The importance of proxy advisers

Followers of Surrey Asset Management would understand that Environmental, Social and Governance (ESG) is an essential part of our investment process. We don’t just pay lip service to it's importance but after years of experience we see it as critical for all stakeholders - from investors, to employees to customers and the wider community. Over time, we believe that all things being equal, those companies that believe in and deliver on rigid ESG policies outperform those that don’t.

In this regard we have been disappointed at the Federal Government’s attempts to stifle the role of independent proxy advisers. Back in February 2021 we spoke with The Australian Financial Review highlighting how important corporate disclosure was and our disagreement with the proposed watering down of continuous disclosure rules Continuous disclosure laws: Investors lash softening (afr.com). One year on and we feel it is worthwhile discussing the Senate’s recent rejection of the Federal government’s “controversial” regulations on proxy advisers.

We are not attempting to take sides in a political debate, more to highlight our disagreement with the proposed regulations and what we believe would be the subsequent detrimental impact on investors and also wider society.  And to what purpose? To benefit a few small minority interests, who it should be questioned… why did they want such changes in regulations in the first place?!

Surrey Asset Management saw the proposed regulations not as a move to improve the consistency and transparency of proxy advisers as has been implied, rather we saw it as being detrimental to the four main proxy advisers in Australia: The Australian Council of Superannuation Investors (ACSI), CGI Glass Lewis, Ownership Matters and ISS. As investors we have used some or all of these advisers in various capacities and have found them to add value overall. 

Proxy advisers are only successful if they provide what they believe to be unbiased and accurate feedback to their clients, or as Australian Council of Superannuation Investors (ACSI) chief executive Louise Davidson said “in facilitating informed shareholder voting at listed Australian company meetings on a range of financially material issues.”

Anyone who has spent time reading through an ASX listed company’s annual report and in particular their ESG statements and critically their remuneration reports will understand that the complexity and confusion of many are on face value a red flag! An ESG section of a recent annual report we analysed ran to 110 pages with the remuneration component alone, being 44 pages! I think the Environmental component of that annual report may struggle given half of the world’s timber would need to be cut down just to print it all!

Without naming names there are countless examples of flawed director behavior which never ends well for the company or its stakeholders. As part of our process, we take directors responsibilities very seriously. We expect a high level of engagement and commitment from directors who typically are well paid for their time while also enjoying the “status” of being am ASX listed company director.

We have found that our investment process typically sees us weighting toward founder led businesses that have highly engaged board members. While no Company or Board is perfect, they typically align themselves with creating long term value for all as opposed to a select few. Good examples include companies such as Lifestyle Communities (LIC.ASX), Uniti Group (UWL.ASX) and Netwealth (NWL.ASX). Some “not so good” examples include the value destruction of particular mining companies over the last few resources cycles.

In summary, we continue to have faith in independent proxy advisers. While we don’t agree with all of their analysis we believe they provide a useful, independent point of reference.  In effect they offer an opinion for investors to consider in analysing companies and holding them to account.