4 June 2019

Time for Proxy Advisors

GILES RAFFERTY, Corporate Communications and Media Advisor

AGM season may seem a long way off for many ASX listed companies but June and July are prime time for engaging with proxy advisors in advance of the peak months of proxy season, between August and October.

Proxy advisors play a vital role in helping inform investment managers and asset owners on the resolutions relating to the companies in which they are invested and offering an opinion on how to vote.

Arranging a meeting with a proxy advisor firm can allow senior executives the chance to:

  • discuss how their governance practices are evolving
  • highlight unique issues that may impact on their governance or remuneration practices
  • gain a better understanding of how the proxy advisor firm views the governance requirements for listed companies.

“Often we need to agree to disagree.”
Simon Connal Founder, Ownership matters

We asked the four proxy adviser firms operating in Australia – ISS Australia, CGI Glass Lewis, Ownership Matter and the Australian Council of Superannuation Investors (ACSI) – for their thoughts on the kind of mistakes companies make when engaging with proxy advisors and how they could improve engagement.

What to do and what not to do

Both ACSI and ISS Australia highlighted the importance of not only engaging with proxy advisors but also directly with investors. Vas Kolesnikoff, Head of Australia & New Zealand Research at ISS, noted the 4thEdition of the ASX Corporate Governance Principles and Recommendations requires companies to have an appropriate stakeholder engagement function. “A lot of them just say, “Oh we’ll just pick the top 10 investors and will talk to them”, but, you know, what about the rest of them?” he said.

Louise Davidson, CEO at ACSI suggested companies that receive (activist) shareholder resolutions should proactively engage with those filing the resolutions, as well as their shareholders, rather than ignoring them. “We have seen this happen on occasions in the past”, she commented, adding that “those that do engage are more likely to make in-roads into managing the issues, which may mean there is no need for investors to support the resolutions.”

“On remuneration issues, the implementation of new policies is only clear once the director’s report has been released.”
Daniel  Smith Managing Director, CGI Glass Lewis

Ownership Matters and CGI Glass Lewis said a mistake some companies make is to assume that engaging with a proxy advisor firm will result in that firm agreeing with the company or giving it a ‘clean bill of health’. No matter how positive a meeting between a company and a proxy advisor firm, it will be the governance disclosures and policies revealed in the company’s annual report and market announcements that underpin a proxy advisor’s view of a company.

Where is the heat?

We also asked each of the proxy advisor firms if there were areas of corporate governance where they felt Australian companies should raise their game. All four agreed that companies needed to do more on remuneration, with greater disclosure around executive, performance related, pay targets   and, in particular, short-term incentives.

ISS Australia, CGI Glass Lewis and ACSI also specifically called out ESG reporting and, in particular, action on climate change as important areas for Australian companies to focus on.  Daniel Smith, General Manager at CGI Glass Lewis, has the view ESG reporting needs to sit within the continuum of risk reporting and disclosure so that the company is “explaining how the board oversees material risks, including environmental and social risks”. CGI Glass Lewis also identified ‘explaining corporate strategy’ as an area where Australian companies could raise their game.

“Disclosure of the risks posed by climate change is a major area of focus for investors, as well as regulators including APRA and ASIC.”
Louise Davidson CEO, ACSI

Simon Connal, a founder of Ownership Matters, took the view Australian companies could do more around “moving-on poorly performing directors” and felt that “APRA’s report on CBA tends to validate this issue”. Ownership Matters also highlighted there is more to be done to hold Boards and management accountable for poor capital management, both M&A and capital allocation.

ACSI included Board gender diversity as a priority area where it would like to see continued progress. “We will continue to recommend our members vote against directors on all-male Boards. We are extending this policy to ASX200 companies with one woman director and the ASX300 this year.” Louise Davison said.

Where to begin?

All four proxy advisory firms are happy to meet with companies, but it is worth noting not every advisory firm covers every company. In reality proxy advisors write reports on the companies that their clients, investment managers and asset owners, ask them to. The good news is proxy firms are happy to say whether they do or don’t report on a company, which is a good place to start any engagement with them.

They also, each have a lot of information on their firms’ policies and guidelines available through their websites.

“I would urge companies to look at our policies to understand why we say what we say.”
Vas KolesnikoffHead of Australia & New Zealand Research, ISS

It is worth reviewing the on line material provided by proxy advisor firms prior to seeking a meeting. It is possible interrogating a proxy advisor’s website will give a company a good understanding of how and why that advisor has formed a certain view, which may make a face to face meeting redundant.

One thing all the proxy advisory firms appear to agree on is that listed companies should focus on building effective IR functions that support and maintain constant, appropriate and effective communication with their shareholders as a priority.

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