There’s a common public perception that institutional investors are not active enough in influencing decision-making in listed companies. As owners of companies, fund managers and asset owners should be voicing their opinions on issues such as executive remuneration, wasting money through poor acquisitions, inefficient use of scarce capital and any number of company decisions. Yet go to a company annual general meeting, and it is the retail investors and peak bodies such as the Australian Shareholders’ Association asking most of the questions.
So where are the big institutions? In fact, they’re usually acting in what might be characterised as an ‘Australian way’. They are not grandstanding and they are not chasing public profile in front of thousands of people. In the United States, fund managers routinely cause public stoushes to raise their own profile and enhance fund-raising ability. In Australia, the approach is more often a quiet influence behind closed doors, letting the companies know their views in a professional and forthright manner. This is not done at annual meetings with a couple of senior executives, but for major shareholders, regular updates and a sharing of ideas. There are exceptions when an argument gains media coverage, but they are far outnumbered by the private actions.
An analogy that comes to mind is a duck floating calmly across a pond, seemingly making gentle easy progress, while underneath the water it is paddling furiously. Asset managers are always prodding and pushing companies to justify their actions or explain the business better.
Examples that don’t reach the public domain
Sensitive issues can be raised privately that may be embarrassing for both sides in public. Consider these examples:
- Jamie Dimon is the Chairman, President and Chief Executive Officer of JP Morgan Chase. Corporate governance best practice would say these roles should be separated, as one is a counter and check for another. Dimon wants all the roles, and there is a risk he may leave if he is forced to give up one of them. An asset owner with an investment in his bank who believes Dimon is an outstanding executive can have a close discussion on the issue, put a position forcefully, but not place Dimon in an even more compromised position. This may not satisfy the governance purists, but it could be the preference of the shareholder.
- All companies like to boast about their diversity policies (relating to gender, age, ethnicity, disability, race, etc), and state them publicly on their website. In truth, they often pay lip-service to the aspirations. You can walk through the offices of most major companies who have, say, a disability employment policy and a wheelchair user on the cover of a public document, but you’ll rarely see a wheelchair. How many senior executives of Australian listed companies have Asian origins? There may be a strong focus on gender equality, but diversity is a much bigger issue. A fund manager or asset owner who feels strongly about the benefits of diversity may never stand up at an AGM and ask where the Asian executives are, but could confront the CEO personally.
- Most major Australian asset managers have signed the United Nations Principles for Responsible Investing (UNPRI). You can see a complete list of Australian names on their website, divided into asset owners (34 Australians), investment managers (79) and professional partners (16). Every fund manager with institutional clients has to establish its PRI credentials before any money is allocated by the client, whether the individuals actually managing the money care about ‘responsible investing’ or not. The time to check the credentials is in private meetings, not on the floor of The Westin.
A good example is forestry operator Gunns, under fire for many years for cutting down old growth forests in Tasmania and placed under administration in September 2012. Fund managers were loath to confront the feisty management team at AGMs, but tried to reflect community concerns and investment expectations in more personal meetings.
Of course, there are ‘activist’ shareholder interventions, such as Geoff Wilson of Wilson Asset Management meeting with the board of Australian Infrastructure Fund to make his point that the company should not be liquidated, leading to an Extraordinary General Meeting. Another that entered the public domain was the investor action which reversed Aurizon’s decision to boost profit margins artificially using accounting changes, which would have counted towards management performance targets. Direct criticism by analysts, in some cases overtly public, ensured the company changed the performance calculations.
More frequent, less formal
Bruce Teele, the retiring Chairman of Australia’s largest Listed Investment Company, AFIC, has been managing investments with the company for 47 years. He recently told The Eureka Report than one defining characteristic of successful companies is that they listen to shareholders. He encourages less formal meetings purely for discussion where no decisions are made, as issues such as executive remuneration preoccupies time at many AGMs.
In fact, contrary to the belief that such ‘private’ briefings are a compromise to continuous public disclosure and may even lead to insider information, the meetings are never one-on-one, as every CEO has ‘minders’ with them, usually the CFO to cover the numbers, and the legal counsel to watch for governance issues. Everyone is intensely aware of their legal obligations, and rather than giving special inside information, the conversation is more likely to relate to:
- general market conditions in which the company operates, for example, the type of lending activity that a bank CEO might see
- a drill down into the numbers by an analyst trying to understand the business better
- an opportunity to see whether the CEO and his management generally understand the company and its opportunities
- whether the company focusses on the short-term for the benefit of the current executives, when most investors are more interested in holding the stock for the longer term.
An example of where companies have become far more willing to consult with major shareholders is the ‘two strike rule’. If 25% or more of shareholders at a company’s AGM vote against the remuneration report the first time, the company must review its executive remuneration policies. The second and final strike is delivered the following year if at least 25% again vote against the report, and shareholders may even be given the right for a board spill. Companies want to ensure such embarrassments do not occur, not least to protect a few senior jobs.
There are also companies which specialise in identifying governance risks in listed companies, and providing advice to asset managers on how to use their shareholder rights to influence companies. They analyse all AGM proposals from the owners’ perspective, and may provide proxy voting services on standard decisions.
Who actually controls the stock?
Although a major asset owner like an industry superannuation fund may outsource its asset management to an external party, the asset owner will instruct the manager how to vote on its behalf, especially for contentious resolutions such as executive remuneration. Even where a fund manager does not speak at an AGM, it is likely to vote on the motions, often dissenting from company preferences. Goldman Sachs Asset Management was reported to have voted against about 20 proposals during the 2012/2013 reporting season. Some large funds have even been educating companies on who actually owns the stock – it is often a surprise to the company executives who are the ultimate owners, and can lead to a sudden heightened responsiveness.
It is important that regulators realise that company engagement by asset owners – be it at an AGM, via voting intentions or private meetings – is active and robust. There is evidence overseas that regulators are watching the space. For example, from 2014, Switzerland’s constitution will require the country’s pension funds to vote all their domestic shareholdings and then disclose their voting records. This is particularly aimed at curbing executive remuneration at big Swiss firms. There are also calls for funds to use their powers to force banks to engage in less risky lending practices, in an attempt to avoid the excesses of European banks in the past.
Don’t judge institutional investors by the big public event, the AGM. Other than providing a forum for certain parties to see or access the senior executives briefly, not much is achieved other than completing formalities. As far as major asset owners are concerned, the AGM has lost its relevance over the last decade, while meetings with listed companies are ongoing and lively.