Shareholders declare war

Thursday 1st March 2001

Beware corporate New Zealand. The investor revolution has begun

As you would expect from the man who stood up at a Brierley Investments annual general meeting wearing a Tommy's steel helmet, Auckland accountant Bruce Sheppard is full of fighting talk, peppering his speech with military epithets like "winning the battle" and "engaging the enemy".

Sheppard is leading the charge to set up a New Zealand small shareholders' association. And like any general, he is looking for troops. Over 30 people have expressed interest (25 are needed for an incorporated society) and a formative group has been convened to map out the association's structure and objectives.

It's an idea whose time has come, Sheppard says. Until recently New Zealand investors have played little part in the rising tide of shareholder activism worldwide. (Analyst Brian Gaynor wrote in a 1995 National Business Review article that company meetings "are held in an environment where individual shareholders are mainly concerned about the post-meeting refreshments [and where] the institutions rarely attend or ask questions.") But that's changing. "The momentum is building," Sheppard says. "Investors are seeing that when public company directors are challenged they pack up their little tents and disappear into the corner. If they are challenged more consistently, they will reform the way they operate."

In January this year, Contact Energy shareholders forced the listed company to back away from a substantial increase in directors' fees - for the second year running. Small shareholders also succeeded in stopping Capital Properties directors raising fees by 25% in July last year, and the same month institutional shareholders forced Fisher & Paykel to abandon a proposal to sell 110,000 shares at bargain prices to four executive directors.

Contact Energy's small shareholders talked of setting up a shareholders association after this year's annual meeting. As shareholder and retired scientist Walter Freitag put it: mum and dad shareholders are choosing to invest off-shore because of a lack of confidence in the local sharemarket, "fuelled largely by frustration over the lack of any effective control, even voice, small shareholders can exert against larger controlling groups."

One of the problems, however, is finding someone to head a shareholder organisation, and people to do the donkey work. Back in 1980 there was a fairly serious attempt to establish a shareholders' group, but Auckland investor and Contact shareholder Celia Longworth says it failed due to lack of funds, "names" (people who can add credibility) and volunteers willing to work for nothing.

One such "name" is Brian Gaynor, well-known for his frequent and pertinent questioning of corporate antics at annual general meetings and in his regular Business Herald column. He has turned down repeated approaches, including those from the Australian Shareholders Association, to spearhead a shareholders' association. He thinks the pool of New Zealand investors willing to pay for such services is too small. "It's a good idea; the problem is the financial viability and the mechanisms for it. You have to do it well or there is no point in doing it."

And it is not just Gaynor who thinks that way. New Zealand Stock Exchange managing director Bill Foster says small investors may "rally around the flag" for a while, but in a small market the momentum can be difficult to sustain. Professional investor Oliver Saint says you'd be lucky to get 200 people in New Zealand willing to pay more than $10 a year to be members.

By contrast, 6300 of Australia's six million or so shareholders are members of the Australian Shareholders Association, paying $A66 a year. Set up as a public company, that association's annual budget of $A450,000 funds a full-time executive director and two other staff. The association provides members with investment advice, attends company meetings, arranges proxies and monitors the -activities of around 200 listed Australian companies.

So what if the New Zealand association isn't financially viable, Sheppard asks. "People who get involved will be motivated by social conscience, not reward," he says. Even the Australian Shareholders Association, set up in the 1960s, struggled with only around 100 members until the late 1980s corporate debacle forced small shareholders to take a stand. Sheppard argues that under an association small investors have a little power; without it, they have none. Hence the call to arms. A New Zealand shareholders association should also help raise corporate governance standards and improve performance. The Australian Shareholders Association publishes an annual list of poorly performing companies - this year it showed the average annual negative return of these companies was an appalling 24.5%. The very existence of such a list is sufficiently embarrassing for Australia's publicly listed companies, who want to avoid being named, and some corporates join just so they have the inside running on whether their company will be on the list. "I think that the annual event has focused the minds of boards on shareholder expectations," says ASA executive director and former Kiwi, Tony McLean.

Who needs it?

Some argue that a small shareholder's association (Sheppard wants to restrict membership of the New Zealand association to small investors because he thinks there is a conflict between the interests of large and small shareholders) is unnecessary because shareholder power is increasingly placed in the hands of institutional investors. Institutional investors have been the biggest factor in forcing changes to Australia's corporate governance, says veteran director and shareholder association member Henry Bosch. The institutions have fought on two fronts: a direct public assault on companies to force board changes, and flexing their muscles behind the scenes.

In the US, according to a recent Fortune magazine article, the real power brokers in corporate America are now the consulting companies set up to advise big fund managers on how to use their proxy voting rights to their best advantage. One such company, Institutional Shareholder Services, has 500 institutional clients representing $US5 trillion in assets. Now that's shareholder clout.

In Australia, small investors and institutions belong to separate organisations, and most of the latter are members of the Investment Savings and Insurance Association. Investment management sub-committee head Anthony Quirk, of Guardian Trust Funds Management, believes the main reason why New Zealand share prices are so low is because of corporate governance issues and poor management practises."

A June 2000 survey by McKinsey & Co found that over 80% of investors say they would pay more for the shares of a well-governed company than for those of a poorly governed one with comparable financial performance. The actual premium investors were willing to pay differs by country: in the UK, investors are willing to pay 18% more for shares in a well-governed company, while in Indonesia and Venezuela the premium leaps to 27%.

Henry Bosch warns New Zealand that our corporates will continue to perform poorly until shareholders exert some pressure. And while small shareholders can't hope to match the power of the institutions, he says, they help stir the big boys to "look under stones they may otherwise leave unturned".

fiona_rotherham@idg.co.nz

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