Facing up to shareholders
The pros and cons of AGMs
Pros:
- They are the only opportunity to interact face to face with retail shareholders
- They help keep the board accountable
Cons:
- Nothing new is announced
- They are costly and time consuming
- The quality of questions raised is generally poor
- The can be hijacked by special-interest groups
With the reporting season fast approaching, directors again face the prospect of that most traditional of events – the annual general meeting (AGM). And again, some directors are arguing this tradition should go the way of other relics.
At the Australian Institute of Company Directors’ annual conference in Christchurch, New Zealand, in May, Mirvac Group and Pacific Brands chairman James MacKenzie FAICD, questioned the value of the AGM in the modern business environment.
“With the increased sophistication of institutional investors and the increasing role of proxy houses, you get to the AGM these days and there’s nothing new announced,” he said.
“If you really seriously analyse the questions asked at AGMs of public companies in Australia, and the value that comes out of the forums of those AGMs, you have to conclude there is a significant cost incurred, a distraction and no value to the process of governance.”
AGL Energy chairman Mark Johnson AO FAICD expressed similar views. “When I go to an AGM, I always think of it as just the price of capitalism. It’s something you have got to do until someone devises a better alternative.”
While not advocating the abolition of AGMs, Alan Cameron FAICD, chair of several companies in the Westpac Group and chairman of Australian Securities Exchange (ASX) Market Supervision, questions their value.
“In the case of large companies, I am not sure AGMs add value and often they are only an opportunity to let off steam,” he says.
This is particularly the case when decisions on key issues are made before the meeting due to voting by institutional and large shareholders. “If the result is pre-ordained, you wonder if the exercise of having the meeting is adding value,” Cameron says.
A war of attrition
Questions about the value of AGMs have been around for some time. In 2004, the Business Council of Australia and the Australian Institute of Company Directors issued a discussion paper, Fresh Approaches to Communication Between Companies and Their Shareholders. It found many of the current practices such as AGMs “may need to be re thought or re-energised” due to increasing shareholder numbers, heightened interest in the performance of listed companies and the introduction of new communication technologies.
Australian Shareholders Association (ASA) chairman Helen Dent sees current talk about the irrelevance of AGMs as just the latest salvo in a long war of attrition.
“Some directors know perfectly well that if they keep working at degrading AGMs in the eyes of policymakers, they will have a better chance of getting rid of the one thing that offers the opportunity to bring them to account – the one forum where shareholders can’t be ignored with impunity,” she explains.
The ASA will not countenance the abolition of the traditional AGM. “The ASA is ever vigilant about suggestions to remove mandated AGMs,” Dent says.
“Many boards would be happy to avoid facing up to their owners at AGMs. But they are the only opportunity for companies to interact with shareholders face to face. They provide an opportunity to hold the board accountable for its stewardship of the company.”
Dean Paatsch, head of corporate governance advisory firm RiskMetrics Australia, has attended a few AGMs in his time and believes there is still life in the existing model.
“The presumption that they have outlived their usefulness is wrong,” he says.
Australasian Investor Relations Association (AIRA) CEO Ian Matheson also believes AGMs are here to stay.
“The AGM has to be held once a year and it is now principally a forum for retail shareholders, so people should just get over their concerns about its worth. It is a necessary evil,” he says.
“They can be tortuous and require a lot of preparation for some boards, but sometimes the concern about the AGM and its worth has more to do with a lack of preparedness and lack of communication with retail shareholders during the year.”
Dent believes AGMs are the linchpin for shareholders’ influence and power. “Removal of AGMs would reduce shareholders and their advocates to mendicants tugging at the hem of powerful boards and management,” she says.
“Mandated AGMs are an essential component in ensuring at least a minimal degree of balance between small company owners and their agents.”
Paatsch agrees that AGMs play an important role in maintaining this balance. “Shareholders are the employers of the directors. Attendance at AGMs is a small price to pay to be answerable to them,” he says.
“If directors can’t turn out and be accountable to shareholders, you need to ask some questions.”
Changing governance environment
Cameron believes AGMs need to be viewed within the changed context in which they operate. For example, the huge share registers of some large companies make the idea of having an AGM where all shareholders have the opportunity to speak impractical.
“Also, it was not understood when this structure was established that so many institutions would be shareholders,” he notes.
“Another change is a lot of shareholders are traders and are not interested in the long-term health of the companies they invest in.”
This raises tricky issues for boards. “Shareholders in companies are a very mixed bag and the challenge for directors is to cater to all these different types of interests,” Cameron says.
BHP Billiton chairman Don Argus AC FAICD made a similar point at the Australian Council of Superannuation Investors annual conference in May and said the trend was interlinked with the growing focus on corporate governance. “We are beginning to see the evolution from a once-a -year [AGM] focus to an integrated approach where governance is part of the investment process.”
Argus believes AGMs are “increasingly developing into events for special-interest groups”. This could see AGMs being held to deal with resolutions, while town or city events are convened to communicate company information, he said.
In the hands of the board
Although retail shareholders view AGMs as very important, how worthwhile they are is up to the company. “The value of AGMs is entirely in the hands of the companies that hold them,” Dent says.
Similarly, Paatsch says: “The prevailing view from many company directors is how to get through this annual obligation rather than to see it as an opportunity to showcase the company and its strategies.
“Why complain about the forum when you could change the format and improve the quality of the questions and discussion?”
Dent agrees that if AGMs are used well, they can provide valuable communication opportunities for companies.
“It is the only opportunity boards have to answer effectively in person to their owners and it can be very valuable or very destructive to shareholder confidence,” she says.
“If the board effectively dismisses shareholders’ concerns by not allowing appropriate time for questions, or by using spin or obfuscation, all that does is confirm in owners’ minds that the board is dishonest, incompetent or has something to hide.”
It may sometimes be uncomfortable for directors to deal with controversial issues such as remuneration or poor strategic decisions at AGMs. But Paatsch believes complaints about AGMs being railroaded by single-issue politics, timewasters and “nutters” are also insufficient reasons to abolish them.
“The idea of solving the problem of lunatic capture by abolishing the meeting is ridiculous,” he says. “If you get rid of AGMs, why not get rid of the ability of shareholders to call a meeting? Everyone would agree that is ridiculous, so why consider this?”
Matheson believes directors’ frustrations about AGMs often result from retail shareholders bringing up issues that have been dealt with through normal disclosure procedures. “But not everyone is an analyst or professional investor and is all over every issue to do with the company.”
He believes questions about the value of AGMs often reflect what the company has done through the rest of the year.
“I think those companies that overly worry about AGMs should reflect more on how they communicate with retail shareholders through the year and recognise their specific information requirements,” Matheson says.
“If you give more opportunities through the year, it is less likely to boil over during the meeting.”
Taking steps to change
With the corporate governance environment changing, Cameron expects the nature of AGMs to also change. “We will see an evolution in AGMs, but the question is when and how.”
Paatsch believes the format could be enhanced. “Technology allows people to listen in to the set pieces, but it is not being used to enfranchise shareholders or allow them to question directors or management,” he says. “It is disappointing that companies have not looked at that as an opportunity.”
Paatsch believes the biggest problem with AGMs is the emphasis on shareholders being present.
“It is a 19th century view that physical attendance is necessary,” he says. “Participation in AGMs has always been physical and that has disenfranchised a lot of shareholders as they can’t attend in person.”
There should be little surprise that the quality of questions raised at AGMs is generally poor, given that so many shareholders are unable to attend, Paatsch says.
This has an influence on the type of shareholders who do attend, often leaving only the disgruntled or those with little else to do.
“The idea of solving the problem by abolishing the meeting is ridiculous. Only a very few descend into farce,” he says. “It is not the forum itself. It is who comes along that matters and needs to be changed.”
Dent believes if directors are unhappy with AGMs and see them as being of limited value, they should take steps to improve them. “The primary determinant of the value of AGMs is the company,” she argues.
“Board chairs can improve them and you don’t need legislation to make improvements. The chairman can ensure what the primary focus is and whether it is on the performance and future strategy of the company.”
Using new technologies
There is considerable scope for improving AGMs if companies are committed to achieving it.
“It could be done as an intermediated forum,” Paatsch suggests, with participants pre-vetted to ensure they are shareholders and eligible to vote. “Technology is not the barrier. The willingness to do it is.”
Cameron believes electronic meetings with simultaneous shareholder polls could be one solution.
“Electronic direct voting will be a feature of the meeting of the future. It would also be beneficial to hear the issues discussed and then voted on, rather than voting prior to hearing the arguments,” he says.
To improve AGMs, Dent believes companies need to be committed to keeping shareholders informed and this includes having all the board present, together with the key members of the management team.
Holding a “fifth analyst call” each year on issues such as governance, sustainability and remuneration could also be useful, according to Paatsch. “It would provide an opportunity to ask open questions about these issues.”
According to Matheson, AIRA is encouraging companies to open up analysts’ briefings to retail shareholders.
“We are working with the ASX Corporate Governance Council to make them more widely known in advance and more accessible via webcasts. If more things are made available, it may help to inform more retail shareholders about what the company is doing through the year and alleviate some of the concerns held over until the AGM,” he says.
However, Cameron has his doubts about multiple shareholder information meetings or additional briefings.
“They allow investors to hear from the board and to express their views, but they are not AGMs. They are beneficial, but they are not an AGM,” he says.