Shareholder activism visible versus invisible

Joe Hockey has called institutional shareholders 'lazy' for not using their proxy votes to influence board decisions.

It is a typical bureaucratic response that relies on a visible process rather than a definite outcome. While major shareholders adhere to proxy voting procedure they are more inclined to resort to direct action if the shareholder value of their investments are threatened. It is, as John Arbouw reports, a question of visible versus invisible shareholder activism.

It's called "having a quiet word" and it is a peculiarly British euphemism for one party directly influencing another party without making a fuss or, more accurately, making whatever is discussed public. In bygone days, the Sydney, Melbourne and Adelaide clubs were the temples where this form of secret men's business was practised and it was in these premises or ones like it, that the commercial and political affairs of the nation was conducted among gentlemen using the "quiet word". In the pluralistic society and the broad-based economy that is Australia, the quiet word among select groups or individuals seems somewhat out of step in an age where everyone screams to be heard. Yet, the process of the quiet word has its defenders particularly in the context of shareholder activism by large institutional investors who prefer invisible activism (the quiet word) to using a company's annual general meeting and exercising their proxy vote (visible activism). In Australia, the quiet word with the chairman of a board by institutional investors has almost always resulted in changes both at board and management level. The boards of Goodman Fielder, Coles Myer, BHP and most recently AMP have all felt the hot breath of the "quiet word" from irate institutional shareholders.

It was the board and management crisis at the AMP over the past year that is bringing the issue of visible or invisible activism to a head. The trigger for this focus was the large payout to departing CEO George Trumbull and the mismanaged takeover of the GIO. The fallout from this corporate takeover continues to reverberate around the nation in various forms of public and political outrage as well as pending legal ramifications. Politically, the Government had to be seen to be doing something and it was in this context that the Federal Minister for Financial Services, Joe Hockey (see June issue) jumped into the fray with comments about "lazy" institutional investors and the need for better corporate governance. This has resulted in Australian institutional investors finding themselves at odds between accepted business practices that bring results and the demand by government as well as small shareholders to provide greater transparency. Underpinning the Hockey charges is the assumption that fund managers and institutional investors are abrogating fundamental corporate governance principles by not exercising their proxies. He says "funds managers and trustees have a responsibility in particular to make boards accountable for the decisions they make on behalf of shareholders".

Investment and Financial Services Association chief executive Lyn Ralph believes fund managers are being unfairly targeted. "I know that comparisons have been made between international fund manager proxy voting patterns and that Australian fund managers vote their proxies less frequently but that doesn't necessarily tell you the whole story," she says. "Fund managers do have a duty to use their proxies if they see fit but it is not always necessary and often it is just a question of voting on a procedural matter rather than a material one. "And I resent any inference that we are not interested in good corporate governance. The Coles Myer case is an obvious example. Fund managers spent a huge amount of time and effort in discussions with the board and management to sort the situation out. This is time that they could otherwise have used to increase the shareholder value of the funds under their management." A recent survey, Proxy Voting in Australia's Largest Companies conducted by the Centre for Corporate Law and Securities Regulation (University of Melbourne) and Corporate Governance International provides a timely perspective on the issue.

There is little doubt that large institutional shareholding will increase. The Australian growth in institutional shareholding is fuelled by compulsory superannuation contributions. By 1997, institutions held about 65-70 percent of listed domestic equities in the UK, about 50 percent in the US and around 45-50 percent in Australia. According to the proxy voting report, the lower Australian figure reflects "the prevalence of large founding family and incorporate stakes in almost half of Australia's large and medium-sized listed companies". While Australians are legally required to vote during an election, there is no such requirement for individual shareholder voting. Institutional investors have greater proxy voting responsibility but are not compelled to vote. However, under the trust law and statutory duties contained in the Superannuation Industry (Supervision) Act 1993 there are obligations on fund managers to consider proxy votes and superannuation trustees have a duty to monitor this. "The relatively low aggregate voting figures," says the proxy voting report. "indicate that on many occasions investment managers do not exercise their delegated voting power. This in turn begs the question whether they are meeting their obligations to consider whether to vote. From the perspective of superannuation fund trustees, the fact that they owe a duty to monitor their investment managers' exercise of voting discretion means that for their own protection, trustees should take a close interest in the proxy voting performance of their investment managers."

To vote or not to vote is indeed the burning question, made even more complicated by an inconsistency in government handling of the matter. Section 251AA of the Corporations Law compels companies and boards to disclose proxy voting information to the Australian Stock Exchange. The ASX normally edits proxy voting information before placing it on its website or giving it to other information service providers so that the "edited version shows merely the number of shares in respect of which proxies were instructed to vote for and against. It does not reveal the number of shares in respect of which proxies were instructed to abstain or vote at their discretion". To obtain this information involves paying the ASX a fee. The Parliamentary Joint Statutory Committee on Corporations and Securities has recently recommended scrapping this rule that it regards as providing little benefit. IFSA does not agree and points out that disclosure of proxy instructions:

• enables shareholders to assess how their voting intentions compare with those of other shareholders and the relative importance of their voting instructions (as a proportion of total instructions given to proxies).

• assists investment managers in reporting back to their clients on exercise of delegated voting rights.

• is consistent with international guidelines on good practice in corporate governance.

According to the proxy voting report, section 251AA disclosures are the only empirically reliable way to check the level of voting at listed Australian companies. Having a reliable means of monitoring the voting level is important from a corporate governance perspective. In the UK, the National Association of Pension Funds has strong views on the need for fund managers to use their proxy votes. Last year NAPF developed its Voting Issues Service, aimed at providing a template for managers when exercising their votes. The interesting element in regards to Australian institutional activism is that the voting template "will support board resolutions and strategy unless there are very good reasons for doing otherwise".

And despite the development of a proxy voting template, NAPF recognises the role of invisible activism in that there is scope to have discussions with the board's position on a particular resolution "with the aim of understanding fully the reasons behind the stance". In addition to its voting issues service which now includes background on directors' remuneration and on the environmental record of companies, NAPF has also released a document updating its position on good corporate governance. One of the underlying issues is whether the growth in institutional shareholding is having a measurable impact on corporate governance. The evidence is far from conclusive. A study into listed UK companies (Faccio and Laser 2000) found that companies in which internally-managed pension funds held large stakes did not outperform their industry counterparts. In the US (Black 1998) reviewed the empirical studies which have tried to determine whether institutional investors have had any impact on the performance of listed US companies.

The results, according to the proxy voting report were mixed with institutional investor activism showing a positive impact on corporate performance in some instances and a negative one in others. One of the reasons for the mixed results says the report is that nearly all of the studies focussed on visible activism. "Behind the scenes activism also occurs in the US, but by definition its impact is very difficult to study. Yet it is entirely plausible that invisible activism is more effective than visible activism. UK institutions have emphasised that their most effective interventions have occurred away from the public spotlight," says the report. The conclusions to come out of the report indicates that the level of shareholding voting at listed Australian companies is lower than that for major US, UK and German companies. The study also revealed that the degree of compliance with the disclosure rule in section 251AA of the Corporations Law is far from high. But the debate surrounding visible or invisible activism begs the question on the role and the future of the AGM. The Australian Shareholders Association believes that the AGM serves a useful purpose, particularly as a forum for small shareholders - and as an opportunity for the board to come face to face with their constituents.

Other views maintain that the AGM is an anachronism in an age of instant telecommunications and that an annual meeting should be replaced by regular electronic communication between the board and shareholders. In many ways this has already occurred. A casual exploration of the websites of large listed companies shows quite clearly that relevant shareholder information is far more accessible than ever before. The missing ingredient is a mechanism by which shareholders can vote electronically on any given issue that boards deem should go to a poll. The Australian Electoral Commission is currently testing electronic voting. Direct and instant democracy is not that far away. The impact on company shareholder democracy and corporate governance will be equally profound. The e-mail or electronic message will inevitably replace the quiet word.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.