone that it is pivotal we have independent research houses assisting big institutional investors in the important process of upholding good governance, transparency and accountability at ASX300 company AGMs each year.

The Frydenberg assault would have undermined this small sector of some 30 staff across four proxy advisory firms generating just $5-8 million a year in revenue. It was an example of using a sledgehammer to crack a nut, which is now thankfully dead, buried, and cremated. Well, for at least the next six months, anyway.