Friday, 20 July 2012

Shareholde​r activism: Defining shareholde​rs' interests and the way in which companies respond to shareholde​r complaints

In my last few posts on corporate governance, in which I covered the topics of who votes at shareholder meetings and why retail shareholders never really bother I was bemoaning the apathy shown by retail shareholders to issues which directly affect their financial well being.  I personally would like to see shareholders take a much more active role in questioning management and voting their shares in order to protect their interests.

I was discussing this issue with a friend who raised the very pertinent point of 'how exactly would you define these interests you want them to protect?'.  This was in the context of the recent fight between anti-gambling activist group GetUp! and Woolworths (ASX:WOW), a major groceries retailer in Australia which owns a large hotel chain which has a significant number of pokies / slot machines. 
  • The issue arose because under the Corporations Act in Australia a group of 100 shareholders can ask a company to hold an Extraordinary General Meeting (EGM) which the company has to do and it needs to be held at the expense of the company. 
  • GetUp! claimed in court that they managed to convince 257 shareholders to sign the required documentation to request a meeting so that shareholders could vote on whether to reduce the maximum bet size to $1
  • WOW argued that they could roll this EGM into their Annual General Meeting which would save the cost of an EGM and would have the same function.  GetUp! obviously wanted more publicity for their cause which a separate EGM would cause so took the matter to court arguing that WOW was failing to honour their obligations to their shareholders under the law
  • The end result (you can see a full description here) was that WOW was allowed to roll the meeting into their AGM.  This probably turned on the fact that GetUp!'s motion was to limit the size of gambling stakes by 2016 so delaying the vote would not make a difference to anyone
There are several interesting questions that come out of this case with respect to corporate governance

  1. Should shareholders working for a 'social cause' be allowed to influence the way in which a company is run? 
    • Traditionally companies are profit making entities which are run for the financial benefit of shareholders and a real question needs to be asked about whether a small group of shareholders agitating for socially better outcomes are really acting in the interests of all shareholders - i.e. is activism in this case a good thing?
    • Note that there are arguments that can be made (and this is very true in extreme cases) that particularly bad social outcomes harms a company's reputation, therefore earning ability and share price (the James Hardy asbestos case is a case in point) however when things are not as clear cut has adverse health outcomes / breaching social norms (such as gambling caps) then the issue becomes more confusing
  2. It worries me that a large corporation was so easily able to dismiss the rights of it's shareholders
    • The ease with which WOW was able to dismiss the small shareholders and roll an issue they found important into an AGM which presumably covers other significant issues is slightly worrying - it shows the almost disdain that small shareholders are treated with
    • This comes back to my point in the last post that small shareholders often do not vote because they are not large enough to bear any pressure - even when they organise in a matter like this the evidence of them getting anywhere is futile
  3. Sets a bad precedent with respect to the balance of power between management and shareholders
    • When it comes down to it the shareholders own the company and should have a say over what is important and what isn't and management should not be able to dodge these issues
    • While I don't think it is a problem in this particular example the real problem arises if a shareholder has a particularly valid grievance against management and seeks to make a change for the benefit of all shareholders but they are unable to because management do not respect their rights and the courts do not uphold them
What I find particularly interesting in the above case was that it was retail shareholders who were agitating for change, not the institutions.  I like the fact that retail shareholders take an interest in the actions of their companies.  Although I think the decisions by the courts was probably the right one, I am worried about the precedent it sets for shareholders rights

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