Background
Since coming to office in 2013, the Abbott, Turnbull and Morrison Governments have shown remarkably little interest in competition law reform. The much-touted 2017 ‘effects test’ changes (the most prominent legislative change that followed the 2015 Harper Review) have been barely used in cases brought by the Australian Competition and Consumer Commission (ACCC). In August 2021, calls for an overhaul of merger powers by ACCC Chair Rod Sims were rejected on the same day by Treasurer Frydenberg.
The contrast with other countries could not be more stark. In the United States, President Joe Biden has appointed Amazon critic Lina Khan as head of the Federal Trade Commission. Tim Wu, author of The Curse of Bigness, serves on the National Economic Council. Jonathan Kanter, a long-time critic of big tech, is the top competition enforcement official at the Justice Department. This new view on competition policy is reflected in Europe too. European Union competition commissioner Margrethe Vestager recently declared ‘We need to push for a broader notion of consumer harm.’ Yet this fresh view is absent from the Coalition’s tired approach to Australian competition policy.
In that environment, we were pleased when the government proposed an inquiry into common ownership. The rise of index investing offers clear benefits to Australian households. Warren Buffett once said that if a statue is ever erected for the person who has done the most to help individual investors, it should be for Vanguard founder Jack Bogle. Because they provide investors with diversification benefits at a low cost, index funds are rapidly increasing their proportion of share markets around the world. Australia is no exception.
Yet because index investing provides substantial economies of scale, Vanguard and BlackRock have become the largest investors in many Australian companies. Since many individual shareholders do not exercise their voting rights, these index investors have the potential to exercise a disproportionate influence over Australian firms. This carries with it the risk that they will look to maximise the combined revenue of an industry, and mute the competitive pressures that would exist if different investors owned competing firms. Because the Australian economy is already highly concentrated, and because scale returns make it likely that index investors will continue to grow, this is an issue that deserves close attention.
In our hearings, we found the regulators differed markedly in their degree of engagement with these issues. Treasury had nothing of substance to contribute to our inquiry. The Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) were mildly engaged. The ACCC provided valuable insights. We are grateful to the academic experts and industry bodies that provided their views on the issue of common ownership.
Recommendations
The majority report makes two recommendations with which we agree.
Labor committee members support Recommendation 1, that the committee recommends that the Australian government considers a requirement for portfolio managers whose assets surpass a particular threshold to report their shareholdings, similar to the 13F disclosure rule introduced by Securities and Exchange Commission in the United States.
In the United States, these 13F disclosure statements have been the main source of data for studies of common ownership, and would provide government regulators, media commentators and academic researchers with more insights than are currently possible when using only disclosures of substantial shareholdings.
Labor members’ support for Recommendation 1 is consistent with our broader support for government transparency. It was Labor that passed laws which required the Australian Taxation Office to disclose the total income and tax paid by firms with a turnover above $100 million, and it was the Coalition (supported by the Greens) that watered down these laws for private companies. Similarly, Labor supported moves in the Senate to require the Australian Taxation Office to report the names of firms with a turnover above $10 million who received JobKeeper. Again, the Coalition opposed this transparency measure.
Labor committee members support Recommendation 3, which proposes the introduction of an explicit legislative requirement for the ACCC to actively monitor the extent of common ownership in Australian markets, and that the ACCC also be empowered to take common ownership implications into account when assessing merger applications. As we have noted, the ACCC appears to be monitoring common ownership of its own volition. However, given the importance of the issue, we believe that an explicit legislative requirement to monitor the issue, and an ability to take account of common ownership in merger decisions, is warranted. The research on common ownership has ripened in recent years, and it is appropriate that the legislation be amended to keep pace with developments.
Labor members of the committee also note the observation by multiple witnesses that the Australian share registry is unusually opaque. Substantial shareholders declarations are required when an investor’s shareholding exceeds 5 percent (and then if there is a change in their holdings of more than 1 percent). But below the 5 percent threshold, it becomes extremely difficult to identify major shareholders.
The committee was provided evidence that large Australian listed entities regularly pay financial investigators to identify their biggest beneficial owners. This can involve making multiple inquiries through nominee and holding companies—sometimes held offshore—in order to identify the true shareholders. (Although these investigatory exercises are paid for by shareholders, their results are rarely disclosed.)
Apart from its benefit in understanding common ownership, a beneficial ownership would reduce Australia’s vulnerability to money laundering. The Australian chief executive of Transparency International, Serena Lillywhite, says that ‘Australia is one of the best places to launder dirty money and the reason for that is there is very little scrutiny, there’s very little verification and checking of information.’ Regarding Australia’s failure to implement a register that lists the beneficial owners of Australian companies, Ms Lillywhite observes: ‘This is where Australia has absolutely fallen off the wagon and is lagging behind international trends,’ and notes that it leaves Australia exposed to investors with illicit funds.
In 2016, then Assistant Treasurer Kelly O’Dwyer pledged that the Coalition government would implement a beneficial ownership register. Following a Treasury consultation process, the Morrison Government backflipped, announcing in 2019 that it would not proceed with a beneficial ownership register.
Labor committee members recommend that the government create a register of beneficial ownership.
Finally, Labor committee members were surprised to discover in the draft report a recommendation relating to proxy advisers, since proxy advisers were barely mentioned in written submissions or verbal evidence. Yet perhaps we should not have been. Since the beginning of these hearings, Coalition members were desperate to find a way of linking the issue of common ownership to industry superannuation funds. Throughout the 46th parliament, Coalition members (particularly the Members for Goldstein and Mackellar) have used the House of Representatives Standing Committee on Economics to subject industry superannuation funds to a relentless inquisition. They have put thousands of questions on notice to superannuation funds, then largely ignored the answers. Although most industry superannuation funds outperform most retail funds, and despite the fact that the Hayne Royal Commission found misconduct almost entirely in the retail sector, Coalition members have used this committee to target industry superannuation funds for purely ideological reasons.
In the case of this inquiry, Coalition members were faced with a conundrum. The evidence clearly showed that the largest shareholders in the Australian market were index funds, not superannuation funds. To suggest that superannuation funds were having an impact as common owners, it was necessary for Coalition members to show that superannuation funds were working in concert. No evidence of this was adduced in the hearings, but Coalition members nonetheless decided to include Recommendation 2, which implies that proxy advisers somehow play a coordinating role across superannuation funds.
Proxy advisers provide financial research that may impact on investors’ voting decisions. They do not instruct custodians about investors’ voting decisions, nor do they deliver voting instructions to company registries. Investors frequently choose not to follow the research provided by proxy advisers. Proxy advice is merely one input into their decision-making process. No evidence was provided to the committee to suggest that proxy advisers attempt to corral multiple investors into acting in unison, as though they were a single investor.
That Coalition members would choose to include a critique of proxy advisers in this report is all the more bizarre given the fact that the Australian Senate voted on 10 February 2022 to disallow regulations that would have subjected proxy advisers to fines of up to $11 million for minor infractions. These regulations, which were announced by Treasurer Frydenberg in the week before Christmas, lasted just three days before being disallowed by the Senate.
It is difficult to overstate the concerns expressed by the government’s ill-judged attack on proxy advisers. Prior to the disallowance, Coalition Senator Concetta Fierravanti-Wells, Chair of the Senate Standing Committee for the Scrutiny of Delegated Legislation, warned Treasurer Frydenberg that the use of regulations rather than delegated legislation ‘appears to be inconsistent with the guidance provided in the Department of the Prime Minister and Cabinet’s Legislation Handbook.’
Fairfax’s Adele Ferguson pointed out the hypocrisy of ‘a government that spruiks itself as champions of cutting red tape and light touch regulation’ attempting to impose ‘draconian new regulations and punitive fines on proxy advisers.’ The Herald Sun’s Terry McCrann described it as trying to ‘break a butterfly on the (torture) wheel.’ The Australian’s Janet Albrechtsen noted that it was ‘Hard to disagree with claims that the reforms are overreach drafted by people who don’t understand business.’ The Australian Financial Review’s Joe Aston observed that ‘This proxy ambush was public policy as campus politics,’ observing that ‘Australia has an undergraduate Treasurer who, instead of doing his own job, is settling other people’s scores as if they were his own.’
Labor members of the committee do not support the ideological attack on proxy advisers embodied in recommendation 2.
Summary of recommendations by Labor members:
Support Recommendations 1 and 3
Add a new recommendation: That the government create a register of beneficial ownership
Hon Dr Andrew Leigh MP
Ms Peta Murphy MP
Dr Daniel Mulino MP