It’s a significant wake-up call for the Australian investor relations community: if you are not already actively engaging with your institutional shareholders, you could be making a dreadful mistake, one with far-reaching consequences.
Several factors are likely to increase institutional interaction with local companies in the near future. The major driver behind the increase in shareholder activism in Australia is a new rule introduced on January 1 this year by the Investment and Financial Services Association (Ifsa), which requires institutional shareholders to vote on every resolution. What’s more, not only do the institutions have to use all their votes, but they also have to make their voting policies publicly available and publish how they have voted on an annual basis.
This is a big change for Australian fund managers, who have long been criticized for not discharging their voting responsibilities appropriately.
Better information
In late June leading global proxy voting group Institutional Shareholder Services (ISS) acquired a presence in Australia by taking over Proxy Australia, a local proxy voting consultancy. The move is another important factor likely to increase institutional participation.
Geof Stapledon, CEO of the merged entity, ISS Proxy Australia, who also founded Proxy Australia, says the acquisition gives the company’s ‘1,300 fund manager and pension fund clients access to locally produced proxy voting research.’ Now ISS Proxy Australia has an on-the-ground presence in Australia, the top 200 Australian companies in particular will see a more consistent approach taken to analysis of resolutions put before shareholders.
‘As global investors increasingly enter the Australian market, companies based here will need to understand their major shareholders’ position on issues to be raised at company meetings,’ says Ian Matheson, CEO of the Australasian Investor Relations Association (Aira), which recently held a members’ forum to help Australian IROs develop strategies for engaging with major investors.
For the first time this year, investors have the opportunity to cast a non-binding vote over a company’s remuneration report. Although this is something that was introduced in the UK in 2003, this is the first time it has applied in Australia. The introduction of non-binding voting means IROs need a better understanding of investor sentiment on remuneration issues to ensure they avoid embarrassing incidents of shareholder opposition to executive pay plans.
Institutions such as Barclays Global Investors have indicated they will tread lightly around the issue for now, because it is a new situation for both the market and the companies. Justin Wood, chief executive officer of Barclays Global Investors, Australia, says: ‘We’re going to be kind this year, but [companies] won’t necessarily get a tick next year if they fail to adequately explain remuneration policies to investors.’
If the UK experience is anything to go by, the non-binding vote over remuneration reports will likely create a culture among Australian listed entities in which there is much more consultation between companies and investors before the annual general meeting to gauge investor expectations.
Sandy Easterbrook, principal and founder of Corporate Governance International, says companies and IROs need to respond to this situation by improving the level of information given to investors. He says companies should produce remuneration reports that ‘explain the reasons [behind the justification for remuneration strategies] and provide facts to back them up.’
Leo Tutt, chairman of Australian insurance group Promina, says the response from his IR team to this new requirement will be ‘to give huge amounts of detail’ on the company’s remuneration policies. ‘We’re also considering a separate report on remuneration,’ he adds. ‘If we can be as transparent as possible our problems will be minimized.’
Super powers
Another new dynamic in the Australian market IROs need to be aware of is the increasing level of shareholder activism from pension funds. In recent years, the Australian Council of Superannuation Investors (Acsi) has become much more active in prompting its membership of industry-based pension funds to directly engage with the fund managers that manage the money in their trust.
New policies have been developed by Acsi to guide the way super-fund trustees talk to fund managers about how they intend to vote on resolutions on the companies they invest in, prompting the development of a more active ownership culture within Australian pension funds.
Although there have been concerns within the IR community that a more active ownership culture might lead to a situation in which super-fund trustees publicly shame companies that won’t respond to their concerns, this is not Acsi’s intention. ‘Our role is to make companies sustainable and successful,’ says Acsi chairman Michael O’Sullivan. ‘The purpose is not to be critical about companies – we prefer to deal with them away from media scrutiny, though this is not always possible.’
Stuart Wilson, executive director of the Australian Shareholders’ Association, agrees. ‘No-one wants to publicly embarrass a company. It’s a last resort,’ he insists.
To avoid a public shaming, firms need to develop a much better understanding of any potentially contentious issues for investors, particularly in relation to remuneration and the appointment of independent directors. Consultation must happen before the notice of meeting is sent to shareholders so companies can avoid a situation in which they could be exposed to the risk of selective disclosure if they closely engage with a selection of investors after the notice is sent.
New pressures
These developments are placing increasing pressure on Australian companies and their IROs to actively engage with institutional shareholders. It is an environment that requires a deep understanding by IROs about the way voting rights are handled by institutions. Achieving a good understanding of voting dynamics is, however, difficult because there is little common ground among institutions about the way voting is handled.
There are three main approaches taken by pension funds to voting responsibilities. ’Some clients withhold voting, others give us guidance on how to vote,’ explains Wood, whose company manages funds for a range of industry super-funds. ‘And then there are others that ask us to raise any contentious issues with them.’
This means IROs need to understand both fund managers’ mandates and underlying beneficial ownership of their major shareholdings to determine who owns voting rights over their stock, something they have not had to closely monitor until now.
Understanding voting relationships is, however, only the first part of the process. Increasingly, investor relations professionals also need to be aware of the perceptions their largest shareholders have toward resolutions to be raised at company meetings in order for resolutions to be successfully carried.
