Australia: Activist Investors – Understanding And Meeting Shareholder Expectations

In the context of discussing Tabcorp Limited’s search for a new CEO to replace Matthew Slatter earlier this year, a fund manager was quoted as saying:

You just hope boards act in the best interests of shareholders and not themselves but the indications don’t look great… You don’t want to start underestimating shareholders because action will be taken. That’s not a threat but there just seems to be this Collins Street mentality that ‘what we say is best’ and I think times have changed.¹

The press has been flooded with commentary on the role of institutional investors in the replacement of Tabcorp’s CEO and Chairman – and yet this is just one example of the power of the shareholder.

Shareholder groups have also sought to call meetings or put resolutions before the AGM. Most recently, a group of BHP Billiton’s shareholders sought to put a resolution before the upcoming AGM in opposition to the mining of uranium at Olympic Dam and Qantas has rejected a proposal by the Transport Workers Union to include a resolution at the company’s AGM in November calling for better company processes as a reaction to the Qantas board’s treatment of the failed takeover bid by Airline Partners Australia. These kinds of shareholder activism are, of course, not new but their frequency is increasing.

Institutional investors

We are seeing more pro-activity by fund managers seeking greater input into the management of their investments – whether into corporate strategy or how value is returned to shareholders – institutional investors’ role in Airline Partners Australia’s failed bid for Qantas, and Cemex’s bid for Rinker Group are recent reminders of that. They are also going to the lengths of campaigning for, and influencing, who obtains board seats on the companies in which they invest (and, in countries such as the US, they have managed to obtain board seats themselves).

Similarly, the ever increasing influence of proxy advisory firms cannot be underestimated, exemplified by ISS’ recommendation to vote against Macquarie Bank’s remuneration report earlier this year.

Whereas once the focus was on shareholder engagement at the time of the deal, times have changed. Many companies now engage shareholders earlier in the process, and on a broader range of issues including CEO appointments, strategic investment, and of course – particularly since the introduction of the non-binding vote – on remuneration.

Special interest groups

As noted above, special interest groups often seek to promote their issue through the requisitioning of meetings or resolutions. Putting to one side whether the group has satisfied the 100 member or 5% rule for the requisition of a meeting or a resolution, it is important to bear in mind that management of the company is almost always vested in the board under the company’s constitution. This affects what is a shareholder ‘power’ or ‘function’ and, accordingly, what resolutions or meetings (to consider certain resolutions) a shareholder is able to properly call.

Companies are, however, choosing to engage with some such interest groups in order to manage their expectations and the ensuing media attention.

This clear shift towards ‘activist’ investors – both institutional and special interest groups – suggests that it is becoming increasingly important for companies to consider their stakeholder engagement strategy and integrate it into the company’s broader strategic, risk management and remuneration framework.

To that end, it is useful to have in place a policy or strategy for which shareholders or groups the company will engage with, at what level the engagement will occur, the role of public affairs, investor relations and the company secretary in managing the engagement and how the company will respond to any requisitions (whether the requisition satisfies the requirements of the Corporations Act or not).

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