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Directors have governance concerns too

The Age

Monday March 28, 2011

LEONIE WOOD

THE highly regarded Canadian lawyer and governance specialist, Carol Hansell, readily admits that a lot of worthy corporate responsibility issues have been "talked to death".It might be how much pay the boss takes home, accountability for poor performance or managing conflicts of interest someone will always want higher standards.But when Ms Hansell visited Australia recently, instead of encountering "governance fatigue" as she terms it, two issues flared: the so-called two-strikes rule and the role of proxy advisers.Directors she spoke to as part of a series of talks convened by the Australian Institute of Company Directors were deeply upset about how legislative changes designed to protect investors under the two-strikes rule might end up causing more harm than good. At the same time they want curbs on the emerging power of third parties such as proxy advisory firms.Ms Hansell, who has been chairman since 2007 of the American Bar Association's corporate governance committee and who is also a director of Canada's central bank, believes regulating to fix governance problems is not always the answer."It's a slippery slope to start talking about regulation or to start trying to take business models [such as proxy advisory firms] apart," she says. "But the issue for directors is that institutional investors seem to rely blindly on these recommendations from proxy firms."The two-strikes rule, if adopted, would provide for investors attending a shareholder meeting to spill a board of directors if the company's remuneration report was rejected by more than 25 per cent of votes in two consecutive years.While investors might like the idea of having a stronger voice in how companies are run and the satisfaction of holding directors to account, directors fear the two-strikes rule paves the way for shareholders with narrow and possibly vested interests to abuse the power and hijack boardroom control."It's something that directors in Australia are very concerned about," Ms Hansell told The Age. "Investors certainly in the last few years have demanded more of a voice in things, and most boards want active shareholders but there's a difference between 'active' and 'activist' shareholders."Legislation on the two-strikes rule was introduced by the Gillard government in late February, and debate on the bill will resume in May.The Coalition, however, wants the bill amended to dilute the trigger: instead of a threshold being 25 per cent "no" votes cast at a meeting, the "no" vote would have to represent 25 per cent of a company's entire shareholder base.The issue surrounding proxy advisory firms is more problematic. It concerns the power, the conflicts of interest and the lack of accountability of global firms that advise institutional shareholders how to vote on resolutions at shareholder meetings.The field for institutional advisory services is dominated by just two firms, ISS/Riskmetrics and Canadian firm Glass Lewis. Institutional investors rely on proxy advisers to organise the mechanics of their votes across thousands of companies during the reporting season.But as Ms Hansell pointed out, many institutional investors have ceded wholesale control of their votes to these institutions by adopting the proxy firms' advice as their own default position. Instead of analysing the ramifications of a particular resolution, the investors automatically align all their votes for all companies in their portfolio with what a particular proxy firmadvises.That raises all sorts of questions about who holds the proxy advisory firms to account.Ms Hansell, who practises commercial law at Toronto-based Davies Ward Phillips & Vineberg LLP, has served on the ABA's governance committee throughout the global financial crisis.Canadian and US companies are increasingly concerned about the quality, and therefore credibility, of proxy firms' voting recommendations, she says.They are frustrated they have little or no opportunity before a vote to respond to the proxy firms'analysis.In turn, she says, capital markets worry that responsibility for big tranches of votes is surrendered to "private companies with no public policy mandate or oversight".

© 2011 The Age

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