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How to combat corporate activism

15 May 2021

9:00 AM

15 May 2021

9:00 AM

It’s only one word – inserting ‘financial’ between ‘members’ and ‘best interests’ – that should kill off much of the political correctness that is corrupting Australia’s multi-trillion fund management industry. Under the fiercely criticised ‘Your Super Your Future’ legislation to operate from this July, superannuation trustees (of particular relevance to union-controlled Industry Super Funds) will no longer be able to splurge their members’ compulsory superannuation contributions on such non-financial (and politically oriented) follies as starting the New Daily newspaper or social agenda campaigns unrelated to the ‘financial best interests’ of their members. This is aimed at resolving what the government says is the current reality that ‘Superannuation Funds lack accountability to their members for their conduct and the outcomes they deliver and there is inadequate transparency on how funds are spending members’ money’.

And in a follow-up salvo in the battle for greater transparency in superannuation, in late April Treasurer Josh Frydenberg issued, for public comment, a range of options for regulating the four Proxy Adviser firms operating in Australia, two of which are foreign-owned, while one, the Australian Council of Superannuation Investors (ACSI), is owned by the union-dominated Industry Super Funds and the other local one is led by a controversial public activist. These four advise superannuation funds that own, on behalf of members, 20 per cent of the ASX, equivalent to $440 billion, in their dealings with companies in which they have invested their members’ funds. ‘Given the influential role of proxy advisers in corporate governance in Australia… Australians deserve to know the advice their superannuation funds are receiving is transparent, accurate and independent’, says Frydenberg. In what the Australian newspaper described as ‘targeting corporate activism’ that had ‘forced companies to shift on issues such as climate change’, the proposals, which follow similar reforms regulating Proxy Advisers in the US and UK, are aimed at requiring them (and their superannuation fund principals) to provide evidence backing up contentious advice on voting on behalf of members (who get no say whatsoever) at company meetings.

The Proxy Adviser proposals followed hard on the heels of another provocative announcement by ACSI, threatening to vote against company directors who do not make sure their businesses are committed to action on ‘global heating’ that includes hitting net zero emissions by 2050. Representing super fund investors that manage more than $1 trillion in retirement savings and holding about 10 per cent of the shares in the top 200 companies in the country, it aims at punishing boards that are not tackling the climate crisis quickly enough. It insists that companies work out and fully disclose what physical and financial risk ‘global heating’ poses to their assets, as well as making sure that their lobbying efforts – including through industry associations – ‘do not undermine efforts to limit climate catastrophe’. But the government is determined that maximising retirement benefits must be ‘the sole purpose’ of managing these funds; ‘it is vital that the voting rights attached to the members’ superannuation assets are managed to maximise the retirement savings of Australians’. So it proposes that Proxy Advisers extend their limited financial services licence beyond the present financial products to cover their advice on major company resolutions like board appointments, remuneration reports and governance. So much of their environment, social and governance agendas (particularly gender and the current fad of ‘stakeholderism’) appear increasingly in conflict with the government’s new ‘sole purpose’ rule.

What is now needed is for the corporate sector to join in this move to restore its main objective.

But the omens are not good. Boardroom courage has evaporated in the face of political correctness in the two years since Australian company directors showed some unexpected spine and rejected the Stock Exchange’s woke attempt to instal a ‘social licence to operate’ as a listing requirement (and which two Proxy Advisers include in their agendas, with ACSI asserting ‘Effectively engaging with stakeholders is key to maintaining this social licence to operate’). And foreign-based Glass Lewis’s guidelines require corporations to take account of the range of stakeholders needed to operate and succeed, including employees, communities, governments, regulators, investors, consumers and suppliers and that acting in the best interests of the company over the long term requires considering their interests.

As Janet Albrechtsen reported in the Weekend Australian, corporate doyen David Murray fears that corporate Australia is ‘too far gone’ down the road of seeking to satisfy activists for companies to return to their core role of driving economic prosperity. ‘Boards have become unworkable mini corporate parliaments busily trying to second-guess community expectations’, with even the Australian Institute of Company Directors, now wanting to ‘elevate stakeholder voices to the board’, putting it, Murray says, ‘at the centre of a retrograde transformation of the listed company that undermines Australia’s prosperity’.

But at least the business lobby has welcomed the government’s move to increase transparency around company voting decisions and how they are reached, with the BCA saying that while Proxy Advisers have a role in ensuring businesses are accountable to shareholders, these advisers must also be subject to appropriate levels of accountability given the significant influence that they now wield. And the Australian Institute of Company Directors added that the current lack of minimum standards means a key market actor is largely unregulated, and ‘Given the important role of proxy advisers, it is vital that their advice is subject to appropriate safeguards to ensure it is fair and accurate.’

The ferocity of the inevitable hostility from the superannuation industry (a misguided, inoperable, unnecessary and illogical blow at investors’ rights) indicates that the suggested changes are far more than just cosmetic. While there is no doubt that the public exercise of proxy adviser power has brought some improvements in corporate governance along with its strikes against remuneration reports and pressure for independent directors, the reality is that its most effective use has been through the back door of the boardroom in private discussions aimed at avoiding conflict – the threats that directors want to avoid being carried out in public, but which, in many instances, the advisers and their client super funds would not want to make public for fear of damaging the value of the shares of the company involved, to the detriment of their members. How transparent is the back door?

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