Listening to the voice of small stakeholders

‘Mum-and-dad investors’ could provide boards with a useful view of company’s operations.

Australian Shareholders’ Association (ASA) Chairman, Allan Goldin, says boards of ASX 200 companies are working harder to engage with retail shareholders. But they are missing an opportunity to broaden that engagement and understand the retail stakeholder “voice”.

The ASA last year met with 180 ASX 200 companies, mostly with the Chair, a few weeks before their Annual General Meeting (AGM). In addition, more companies are meeting with ASA after their half-year results, to lift their engagement with retail shareholders.

“Communication has definitely improved,” says Goldin. “We see more boards wanting to explain key governance issues to ASA, as a proxy for retail shareholders. But there’s a long way to go and a big area for improvement for boards to understand the needs of retail shareholders and also benefit from their view on how the company is performing.”

Greater engagement with investors has been a focus of many ASX 200 companies this decade. Industry superannuation funds, index funds and other institutional investors have sought meetings with boards to understand their organisation’s governance approach.

The investment community’s heightened focus on Environmental, Social and Governance (ESG) performance has meant boards are engaging on a broader range of non-financial issues. For example, the organisation’s approach to climate-change and modern-slavery risks.

Anecdotally, Chairs are spending extra time meeting with institutional shareholders in Australia and overseas each year, as investor relations become a bigger part of the board’s role for large listed companies. The rise in shareholder activism has also led boards to lift their engagement on investor relations with institutions.

Less considered has been how boards engage with small shareholders. Although retail investors are large in number, they often have limited voting power in listed companies because of their small shareholding on a one-share, one-vote system. Engaging institutional shareholders has always been the focus given their voting power.

But as renewed debate emerges on “Stakeholder Capitalism” – that is, boards considering the needs of a broader range of stakeholders – it is worth asking: Can boards better engage with their organisation’s retail shareholder base to understand their view?

About 37 per cent of Australian adults, or 6.9 million people, held listed investments, mostly shares, at the time of the 2017 ASX Australian Investor Study. That’s a large “stakeholder group” for boards to source information from, not just on their shareholder needs but their broader views on an organisation’s brand, culture, products and corporate social responsibility. As shareholders, they have a vested interest in the organisation’s success.

Engaging with retail shareholders could align with other work directors are doing to understand their organisation: for example, conducting more site visits to get first-hand knowledge of products or services, and the customer experience.

The ASA’s Allan Goldin says organisations are missing an opportunity to view their retail shareholder base as an information source that can inform boards. “In some companies, retail shareholders are regular users of the products and services. They have a sense of when the organisation is performing well or when it is doing the wrong thing by customers.

There’s a lot of knowledge boards could tap into with retail shareholders if they made an effort to ask.”

Goldin says most engagement between boards and retail shareholders, via ASA, is about executive pay. “Often a new Chair will want to meet with us to explain the executive remuneration (REM) appraoch or if there is a significant REM change. Executive pay is very important – we think too many executives get bonuses for work they should be doing already and that is factored into their base pay. But REM is not all we want to talk about.”

ESG and small shareholders

Goldin says retail shareholders, like institutions, also have a long-term investment horizon and growing interest in ESG issues. “Retail shareholders are thinking about their organisation’s culture and how it is managing environment and other risks. The Financial Services Royal Commission has raised awareness of these risks among retail investors.”

Boards, says Goldin, can do more to explain to retail shareholders their organisation’s long-term approach to strategy and sustainability. “Retail investors, on average, hold a stock for 11 years, so want to know the company will grow sustainably over that period, lifting earnings and fully franked dividends. Yet we hear about ESG from boards generally.”

Retail shareholders are also focusing on board composition, says Goldin. “The ASA has for many years been concerned about the lack of gender diversity on boards. Increasingly, we’re asking whether boards lack digital and other technology skills. Boards could do more to explain their composition to retail shareholders and if they have the right mix of skills.”

Australian Investors Association (AIA) National President, Graeme Bottrill, agrees that boards and executives of listed companies can do more to communicate with retail shareholders. “Companies generally don’t engage well with retail shareholders. Some provide lots of information for a retail audience, but shareholders want that information explained to them.”

Bottrill says company presentations at retail investor events are effective. “We had some terrific presentations at the AIA’s Gold Coast conference. The CEOs explained the strategy to investors, took their questions and made an effort to engage with them. It’s really valuable.”

Just as companies form customer advisory groups to better understand their consumers, so too might directors consider mechanisms to get a stronger real-time voice from retail shareholders at the boardroom table. If boards want more information sources and “lines of sight” into their organisation’s operations and dealings with stakeholders, engaging with retail shareholders is an option.

This strategy won’t suit every company or board, particularly when the organisation does not deal with retail customers. But retail shareholders may need more consideration in the “Stakeholder Capitalism” debate, given their weight of numbers.