When it was announced that Unitab's chief executive Dick McIlwain would replace TattersallÆs chief executive Duncan Fischer at the helm of the merged gaming company, it was the second time this year that shareholders have ousted a prospective chief executive in a merger. A month earlier Robert Elstone, the boss of the Sydney Futures Exchange, was due to step down in favour of the ASX chief executive Tony D'Aloisio when the ASX bought the Sydney Futures Exchange, but shareholders wanted Elstone to run the merged company. Like Fletcher, D'Aloisio was forced to step aside.
A month earlier energy group Origin Energy and itÆs 51% held Contact Energy terminated their merger implementation agreement after minority shareholders refused to accept the deal.
At the same time Futuris, the listed Australian agribusiness, had to increase its cash consideration to buy the 45% it did not own in Integrated Tree Cropping due to shareholder resistance.
All, barring perhaps Unitab, seemed slam dunk deals û board approval and majority shareholder support. Yet in all it was the view of minority institutional shareholders that was able to change the terms and, in the case of Origin, get the entire deal scuppered.
It may be glib to conclude that the era of shareholder activism has arrived in Australia. But few would dispute the trend of more vocal institutional shareholders influencing significant strategic decisions of companies, including mergers and acquisitions. ôAt the very least dealmakers cannot assume a board recommendation means the deal will cross the line,ö says one investment banker. ôIt used to be a safe assumption that in the absence of a higher offer the board recommended bid prevailed. Such assumptions are no longer valid.ö
He cites two factors behind this shift. With a handful of sizeable companies in each sector, institutions recognise the limited investment opportunities and are willing to fight for them rather than simply sell or drop off the register. Second is the greater consciousness of corporate governance issues ôwhere institutions are aware of their role as shareholders and custodians of peopleÆs money. They are more aware as stakeholders demand them to stand up and represent their interests.ö
A report by Goldman Sachs JBWere finds ôa significant increase in interest in the relationship of corporate governance to investing.ö It cites two key drivers. First is an increasing body of finance literature suggesting companies with superior governance offer better relative investment performance or lower investment risk. Second is increasing demands from the ultimate investor (shareholders, superannuation fund members and fund trustees). It concludes that ôgovernance is a factor investors should incorporate in their investment thinking. Further, with the quantitative evidence building, it is a factor than can be used in a structured and quantitative way (eg via a governance rating system) rather than only implicitly considered as part of an unstructured qualitative stock analysis.ö
The Australian Council of Super Investors finds that in 2004 35% of shareholders voted at annual general meetings. This year it is up to 50%. A spokesperson notes that ôinstitutional investors are more strident in determining their course. They are more aware of their fiduciary responsibilities as trustees.ö
One investment manager, instrumental in getting the ASX/SFE deal changed, notes that it is not simply size that makes a difference in scuttling a deal. ôIt is not so much the numbers but the relative influence of the size. Often a 7%-8% holding is enough to get heard. It depends on the concentration of the share register.ö
In Australia a small number of influential fund managers can be persuasive. The market is small and has its leaders. Value is harder to come by so institutional shareholders are more active in defending and realising value in its investments. When M&A is buoyant then shareholder activism is more vociferous. There are more options so they can push further.
Sandy Easterbrook, director of Corporate Governance International (CGI), consultants to institutional investors in the field of corporate governance, says institutional shareholders are ôbeginning to crack the whip in areas like board composition and performance.ö He detects growing cooperation among institutional shareholders around these issues. ôThey realise cooperation is legal and are thus less reticent to cooperate.ö
There are limits to this. The legality around association issues means institutional shareholders cannot gang up against a company. Declaring the era of shareholder activism has arrived in Australia may be premature. What is clearer is that M&A activity in Australia is increasingly being influenced by institutional shareholders. This is having a broader impact not only on the investment bank driven tactics of deals but challenges the underlying assumptions of the logic of deals.
JapanÆs shareholder activism after Murakami
Yoshiaki Murakami has upset many people in Japan, but he might have done something right. Namely, by introducing the concept of shareholder rights, Murakami, JapanÆs controversial shareholder activist who was arrested for insider trading, has raised awareness of shareholder power among the countryÆs traditionally sleepy institutions and heralded the emergence of more active voting policies.
For years, Murakami was probably the only one who pushed, prodded and knocked underperforming companies into shape. But in recent years, foreign investors, pension funds and proxy voting agencies have become increasingly vocal proponents of better corporate governance.
This year at company annual meetings, shareholders voted decisively against the proposals of managers at Arrk, Japan Asia Investment, Net One Systems and Nintendo. The shareholdersÆ revolt focused mainly on the change of company charters related to a couple of issues [as a result of the new company law]: the transfer of decision-making power over quarterly payouts to directors from shareholders and the method by which members of the board of directors are evicted.
Shareholders, mainly, foreign investors, opposed to the transfer of decision-making power over quarterly payouts to directors from shareholders, saying such transfer would grant too much power to directors. Shareholders also called for directors to be dismissed by majority voting, instead of the traditional method of special resolution. Several companies, such as Seiko Epson and Yamada Denki, saw defeat looming and abruptly withdrew their proposals. In almost all of these companies, foreign investors have a significant stake of well over 30%.
Clearly, there are growing signs of a genuine resurgence in shareholder activism in Japan, says Akira Takada, general manager of IB Consulting at Nomura Securities. ôAs a result, how companies approach to shareholders has become increasingly important recently,ö said Takada.
One notable change this year was that shareholders did not block any motions to introduce anti-takeover measures, although 90% of such proposals were rejected at last yearÆs shareholders meetings. ôI suspect many companies with the strong presence of Japanese and foreign institutional investors took various approaches that would prevent their proposals from being rejected, including careful one-on-one meetings with investors,ö said NomuraÆs Takada.
The controversy around the newfound activism by foreign investors intensified in June 2005, when SFP Value Realisation Fund, a Cayman-based foreign investor, asked the Tokyo District Court to issue an injunction to prevent Nireco, a manufacturer, from issuing equity warrants to defend itself against a hostile bid. The court ruled that NirecoÆs poison pill was illegal and ordered the manufacturer to abandon the plan, saying it would unfairly penalize shareholders. The move was seen as a massive victory to shareholder activism in the country.
As another sign of the growing activism, JapanÆs leading pension fund association has significantly tightened its proxy voting guidelines since 2003 to penalize managements that fail to uphold shareholder values. This year, the Pension Fund Association (PFA), JapanÆs most vocal advocate of better corporate governance, opposed 22.6% of the motions put by 819 companies. The PFA, which manages directly Ñ10 trillion ($86 billion) of its own funds, opposed 40% of the motions that abuse anti-takeover measures and all of the motions that called for directors to be dismissed by special resolution instead of majority voting.
Until recently, Japanese pension funds seldom exercised their voting rights. But since 2003, when it introduced new proxy voting guidelines, the PFA has voted against numerous proposals, said Tasuku Suzuki, a pension fund analyst at Daiwa Institute of Research. ôIt was a shocking thing for fund managers when they find out how strictly the PFA keeps track of the performance of individual firms,ö said Suzuki.
Meanwhile, proxy voting agencies, such as Institutional Investor Services (ISS), have also stepped up their operations in Japan. This year, ISS recommended its clients to reject all of the anti-takeover measures that have been introduced without shareholder approval. ôThese measures can be used to entrench the position of existing management, even though a hostile takeover could enhance shareholder value,ö said Marc Goldstein, ISSÆs director of research services in Japan. This year, ISS recommended its clients to oppose 184 director appointments out of the proposals to appoint 14,181 directors.
On the retail side, various civic groups have been formed across the country to take a closer look at the performance of individual firms and have filed law suits. Until recently, Japanese pension funds seldom exercised their voting rights. But since 2003, when it introduced new proxy voting guidelines, the PFA has voted against numerous proposals.
Meanwhile, proxy voting agencies, such as Institutional Investor Services (ISS), have also stepped up their operations in Japan. This year, ISS recommended its clients to reject all of the anti-takeover measures that have been introduced without shareholder approval. ôThese measures can be used to entrench the position of existing management, even though a hostile takeover could enhance shareholder value,ö said Marc Goldstein, ISSÆs director of research services in Japan. This year, ISS recommended its clients to oppose 184 director appointments out of the proposals to appoint 14,181 directors.
On the retail side, various civic groups have been formed across the country to take a closer look at the performance of individual firms and have filed law suits demanding shareholders receive better treatment by companies with sloppy corporate governance. This year, for example, Shareholder Ombudsman, which is based in Osaka, demanded Sony to disclose its executive salaries and filed a lawsuit against Sumitomo Metals Industries demanding compensation for the Ñ7.6 billion surcharge it had to pay for the violation of its antitrust activity.
ôWithout activists like Murakami, companies in Japan do not seem to have the feeling of tension, though I did not support Murakami entirely,ö said ISSÆs Goldstein. ôJapan has been slow to embrace change, but I think it is changing.ö
