“Absurd proposition”: Why Josh Frydenberg’s war on proxy advisers needs to fail

After giving just 52 days’ notice, ASIC licences for Australia’s small proxy advisory firms were cancelled on Monday by Josh Frydenberg.

In a major win for Australia’s ASX-listed boards, the Treasurer thought this was a smart thing to do by way of regulation, rather than legislation, in the week before Christmas when no one was watching.

The research houses which advise big institutional investors on how to vote at public company AGMs are in a twilight zone, scrambling to secure new ASIC licences while waiting to see what happens in the Senate on Thursday morning where independent Senator Rex Patrick is leading a push for a disallowance motion which will be supported by Labor and the Greens.

The potential for changes in the proxy advisory space was first covered off in this May 2021 Crikey piece, but few people believed Frydenberg would actually follow through with a proposal that forces independent research houses to provide their reports to public companies at the same time as they go to paying institutional clients.

Even worse, the firms can be fined up to $11.3 million each time they fail to do this, and the individuals responsible up to $1.3 million each time.

There has been a rise in media coverage on the issue in recent days ahead of Thursday’s Senate vote. Nine’s senior investigative business reporter Adele Ferguson provided a good summary of the issues in Saturday’s The Age and The Sydney Morning Herald and News Corp’s Terry McCrann has also become a fierce critic, labelling the proposed fines “offensive and embarrassingly stupid”.

However, it has been the AFR’s acerbic Rear Window columnist Joe Aston (see this and this) who has unveiled the real governance stinker, namely the role of Melbourne law firm Arnold Bloch Leibler in the whole affair.

ABL partner Jeremy Leibler has campaigned for tougher regulations on proxy advisers for many years on behalf of some of his more colourful clients — such as Gerry Harvey, Solomon Lew, the old Slater & Gordon, Crown Resorts, Afterpay, Freedom Foods and Retail Food Group. These governance-challenged outfits don’t like being criticised and prefer minority shareholders who aren’t well informed about their practices.

However, it wasn’t until after ABL took on two pro bono legal cases for Frydenberg worth at least $400,000 to the member for Kooyong over the past five years that he finally decided to move on the proxy adviser issue.

The first was representing Frydenberg in an attempt to suppress his transcript of an interview with the Australian Federal Police back in 2003 related to the notorious leaking of a document critical of Andrew Wilkie to Andrew Bolt. They failed, and the full interview transcript is available on the ABC’s website.

The dollar value of this advice was never disclosed, but when ABL represented Frydenberg in a High Court challenge to his citizenship in 2019, he disclosed a benefit worth $410,000 which was the legal costs order imposed by the court against complainant Michael Staindl, who is now facing bankruptcy proceedings from ABL.

Then you have the curious case of Luke Jedynak, the adviser in Frydenberg’s office who has had carriage of the proxy adviser changes since February last year. Jedynak is on secondment from ABL, where he is a senior associate who works alongside Leibler.

The optics of this are all too cosy. Should an ABL lawyer be embedded in the Treasurer’s office pushing controversial regulations supported by key ABL clients at the same time as ABL is delivering free legal services to Frydenberg? Perhaps this is an issue which a federal ICAC could look at.

At the very least, a reform like this should be implemented by way of legislation, not regulation, and even Liberal Senator Concetta Fierravanti-Wells was happy to spell this out in an excoriating eight-page letter to Frydenberg objecting to the changes on behalf of a bipartisan Senate committee.

I have relied on proxy advisers for almost 20 years to assist with uncovering governance snafus at public companies that warrant some AGM attention. Without them, remuneration would be out of control, dud directors would remain in the club, and retail investors would have lost many billions more in capital raising rip-offs.

In terms of motivation, suspicions remain that Frydenberg is upset that governance advisory service Ownership Matters produced some cracking research that lifted the lid on huge JobKeeper rorts, where $38 billion was paid to applicants who didn’t actually qualify under the rules of the program.

As an example of the work done by proxy advisers, here is the 60-page report produced by ISS ahead of last year’s Rio Tinto AGM when the Juukan Gorge scandal was still playing out. The report is paid for by institutional investors, so why Rio should be mandated by federal regulation to receive a copy at the same time as investors remains a mystery.

As for the idea that ISS should be fined $11.3 million if it fails to email a copy to Rio Tinto, even IPA chairman Janet Albrechstsen has slammed that idea on Twitter.

What next? Journalists being fined millions for not emailing their stories to politicians at the same as they are made available to paying subscribers?

It’s an absurd proposition which the Senate should throw into the dustbin of history on Thursday.

This article was first published by Crikey.