AMP demonstrates the poxy proxy system

Stan Wallis had every reason – bar one – to be a little nervous ahead of last week's AMP shareholders' meeting. More than 1000 people had gathered in the Melbourne Convention Centre and they were in a mood to exact revenge on the AMP for a year that Australia's biggest investor itself would not tolerate in any of the hundreds of listed companies in which it invests.

It lost $1.2 billion via the GIO, paid $13 million to former chief executive George Trumbull, rejected a $21-a-share takeover offer from National Australia Bank and suffered a board suicide that laid waste to long-standing directors, including chairman Ian Burgess. In the week before the meeting, new chief executive Paul Batchelor was accused over his role in the board spill.

What's more, Wallis would be asking shareholders at the meeting to re-elect several of the directors who had presided over those debacles and grant Batchelor $20 million in options over AMP shares. There was every reason in the world to be nervous.

Yet, as Wallis mingled with shareholders in the foyer, then took to the podium under soothing blue light of the auditorium, he knew what they didn't.

Whatever curly questions were asked, however vicious the recriminations, he knew that nothing said at the meeting would change its outcome.

For in his back pocket he had enough votes cast ahead of the meeting or given to him as proxy to vote at his discretion to ensure that the meeting would go to plan.

And, as noted by broking analysts who had been more or less silent on the question of board accountability throughout the AMP's troubles, the company largely succeeded in getting investors to re-focus on the better performing parts of the business.

"There could never be a satisfactory meeting, because nothing was resolved," said Australian Shareholders Association Victoria branch chairman Stan Mather, who was at the meeting.

"All it did was provide an opportunity for comment, much of it derogatory, and a lot of spleen-venting."

"It would have been more satisfactory to have Mr Batchelor's options defeated."

"That would have sent a message to the board that people were to do more than just speak against it, they were prepared to vote against it."

As it was, Wallis cast 18.2 million proxies at his discretion to rescue Batchelor's options from defeat with only 64 per cent of the vote. The same sort of thing will happen at hundreds of annual meetings this year as directors seek re-election, ask for a pay rise or a grant of options, however the company has performed.

Welcome to the world's greatest share-owning democracy. Just don't expect to see much democracy in action at an annual meeting. While shareholders are turning out like never before at annual meetings, thanks to a proliferation in private share ownership, they are noticeably failing to do more than provide an uncomfortable hour or two for Australia's corporate directors.

Professional shareholder activist Stephen Mayne, who nominated unsuccessfully for the AMP board, says AGMs are not being used properly by shareholders to foster debate and force change.

"They have largely become pointless PR exercises, because the small shareholders don't know what to ask and the big shareholders remain silent," Mayne says.

"They should be the one opportunity for shareholders to stamp their mark on the company in the public spotlight."

According to a study by Independent Shareholder Services, an average of just 32 per cent of the capital on issue in 74 of the top 100 companies was voted by shareholders in proxy at annual meetings in the second half of 1998.

That is well below the UK, where about half the capital is voted, and the 80 per cent in the US, where it is compulsory to vote. In Australia, that means that as little as 16 per cent of the shares on issue – or two or three large institutions – can determine the outcome of a meeting.

At the AMP annual meeting, all the resolutions were passed, including the election of directors and Paul Batchelor's options, with less than 20 per cent of the issued shares voted.

Just one resolution attracted more than 20 per cent of the 1.1 billion shares on issue – the election of Mayne. He attracted only 21 per cent of votes in favour but a remarkably high 43 per cent of votes cast were abstentions.

"The institutions wouldn't vote for me, but they wouldn't vote against me, either," he says.

The real action takes place behind closed doors, with powerful institutions that can analyse a company's issues and have the shares to back their views.

Companies routinely seek out major shareholders ahead of their meeting to take their pulse on issues that might come up. In addition to the institutions, Wallis also talked to Mayne and the ASA in private.

Perpetual Funds Management equities manager Peter Morgan was asked by AMP several days before the meeting if he had any concerns and told them of his complaint about Batchelor's options.

At the meeting, a representative of fund manager UBS got up and supported the options issue, but was then revealed to have been asked by Wallis to do so.

The backroom dealings were evident at the AMP earlier this year when the company offered up first two directors, and then another five, plus the chairman, to the growing band of investors and commentators looking for scalps ahead of the annual meeting.

Similarly, at Coles Myer in 1995, two directors decided not to stand for re-election and Solomon Lew was forced to stand down as executive chairman after a campaign against director dealings by a number of large institutions.

Thus, the institutions didn't have to vote and by taking pre-emptive action, the companies defused a potentially volatile situation – at the same time avoiding the public embarrassment of having directors put to the sword in public.

Critics argue that by not making a firm choice one way or the other, or taking an active public stance, institutions and other investors appear to be giving the board free rein.

Sandy Easterbrook, the head of ISS, which advises institutions on how to vote, stopped going to annual meetings years ago.

"We learned very little from them," he says. "There was little we could achieve at them and and little we could take away."

From ISS's point of view, the work had to be done well in advance and presented to the institutional clients in time for them to effect change, if it was needed, well before a resolution got to the floor of the meeting.

But that doesn't mean institutions shouldn't vote.

"Voting is where shareholder power starts," Easterbrook says.

ASA's Mather defends the annual meeting as an imperfect but necessary mechanism for holding companies to account. The proceedings are often rambling and unfocused: some shareholders go into monologues, some are single-issue pressure groups, others have a personal bugbear and won't be placated whatever answer they are given.

Information provided to the ASA suggests that as few as 10 per cent of shareholders ask for the full annual report of a company. But from an investor's point of view – whether large or small – the meeting should not be the sole focus.

Steve Gibbs, chief executive of the Commonwealth and Public Sector Superannuation Schemes (CSS and PSS), believes that while voting is important, addressing the issues inside the company when they arise is paramount.

"It is much better that if there are genuine issues that need to be resolved, (they are) resolved before a meeting rather than subjecting it to debate and a vote."

Whether more shareholders voting would change the outcome of a given resolution is a moot point in the industry. But ISS's Easterbrook says the mere fact that institutions were seen to be scrutinising resolutions and casting an informed vote would keep companies on their toes.

In the UK, the government believed the situation was so bad that it set up an inquiry and threatened legislative action to rectify what it believed were unacceptable voting levels – as low as 40 per cent.

Here, Financial Services and Regulation Minister Joe Hockey is resisting calls for legislation, believing institutions need to motivate themselves.

But he has placed the issue of institutional voting firmly on the agenda, with comments in the middle of the AMP storm earlier this year that helped bring the board crisis to a climax.

Morgan caused a sensation when he travelled from Sydney to Melbourne to publicly take the AMP to task over the grant of options to Batchelor.

"I don't think any shareholder in this room can go home tonight having approved the option issue and sleep safely, knowing that the NAB or any other institution could approach the AMP in the next few weeks (with an offer) well in excess of $16 a share,'' he told the meeting.

A lot of people can't remember anything like that at an AGM – a major investment institution taking a blue-chip company to task. Everyone assumed these things went on behind closed doors.

For the most part they are right.

Wallis was asked by the ASA why the AMP did not use its clout to publicly shame companies into changing their ways.

Wallis said that the AMP believed it could achieve more in private, and had been involved in changes that shareholders were not even aware of.

Morgan says he doesn't plan to make a habit of standing up at big meetings, but believes there is a place for it.

"There are various scenarios where we want to protect our position and we have got a responsibility to exercise that right to vote," he says.

Most observers see the issue coming down to will. There is simply not the impetus at senior levels of the funds management community to take an active interest in governance issues.

Morgan is not alone in pointing to trends in financial institutions that make it unlikely. The aggregation of corporate finance, broking and funds management operations under the one roof at major banks may constrain fund managers from speaking out against bad corporate practice.

"They (the banks) have got business relationships or broking relationships (in other parts of the banks) that make them more cautious in their approach," says Morgan.

Ian Mathieson, who headed the Australian Investment Managers Association's charge in the early 1990s for better governance standards, says simple inertia often prevents votes from being cast.

Fund managers may not be given discretion to vote by the trustees of the superannuation funds, or they don't exercise that discretion where they are able.

In other instances the name on the share register may be the first of three or four layers of custody, sub-custody, management and trustee responsibility, so that by the time the notice of meeting reaches the right person it is too late to vote.

Mathieson, who now works for the world's largest share registry company, Computershare – helping corporate clients discover who the decision makers behind the shareholdings are – believes electronic voting will help solve that problem by allowing the responsible manager to receive and act on the information directly.

Whether Morgan's action at AMP heralds a new era in institutional activism remains to be seen. Australia lacks a public champion of corporate governance which has money at stake.

In the US, the massive California Public Employees Retirement Scheme takes an aggressive stand on board accountability, publishing every year a list of the 10 worst performers on corporate governance criteria.

The list serves as a starting point for CalPERs to work with the companies to improve their performance. Behind that action is the belief that better corporate governance – such as aligning the interests of management with those of shareholders via performance pay – would improve the returns from the company.

There are encouraging signs in Australia that shareholders are taking more interest and being prepared to act.

Steve Gibbs has begun a review of fund managers under his control at CSS and PSS to see whether they are using their voting discretion effectively, if at all.

The review is only in its early stages, but already Gibbs, a former head of the Australia Institute of Superannuation Trustees, is signalling a more direct approach to voting.

"It is likely that we will get a little more specific about the voting by our managers," he says. " We would like to direct managers to vote where we can see issues of particular concern."

On the other side of the debate, Rio Tinto company secretary Ian Falconer argues that the AGM may soon become a thing of the past. In an article in Company Director magazine last month, ahead of the annual meeting vote, Falconer was quoted as saying that electronic voting at annual meetings – that is, over the internet – may cause the AGM's demise.

"This is starting to happen in the US and takes all the heat out of the traditional AGM,'' he says.

Falconer is not alone in his belief. Commonwealth Bank chief executive David Murray told a group of newspaper executives in 1998 that the important question about AGMs was not how they were run, but whether they should be held at all. The bank was constrained in what it could tell its shareholders at the meeting and was bound to be confronted with nuisance questions.

So, if shareholders are increasingly going to disrupt the meeting, it might be a good idea to turn on the fans after a couple of hours to blow in the aroma of tea and sandwiches to encourage an end to debate.

Copyright © 2022 The Mayne Report. All rights reserved

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