Global headwinds

International trends are having a bigger impact on ASX-listed companies and investor relations teams than ever before, writes Dr. Ulysses Chioatto.

S&P/ASX 300 listed companies heading into the annual general meeting season are facing director elections and re-elections, increased pressure on getting greater diversity on the board; and shareholder votes on remuneration and capital management plans.

There is also a spate of extraordinary general meetings, which typically are not welcomed by directors if they originate from “activists”. More activism will have mixed outcomes for shareholders, who will benefit if a company is forced to lift its game, but lose out if short-term activists wade in and undermine long-term strategic planning.

Another local rule change impacting ASX boards, driven by global trends among investors, is assessing director independence based on tenure. The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations now refer to tenure as a guide to independence with 10 years being suggested as the maximum term a director should serve. Global proxy adviser firms have changed their rules and use 12 years as the measure while actively recommending against director re-elections; examples include the ASX itself, Telstra and Crown Resorts.

So will 2015 see significant director movement across listed boards? 

Diversity and board renewal

Globally, investors, regulators and other market participants continue to have a growing focus on, and emphasise the need for, board gender diversity (often as part of a broader view of board diversity) and greater transparency of related initiatives by companies.

Female representation on corporate boards globally has increased noticeably over several years across different markets and market capitalisations, irrespective of the presence of gender diversity quotas. That said, markets with mandatory quotas generally have higher female board representation than those without quotas. 

The percentage of women on the boards of FTSE 350 companies and the ASX 300 (non-quota markets) since 2011 have both increased from 11 per cent in 2011 to 18 per cent in 2014. In contrast, Norway has had a law requiring 40 per cent gender diversity on all public boards within five years and has achieved approximately 38 per cent in 2014. The Netherlands passed legislation, effective July 2013, requiring 30 per cent gender diversity and they have achieved 26 per cent in 2014.

In 2010, the 30 Percent Club in the UK set a goal of 30 per cent of women on the boards of FTSE 100 companies by 2015. The club points to research that suggests 30 per cent is the proportion when a critical mass is reached in a group setting, and where the voices of the minority group are heard in their own right rather than as a simple representation of the minority.

Other global trends

Mergers and acquisitions (M&A) activity in the US is expected to increase in 2015, with shareholder activism the key factor in the mix of corporate transactions. In financial terms, hedge fund assets under management ended 2013 at a new record: capital invested in the global hedge fund industry was reported to be US$2.63 trillion, while US activist hedge funds now hold around $100 billion in assets under management.

FTI Consulting conducted in-depth interviews with economic activist investors from 1 — 19 March 2014. The survey sample consisted of activist funds that have been engaged in more than 500 situations; 40 per cent are shifting their focus outside North America.

Australia is fertile ground for all activists — not just home grown — once they work out the local rules. The rules include the well-established NRMA principle regarding shareholder resolutions; shareholders cannot tell directors how to run the company unless the company’s constitution explicitly gives such power to shareholders. However, incumbent directors cannot use corporate funds to run a defensive campaign under the FAI rule; this does not apply to activists, as there is no such rule in the US. This means activists can easily run a war of attrition.

What to do?

Directors are abuzz about shareholder activism. Companies and investor relations practitioners need to take a close look at their share registers and better understand the beneficial owners. This will help develop better engagement strategies, especially if the investors are global funds, which can only be effectively reached through the global proxy advisers.