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Dec 06, 2017

Errors found in proxy adviser reports, Aira says

One-third of top Australian company respondents report problems in survey

Companies listed on the Australian Securities Exchange (ASX) report that a large number of factual errors are being made in proxy adviser reports, according to a survey by the Australasian Investor Relations Association (Aira).

These reports can critically influence votes cast by major institutional shareholders, and Aira joins some US organizations in raising concerns about proxy advisers’ work.

One third of ASX 200 respondents say they have found errors in reports on them written by proxy advisers, Corporate Secretary sister publication IR Magazine reports. Each of the four leading Australian proxy advisory firms – Institutional Shareholder Services (ISS), CGI Glass Lewis, Ownership Matters and the Australian Council of Superannuation Investors (ACSI) – are named by respondents as having made mistakes.

Aira CEO Ian Matheson says in a statement accompanying the survey: ‘Proxy advisers play an extremely important role in critically analyzing proposals put to shareholders by companies. Companies therefore want to ensure the analysis is factually correct before it goes out. This is not about differences on matters of policy.

‘Companies want to work with proxy advisers in a constructive way to ensure shareholders are getting the best possible advice on voting matters. It should be in all parties’ interests and, indeed, for the integrity of the capital markets, for proxy reports to be factually correct.’

Aira recently called on all parties to adopt its initiative for a voluntary Code of Engagement to improve interaction between proxy advisers and listed companies.

‘We remain committed to supporting the valuable role proxy advisers play but our members are increasingly frustrated by matters like those raised in the Aira research and we continue to seek a voluntary code of conduct for proxy advisers to bring stronger alignment and consistency,’ says Stephen Woodhill, CEO of Group of 100, the Australian body for leading CFOs.

The survey also gives details of specific areas where companies say errors are being made in proxy reports. Respondents cite examples including:

  • Misunderstanding long-term incentives in remuneration reports
  • Lack of understanding of normalized profit frameworks
  • Incorrect year-on-year comparisons of key financial metrics
  • Incorrect details of shareholder approvals already in place.

Comments made by respondents outline some other issues, such as what they describe as:

  • Difficulties in arranging meetings with one or more of the proxy advisers that cover their companies
  • Evidence of errors in reports, but no corrections made even when those errors are drawn to the adviser’s attention
  • Proxy advisers in some cases encroaching into areas traditionally covered in stockbroker reports, indicating that some level of regulation may be required.

Matheson says proxy advisers need to heed the concern of major listed companies and allow them to check the factual accuracy of their data before publication. ‘Aira would like to see a re-examination by the Australian Securities and Investments Commission to determine whether the carve-out proxy advisers currently have in their Australian Financial Services License (AFSL) for general proxy advice is appropriate.

‘All proxy advisers have AFSLs, but that covers only financial advice and not the vast majority of the other advice on resolutions at AGMs that they generate. It might be time for that to change.’

The survey received responses from 52 listed companies, 46 of which are in the ASX 200.

An ACSI spokesperson stated that the Australian press has criticized ‘inaccuracies’ in the report. Spokespeople for ISS and CGI Glass Lewis did not respond to requests for comment.

In a statement, Ownership Matters says: ‘Ownership Matters does not take the Aira report seriously. It is an anonymous survey, designed to slur, without a scintilla of corroborating evidence. Not a single complaint has been made to [the Australian Securities & Investments Commission] – the body which supervises our license – about errors in our reports. We complied with all four requests we received from issuers in 2018 to correct minor typographical errors including misstating a chairman’s age.’

Matheson dismissed negative coverage of its report.

Earlier this year, National Investor Relations Institute (NIRI) chief executive Gary LaBranche wrote to the SEC raising concerns about proxy advisers’ use of automated systems to cast votes on behalf of their clients (, 8/22).

The letter describes how clients of proxy advisory firms develop custom voting guidelines, which staff at the firms then use to create a list of recommended voting decisions. Clients can manually change their vote if they disagree with an advisory firm’s recommended stance, but LaBranche writes that if the client takes no action, the vote is cast using the default voting instructions.

Other organizations calling for greater regulation of proxy advisory firms include the NYSE and the US Chamber of Commerce. In July, SEC commissioner Michael Piwowar told attendees at the Society for Corporate Governance national conference that proxy advisory firms have an ‘outsized influence’ and that he is in favor of them having to register with the agency.

In a statement sent to Corporate Secretary in response to the NIRI letter, ISS general counsel Steven Friedman says: ‘As a registered investment adviser, ISS is very cognizant of its obligations under the Investment Advisers Act and we have implemented extensive policies and procedures designed to comply with all of those requirements. ISS does not provide unsolicited proxy advice, does not engage in the solicitation of proxies and, even if we were viewed as doing so, we are in compliance with available exemptions.’

A spokesperson for Glass Lewis in the US declined to comment at that time.