Corporate governance has been put under the spotlight globally with the spectacular failure of a number of well known listed companies including HIH Insurance Limited, Enron Inc. and WorldCom Inc.
In Australia the importance of effective channels of communication between companies and their shareholders, as well as efficient and transparent voting mechanisms to enable shareholders to enforce board accountability recently came under the microscope of the Parliamentary Joint Committee on Corporations and Financial Services (Committee). The Committee through its report entitled Better Shareholders - Better Company: Shareholder Engagement and Participation in Australia has set out several recommendations to improve shareholder engagement and participation.
Terms of reference
The Committee's terms of reference were to
In particular, the Committee outlined the barriers to the effective engagement of all shareholders in the governance of companies, best practice in corporate governance mechanisms, whether institutional shareholders are adequately engaged in relevant corporate affairs, the particular needs of shareholders who may have a limited knowledge of corporate and financial matters, and whether there was any need for legislative or regulatory change.
Shareholder engagement and effective governance - how does this affect you?
The critical link between decision-making and accountability, is engagement between shareholders and the company board that is informed, meaningful and effective. Effective participation by shareholders in the companies in which they invest is an important means through which corporate governance standards can be improved and shareholders can improve the value of their ownership.
The Committee made several recommendations to improve shareholder engagement and participation through improving the flow of information between shareholders and company boards and the effectiveness of shareholders' exercise of voting powers. The Committee's recommendations included recommendations for legislative change and for regulators to establish best practice guidelines regarding company reporting, annual general meetings and voting on directors and their remuneration.
Corporate governance model
The Committee noted that the participation and engagement of shareholders in the companies in which they invest occurs within the delegated authority model of corporate governance. This operates on the basis that directors are responsible for managing companies and they are held accountable for their decisions by shareholders, who are entitled to appoint and remove the directors.
Deficiencies in shareholder engagement and participation principally arise from companies and investors not adopting the best practices allowed within the current regulatory framework. The Committee considered that it would be more appropriate for legislative reform to remove impediments that prevent companies engaging with shareholders in line with best practice, rather than imposing a minimum standard of engagement.
Simplifying company information for retail investors
Despite recent reforms to the Corporations Act 2001 (Cth) (Act), company information remains inaccessible to retail investors and impedes shareholders from being capable or willing to engage with companies. The Committee recommended that section 314 of the Act be amended to remove the requirement to produce a concise financial year company report1. The intention is to encourage companies to provide a report on company performance and objectives that is a plain, comprehensible statement of company performance and direction that is better suited to the requirements of shareholders.
The Committee further recommended that the Australian Securities and Investments Commission (ASIC) should establish best practice guidelines for clear and concise company reporting.2
The usefulness of annual general meetings (AGM)
The Committee considered that AGMs remained an important forum for shareholders to engage directly with company boards, particularly for retail investors who are not afforded the opportunity to attend private briefings accorded to institutional investors. The AGM is the only chance for a face-to-face meeting with the company board. The Committee took the view that companies could broaden participation by allowing investors to submit questions to the board and recommended that ASIC should establish guidelines to address issues such as ways to maximise attendance.
Disclosing material information equitably
The Committee heard concerns that retail investors are disadvantaged by not having timely access to company information, in particular information which is distributed during private briefings to institutional shareholders. This also extended concerns that information was not being reflected in the market disclosures made by companies in accordance with their continuous disclosure requirements.3
The Committee supported companies holding private briefings with institutional investors conducted within the parameters established by ASX Listing Rule 3.1 but suggested that ASIC should carefully monitor the effect of these briefings on share prices to ensure companies are not selectively disclosing material company information.
It was also considered that companies should post the information contained in private briefings on their websites at the same time as the briefing itself and shareholders should be forewarned of its pending availability to provide the most equitable access.
Company meetings informing voting
Concerns have been raised that shareholders' voting decisions are not being based on the information conveyed at AGMs. Low attendance at AGMs dictate that most votes are lodged by proxy prior to discussing the resolutions at the meeting.
The Committee took the view that the capacity for shareholders to make informed voting decisions would be greatly enhanced be allowing them to vote after the close of a company AGM. The Committee recommended that the government should consult with industry on the implementation of postponed voting after the close of company AGMs.4
Voting on directors
As previously discussed, directors' accountability to shareholders is an important component of shareholder engagement. Significant impediments to shareholders enforcing this accountability are director entrenchment and a lack of information being provided on director candidates.
The dominance of entrenched directors on company boards is contrary to good corporate governance and shareholder's interests. Shareholder voting on directors should be informed by proper information about candidates' qualifications and experience.
Obligations on small companies
The Committee recognised concerns that the substantial corporate governance requirements imposed by the Act may impede small, closely held, entities from incorporating. The one-size-fits-all approach best suited to regulating large financial entities is not necessarily suitable for small businesses without a diverse group of equity investors to protect.
Submissions from Family Business Australia (FBA) called for an amendment to the 50 shareholder rule found in section 113 of the Act, which provides that companies with more than 50 shareholders are required to become unlisted public companies. FBA claimed that family companies with successive generations of shareholders could exceed 50 shareholders, forcing them to relinquish family control and triggering reporting obligations unsuited to family-run companies.
The Committee has recommended that the government should amend section 113 of the Act to raise the limit for shareholders in a proprietary company to 100, as this would address the difficulty some family businesses face when new generations acquire an interest in the company and would not have any adverse regulatory consequences.
Conclusion
Companies and investors should consider whether their current approaches to shareholder engagement and participation can be improved within the existing regulatory framework. Effective engagement and participation by shareholders is an important facet by which corporate governance standards may be improved and shareholders can increase the value of their ownership.
Footnotes
1. Recommendation 4
2. Recommendation 6
3. ASX Listing Rule 3.1
4. Recommendation 18
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