CEO Report

  • Date:01 Nov 2007
  • Type:CompanyDirectorMagazine

Shareholder engagement – but with whom?

The present enquiry by a parliamentary committee into shareholder engagement in the governance of companies points to two questions. Who really owns shares? And how can a company and its board, with the best of intentions, engage most effectively with shareholders?

Australian Securities Exchange CEO Robert Elstone recently provided us with some fascinating data on how the market is structured. Six million Australians own shares, representing one of the highest proportions of public ownership in the world. However, households own only 24 per cent of total ASX securities and perhaps one quarter is held through managed funds.

ASX listed securities are currently valued at $1.5 trillion – more than $70,000 per Australian. One third of this amount is foreign-owned and there is an offsetting ownership by Australian interests of foreign securities which is not counted in this total. Superannuation funds hold $850 billion in securities on behalf of ordinary Australians. About one quarter is held in self-managed funds, almost $300 million in retail super funds and $350 billion in corporate, public sector and industry funds. Insurance companies own another significant chunk, worth approximately $260 billion.

Large super funds and others parcel the money they hold for their members out to fund managers who compete fiercely for the right to manage this money. The top ten funds manage equities worth $194 billion. Your super fund may own shares in one company through several different portfolios run by different fund managers, each with a slightly different investment approach.

Decisions on whether to buy or sell shares can be influenced by a variety of parties. Super trustees are at the top of the food chain. Portfolio managers, asset consultants and corporate governance advisers can all play a role. Some wish to engage in the governance of companies and some simply play the market. Of those who wish to engage, some want to reduce their risks or believe they can help boards enhance company performance. Some have social or environmental agendas and some see links between these things.

The rate of turnover of shares varies. Some private investors and index-tracking funds keep shares for ages. At the other end are hedge funds, which may move in or out of stocks very quickly, and ‘quant’ or algorithmic funds, which trade automatically according to mathematical formulae. These latter two new investment forms have accelerated turnover and will continue to do so.

According to Elstone, a consequence of the complex nature and constant seething change in the market is that it is impossible for any big company to know at any one time who owns all of its shares. The market is complex and shareholders are a diverse group with dynamic and global investment strategies. More than half of the shares of many companies change hands annually.

Engagement with shareholders in such a market is not simple. The difficulty was illustrated at Alinta’s recent extraordinary general meeting of shareholders in Perth where a scheme to sell the company to Babcock & Brown was considered. A large number of the retail shareholders present were against the proposal and wanted the company to continue as it was. But when it came to the vote, 97 per cent of shareholders were in favour. Institutional fund analysts clearly had a different view of the deal.

Evidently, retail shareholders represent a very different market segment to institutions. Engaging with them needs a specific strategy and new thinking is needed now the law has changed to allow online reporting. Simplified ‘shareholder friendly’ reports, backed by well-designed websites, will be the main means of communication with retail shareholders during the year. The annual general meeting is really for them too, as few institutions attend.

Major companies have already developed the art of communicating to the professional market through analyst briefings and ‘roadshows’ for local and foreign institutions. Competitive pressures will force this practice to evolve further. A new factor is where the biggest institutions – in Australia’s case, the large super funds – are seeking to wield more power over companies. AICD is researching this subject and will continue to engage legislators, regulators and other key stakeholders on this issue on behalf of members.

Ralph Evans FAICD
CEO, Australian Institute of Company Directors

Note: AICD will lodge a submission this month to the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into shareholder engagement and participation. For more information see page 52.