Australia: Shareholder engagement - has the AGM had its day?

One of the pillars of the corporate calendar – a company's annual general meeting – is on the brink of being made optional, giving listed companies the opportunity to scrap it.

While undoubtedly greeted with secret delight in the boardrooms of corporate Australia, it has unsurprisingly been condemned by retail shareholders and the Australian Shareholders Association. But will the AGM really be scrapped?

CAMAC's discussion paper

The ASX Corporate Governance Council Principles and Recommendations describe the annual general meeting as the "central forum by which companies can effectively communicate with shareholders, provide them with access to information about the company and corporate proposals, and enable their participation in decision-making."

In reality the AGM has become less and less relevant for significant strategic decision making, and there is a steady decline in shareholders wanting to participate in the forum.

In response to a request from the Australian Government for advice on the role of the AGM, the Corporations and Markets Advisory Committee has published a discussion paper on The AGM and shareholder engagement (14 September 2012).

Apart from considering the future viability of the AGM, the discussion paper also seeks comment on company annual reports – what content should and shouldn't be included –and possible future formats for AGMs, taking into account technological developments.

But it is the prospect that the AGM may be scrapped that has captured public attention.

Walking the tightrope

In proposing to scrap the obligation to hold an AGM, the Government is walking a tightrope between such issues as:

  • retail v institutional shareholders
  • accountability v limited accountability, and
  • use of technology v traditional methods.

Retail v institutional shareholders

While CAMAC's paper has been welcomed by institutional shareholders and listed company boards, retail shareholders and their representatives are outraged that losing AGMs would potentially shut out ordinary investors from accessing boards of the companies of which they are part owners.

But there is no getting away from the facts. Only 5 per cent of the top 200 companies draw more than 500 shareholders to their AGM. Rather than being an effective communication forum, AGMs are increasingly viewed as an opportunity for a few disgruntled retail shareholders to 'vent their spleen' at the board.

Questions put to the board are often ill-informed and little of the shareholder debate at AGMs is on the strategic direction of the company. There is a view that much of the meeting's 'ordinary business' (tabling of director's report, remuneration report, re-election of directors) could be done without the need for shareholders to attend a specific meeting.

Institutional shareholders (and to a certain extent listed companies themselves) argue that higher levels of continuous disclosure combined with companies using more corporate briefings, teleconferences and webcasts have rendered the AGM largely irrelevant.

However, listed companies need to ensure their investor communication is balanced. Retail shareholders must have the opportunity to participate if they want and communication can not be solely focussed on institutions. Until this can be achieved, it will be difficult to scrap the AGM completely.

Accountability v limited accountability

On release of the discussion paper, the chief executive of the Australian Shareholders Association is quoted as saying that the AGM is the only access small investors get to boards and executives, and that this engagement should be increased, not reduced. In other words, boards are currently held accountable and have to 'front' shareholders.

Under the potential reforms, it may not even be necessary for the board to turn up to a meeting at which shareholders can be present. Retail shareholders have not reacted favourably to that suggestion.

There is an argument that the loss of a physical AGM leads to a loss of accountability. This will largely depend on the format of the AGM, if it is retained. For example, a meeting that allows 'on-line' participation will still require there to be a physical meeting held somewhere, whereas an entirely 'virtual' meeting may not require the board to participate.

In reaching any conclusions on the future of the AGM, the requirement that the board remain physically accountable to its shareholders for the overall management of the company should not be underestimated.

Technology v traditional methods

Beyond the hype of whether companies should be allowed to scrap their AGM, the more important issue is how to modernise it such that it once again becomes a meaningful forum for shareholders and companies alike.

Embracing technology is the key. Arguably many more shareholders would participate in AGMs if they were held over the internet and if 'on-line' voting was a feature.

With greater use of technology, the issue becomes one of maintaining accountability of management via questions or comments. US companies are leading the push into increased use of the technology at meetings, which is made easier due to the provisions of Delaware Law that facilitate the use of technology when engaging with shareholders.

In Australia, developments like 'on-line meetings would be expedited if current legislation was broadened to provide clearer guidance for the use of technology in meetings.

Expanding the use of direct voting by shareholders would also help rejuvenate the AGM. Direct voting involves shareholders casting a vote on one or more matters and forwarding that vote or votes to the company prior to a cut-off time before the AGM.

This would replace the necessity to appoint a proxy, and give shareholders direct ownership of their votes. Several ASX top 50 companies already permit direct voting as it normally only requires a simple amendment to a company's constitution to allow it to take place. However, companies would be more willing to use direct voting if it was explicitly permitted by the legislation or the ASX Listing Rules.

Ability for shareholders to call general meetings

In addition to AGM reform, the discussion paper also addresses the legal anomaly that allows 100 shareholders (whether the company has 500 shareholders, or 500,000 shareholders) to force the company to convene a general meeting to consider a resolution proposed by the requisitioning shareholders. Separate to the 100 shareholder test, one or more shareholders holding 5% or more of the company's share capital may also requisition a meeting.

While other jurisdictions such as the UK and France have the 5% threshold, Australia alone retains the right for 100 shareholders to requisition a meeting.

There needs to be a balance between legitimate shareholders' rights, and the potential abuse of those rights at a substantial cost to the company. The issue has risen to prominence by the recent example of Woolworths Limited.

Woolworths was forced to go to the Federal Court to obtain an extension of time to allow a shareholder meeting that had been requisitioned by 100 shareholders to consider a resolution in relation to gambling. This is despite Woolworths' involvement in gambling amounting to a fraction of its total revenue. Woolworths was successful in persuading the court that the cost of going to 430,000 shareholders to consider the resolution was ridiculous in the circumstances. Woolworths agreed to propose the resolution at the same time as its AGM to avoid any unnecessary costs in considering a resolution that in all likelihood will be defeated.

There will be strong support from companies for the removal of the 100 shareholder legislative provision and in all likelihood, despite retail shareholder opposition, it will be scrapped.

What next?

While the Government could decide to scrap the requirement for AGMs this would undoubtedly alienate large numbers of (voting) shareholders. Politically, it could be a move that is considered too drastic. Instead, it appears that AGMs and other related issues such as the information in annual reports, will receive a major overhaul.

The hope is that these changes will act to galvanise shareholders and allow the AGM to regain its foothold as the pinnacle event in the corporate calendar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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