Greens Piece Proxy by proxy

  • Date:01 May 2010
  • Type:CompanyDirectorMagazine

John M Green suggests it may not be the proxy advisory firms that are the problem, but some of the institutions that hire them.


Proxy by proxy


During each year’s annual general meeting season, directors come out blasting at corporate governance proxy advisory firms. It’s mostly done privately, discreetly, only occasionally breaking into the press. Almost inevitably, it’s after one of these firm’s reports has “mindlessly” or “wrongly” criticised some aspect of the governance practices of that director’s company.

Though these are frequent complaints, they are not always justified. But even when they are, these directors’ attacks may still be misdirected. If boards and investors feel something has gone wrong in proxy land, then good governance might be better served if we refocused on a different party.

Who? Perhaps it’s institutional fund managers that hire these firms in the first place and their governance practices that we should be more closely scrutinising. Any one of these institutions can speak for billions of dollars of other people’s money. They are important players in our markets, indeed in our society. What they do, and how they do it, matters.

Of course, if they seek advice on as critical an issue as the governance of companies they invest their clients’ money in, that is no bad thing.

The key problem is that too often they don’t receive it as the advice it is intended to be, to be tasted and tested, but rather as a fast-food gulp-it-down-without-thinking voting direction.

If these were trivial issues, fine. Life is short and these busy people may have better things to do with their time after poring over the numbers and collecting their fees... like going to lunch.

But since when is governance trivial? If it were, why all the fuss about it? Governance does matter.

Twenty years ago, a highly respected Australian investor told me he never even looked at a prospective company’s numbers, its performance etc, until he’d first satisfied himself that the board and management were people he could trust, with a culture he could trust. For him, the people and the culture were the first step in analysing a company, not the last. Back in those days he didn’t call it governance, but it was.

Warren Buffett has put it this way: “The important thing is to buy into the right business with the right people and at the right price.”

Yet often, institutional investors outsource the whole question of the “right people”, pushing it off their own desks to the outside proxy advisory firms. And in some cases, bizarrely, a fund manager’s trust deed can oblige it to follow a proxy firm’s recommendations as if they were the Ten Commandments.

Doesn’t that seem to you like an abrogation of a fund manager’s most basic responsibility to its investors? Sure, its trust deeds might technically permit it, if not mandate it, but who drafted those deeds to say that? Not their investor clients. Most people trying to find a home for their superannuation wouldn’t have a clue they were agreeing to such a thing, and some would be horrified to learn it.

And, where this isn’t mandated, it might as well be, judging by the avalanche of proxies that flow straight after a proxy advisory firm’s report hits its client’s desk. What’s happening in those cases? Presumably the report comes in, and a busy analyst ticks the boxes, washes his or her hands of it and, again, goes to lunch, an important job done.

What investors expect from their fund managers, and pay handsomely for, is judgement, not blind obeisance to a third party’s judgement, no matter how smart or methodical it is. By all means, they should get the proxy firm’s advice if they want. But only if they’re going to treat it as advice, something to be received, considered and only if judged appropriate, acted on.

There’s an ancient and basic legal principle that the modern funds management industry seems cleverly to have side-stepped: delegatus non potest delegare. Unless it’s expressly authorised, a delegate can’t delegate to someone else. Aha! Now we have a reason for those bizarre trust deeds mentioned above: express authorisation.

But Latin and deeds aside, how would these same fund managers react if the board of a company under takeover hired an investment bank to advise on the takeover defence, the bank’s advice was to flatly reject the offer and the board simply accepted it without analysis or debate? After all, directors also have lunches to go to.

Those fund managers would rightly call for the board to be sacked. So why is it different if they do the same thing?


John M Green FAICDis a company director, a writer and a publisher, and was formerly an investment banker and a lawyer