Saturday, September 10, 2005

Shareholder democracy

So far I've been quiet - well, silent, really - on Telstra, and I want to make a quick post about it. Not, as one might imagine, on the issue of privatisation (Ari's solution: split it in two: wholesale and retail; as a monopoly owner of infrastructure, keep wholesale in public ownership; privatise the retail divison. Easy. Next problem, Mr H?), but on something else dear to my wallet heart.

The issue I really want to muse on, though, is corporate democracy. Much as it pains me to say it, I'm a Telstra shareholder, and yesterday an invitation to the company AGM arrived in my email inbox. Not keen to head to Sydney for a morning of boring speeches and cucumber sandwiches, I decided instead to lodge a directed proxy vote. Whilst in the past I've been tempted to do this for the handful of companies lucky enough to have me as a shareholder, in most cases the effort necessary has been sufficiently high for me not to bother. This time around, though, the process is seemless and electronic, and easy enough for me to overcome my indifference. So in a few clicks, I've managed to confirm my identity, vote against a pay rise for directors, vote for some directors and against others (no soup for you, Mr McGauchie).

It seems that Telstra are using the services of ASX Perpetual, an offshoot of the Australian Stock Exchange which facilitate a company's obligations to its shareholders - share registry management. A quick glance at the ASX Perpetual client list reveals plenty of big names, and there are several other companies in this interesting bit of outsourcing. Unquestionably, services like this are good for shareholder democracy. And it's a good little earner for those companies playing the registry management game.

The theory of shareholder democracy is a sounds one, but it's rarely translated into practice. As controllers of a significant amount of (shareholder-owner) wealth, company directors need to be held accountable. Shareholders have a strong interest in maintaining good corporate governance, since it's the value of their shares which will suffer due to poor management. Of course, the theory presumes a few things which are utterly false. Firstly, there are inherent difficulties is actually lodging a vote. Secondly, few shareholders are sufficiently informed to cast a well-considered vote, creating an information asymmetry. Thirdly, many investor treat their shareholding much like the would a bet on a horse, with little interest in its finer details but plenty of interest in its next race.

The reality is that few shareholders will ever bother to attend a company's AGM. Those who do appoint proxies almost always offer their proxies to the chairperson, undirected, and hence doing little to make an active decision. Through the internet, in combination with companies making an active attempt to engage with their shareholders, shareholders can now have a more decisive say in the management of companies. True, this change for the good is not really the initiative of companies themselves - the CLERP9 legislation last year has put the pressure on companies to improve their corporate governance. If shareholders can easily and effectively make themselves heard at an AGM, then company management is more likely to feel the pressure to perform. No longer can fumbling directors presume their own reelection (and a decent pay-rise, to boot) because of a low AGM attendance and undirected proxies.

Perhaps the biggest impedement to shareholder democracy is a fourth problem, which could be added to the list a paragraph back. A large chunk of the shares in most companies are held by major institutions - investment banks, trusts, superannuation - who have traditionally been slack when it comes to exercising their democratic rights as shareholders. Generally, pesky little things like the casting of votes has been a burden rather than an opportunity. Whilst this attitude continues, shareholder democracy is going to be limited in what it can achieve. These institutions owe it to themselves and to other shareholders to be active participants in the process of corporate governance. If the theory is right, an active shareholder body should result in better quality management, and hence a higher share price. Given this, it makes sense for the institutions to get actively involved. What will it take to make it happen?

3 comments:

Jeremy said...

I think the main problem is that those large corporate share-holders, like the Superannuation funds, almost always control a majority of the shares, making the votes of minor shareholders utterly irrelevant.

And it's in the interests of the directors of those corporate shareholders for directors' salaries to be high; and the best way of ensuring that is to make sure that any time a corporate pay rise comes up in the companies in which they have a stake, they vote in favour of it.

Essentially, using our superannuation money, the corporate sector keeps voting itself whopping payrises. And there's nothing we can do about it.

steve at the pub said...

Is it an appropriate use of comments to point out spelling errors? (yes, spelling errors, no deflection of guilt by attempting to label them "typos")

MrLefty, you have a strong point about the use of superannuation money, but the misuse of it does not stop with mere payrises.

The compulsory super scheme is a rort, & should be scrapped or at the least brutally overhauled.

Mothy said...

Mr Lefty goes a bit far suggesting that super funds vote themselves bigger payrises.

Seriously, I see stuff like that and all I can think of is the satirical speech from "Tim Robbins" in "Team America";

"And the corporations act all... corporationy"

Please use the other side of the mind occasionally.

Not all insto's are out there voting blindly in favour of everything. Unfortunately, yes, many are. And yes, often, insto's do control the majority of the "free float" in a given company (meaning those nto already controlled by company founders or other long term holders you'll find identified in your average prospectus or annual report).

So shareholder democracy, on an individual or "mums and dads" shareholder level at least, is a furphy.

However I would encourage anyone with money with an insitutional investor, which, thanks to Super, is damn near everyone, to contact that body and ask them for thier proxy voting record, and where you do not agree with that record, make the point known.

The Investment and Financial Services Association (IFSA) publishes a number of Standards that are compulsory for membership. IFSA Standard 13.0 requires the publication of a company's proxy voting policy and record.

I think the standard is rather weak, in that is is more quantitative than qualitative (number of resolutions for and against, rather than reasons), but it is at least a step in the right direction.

And Steve - you have the right to manage your own super and avoid the management fees, so by all means enjoy.

Tk.