There were plenty of people who could fill the role of the villain if a movie were ever made about the recent global financial crisis and its preceding two-decade long bubble. From greedy executives, to dim-witted company directors, investment bankers, auditors, independent experts and sometimes even corporate lawyers — there were few people who investors could really trust to act on their behalf. It seemed that despite being paid by them, everyone was financially motivated to act against the best interests of shareholders.

There were only a couple of exceptions — largely financial journalists (in Australia, these included Stephen Mayne, Michael West, Michael Pascoe, Trevor Sykes, Alan Kohler and John Durie) and proxy advisers (specifically RiskMetrics and CGI Glass Lewis). These people and firms used raw intellect and an un-conflicted business model to finally hold poorly performing directors and executives to account. Those chosen few company directors, highly paid by shareholders to represent their interests appeared too pre-occupied ensuring their friends in the executive suite were remunerated to be concerned with pesky issues such as solvency or competence.

It is not totally surprising therefore that the Zegna-clad charlatans, perhaps incensed that their pre-eminence over shareholders has been gradually eroded, are fighting back. First, it was Chris Thomas, of headhunter Egon Zehnder, who launched an unprovoked attack last month in the Financial Review on proxy advisers who dared criticise the remuneration of executives that his well paid firm recommended. Thomas, whose credibility was questionable to begin with (Egon Zehnder was paid millions of dollars by Telstra for their advice in appointing Sol Trujillo as CEO) didn’t bother to check with any shareholders who were clients of the proxy advisers, nor did he take the time to check the actual advice provided by the proxy advisers before criticising it.

The attacks on proxy advisers stepped up once more last week after two corporate partners from law-firm Mallesons, Craig Semple and David Friedlander, claimed in an op-ed piece in the Financial Review that “proxy advisory services are themselves very leanly staffed and don’t really have the ability to conduct granular reviews or cover such a large number of entities”.

Like Thomas, Semple and Friedlander appeared to base their criticisms on anecdotal evidence supplied by a couple of disgruntled (and most likely embarrassed) company directors, unhappy at their insipid performance being exposed by proxy advisors’ Louis Brandeis-style sunlight.

While Semple and Friedlander accuse proxy advisers of being unable to conduct adequate reviews, the evidence suggests otherwise. Aside from the fact that RiskMetrics Melbourne office is itself more highly staffed than Berkshire Hathaway was for most of its existence, RiskMetrics was virtually the only organisation to vocally criticise the related-party purchase of Rubicon by Allco (the deal was partially responsible for Allco’s multibillion collapse).

Independent expert Grant  Samuel deemed that the deal (which led to Allco directors receiving tens of millions of dollars in cash) was “fair and reasonable” — investment banks did not criticise the deal, nor did Allco’s lawyers Allens Arthur Robinson or Allco’s financial adviser Credit Suisse, although they were probably too preoccupied with banking their multimillion dollars fees to notice.

Mallesons, of course, made no public criticism of Allco during the Rubicon deal (they appear to save their public attacks only for whistle-blowing proxy advisers). Admittedly, Mallesons’ silence may also have been due to Allco founder David Coe being a former partner of the firm. Or possibly because Mallesons earned millions of dollars from Allco advising them on transactions such as failed Qantas takeover bid or German property deals. (Friedlander himself advised Allco on the disastrous Qantas bid).

RiskMetrics was also one of the lone critical voices of Babcock & Brown and MFS’s highly leveraged opaque business models. While lawyers such as Mallesons and investment banks were being paid millions for their sage advice, and Babcock’s directors were plying executives with $296 million in cash over four years — RiskMetrics was quietly warning clients of the dangers inherent in the infrastructure model pursued by Babcock.

Mallesons also acted at times for disgraced fund manager MFS. In fact, according to The Age, Mallesons signed off on a transaction that involved MFS allegedly transferring $147.5 million from a managed fund to repay liabilities. ASIC is currently taking legal action against several MFS executives and directors over the incident.

Semple and Friedlander also boldly stated that “proxy advisory services do not need to hold Australian Financial Services licenses”. However, had Semple and Friedlander bothered to check a report from a proxy adviser they would notice that they do have such licences, printed proudly on the front cover. One would hope that Mallesons’ clients, who pay upwards of $600 per hour for Semple and Friedlander’s services, receive somewhat more accurate research.

Mallesons’ and Egon Zehnder’s attacks on proxy advisers have shown one thing — that lawyers and head-hunters care far more for the executives and directors who appoint them, than for the shareholders who pay them.

It appears that Semple and Friedlander forgot to check that the walls of their own firm weren’t made of glass before they started throwing stones.

The author is a former corporate lawyer at a top-tier national law firm and briefly consulted to proxy adviser RiskMetrics. Schwab is also the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.

Peter Fray

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Peter Fray
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