Shareholder activism seems alive in Australia. Yet UNSW Business School research shows there is still a long way to go in actually influencing company boards.
Yes, 60% of AMP shareholders recently voted against the reappointment of directors in the wake of royal commission revelations that the company had been ripping off clients. Usually company boards gets 95% support, so the extraordinary turnaround proves shareholders can wield power.
And yes, shareholders had been pressuring the Commonwealth Bank (CBA) out of a 'complacent culture', before it was exposed in a report by the Australian Prudential and Regulatory Authority.
Plus there have been reforms such as Australia's unique 'two strikes' rule – which can spill a board if one-quarter of shareholders reject its recommendation on remuneration at two successive AGMs. Nearly 10% of major companies received a first strike in the recent reporting season.
"And we are now having discussions about introducing 'advisory shareholder resolutions' where you get to hear what shareholders think about things on a range of matters," says Judith Fox, CEO of the Australian Shareholders Association, which represents 'mum and dad' shareholders.
Yet the truth of the matter is that shareholders don't usually have much say in running a bank or any other company, apart from electing board members.
Research shows shareholders are seen as, and feel, relatively powerless to directly influence company boards and their decisions.
Drag on performance
Gavin Schwarz, an associate professor in the school of management at UNSW Business School, says we have come to expect that company boards should be more accountable to their shareholders.
Proxy voting and electronic voting – or e-voting – on board recommendations were early reforms aimed at encouraging shareholders (who could not attend AGMs) to better call directors to account.
"Surprisingly, what our research shows is that adopting e-voting actually leads to even more board control, which then negatively impacts on firm performance. A key lesson we should pay attention to is how to use e-voting alongside other, broader governance change," Schwarz says.
'A key lesson we should pay attention to is how to use e-voting alongside other, broader governance change'
– GAVIN SCHWARZ
"The [present Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry] points to this problem. Leading up to the scandals of AMP and CBA, the excess control that allowed each board to operate as they did, left shareholders a relatively powerless group.
"But once shareholders came together and bottled their anger and concerns, they were able to more effectively challenge the board," he adds.
Schwarz's new study shows the same effect is marked in emerging tiger economies in Asia, where large public companies are tightly controlled by families and the lack of independent directors are a drag on performance.
With Kuo-Pin Yang and Christine Chou of National Dong Hwa University in Taiwan, Schwarz looked at whether the introduction of e-voting in Taiwan improved shareholder democracy and flowed on to better company performance.
Their results show e-voting can even makes things worse by entrenching the power of families and dominant shareholding blocks. This means shareholders may end up voting against their own interests, as graphically illustrated in a recent Taiwanese business scandal.
Last year, Ho Show-Chung, the influential chairman of SinoPac Financial Holdings, a business group comprising nine publicly listed firms, was detained without bail on charges of breach of trust.
Ho was accused of having directed illegal loans of more than US$164 million (A$217 million) from SinoPac's subsidiaries to offshore dummy companies with direct ties to the Ho family, to finance a commercial building in Shanghai.
As the controlling (majority) shareholder of the SinoPac Group, Ho misappropriated the business group's funds to serve his family's private financial needs.
Yet two months after this misconduct was disclosed, Ho family members were elected as directors to six of the nine seats on the group's board – a level of governance control disproportionate to their shareholding.
Their election – through state-mandated e-voting – raised the question as to whether e-voting helped or hindered them or was merely a by-product of common governance practices.
Why would non-family, minority shareholders not vote to veto those directors associated with the unethical family? Clearly extending shareholder democracy here failed to dent the excess control of major shareholders.
SinoPac shareholders may strive for value and growth, but they ended up e-voting against their own interests because controlling shareholders had more power over the firm than is justified by their shareholding. Interlocking directorships served controlling shareholders' agenda instead of the interest of the majority of shareholders.
Pyramid of affiliates
This result is typical of the legal pyramid structure where a family or major shareholder controls an apex company that then holds controlling blocks in other affiliated companies.
The Ho family in the SinoPac group directly or indirectly controls every member company that is affiliated with such groups and who therefore tend to have a vested interest in the make-up of the board of directors.
These networks of legally independent firms are particularly ingrained in East Asia, characterised as
keiretsu in Japan,
chaebol in Korea,
qiye jituan in China, and
guanxi qiye in Taiwan.
Such pyramiding entrenches firm value, which is enticing for controlling shareholders, but impacts on the potential benefits of e-voting – such as independent directors improving growth and dividends. Apparently even minority shareholders give tacit approval to this in the interests of stability of the whole.
'Exploring e-voting is a reminder that company vested interests and shareholders were originally viewed as partners and were given rights and veto powers'
– GAVIN SCHWARZ
In emerging economies where institutional protections are weak, investors recognise the trade-off between the costs and benefits associated with this feature of pyramidal control.
Schwarz's paper demonstrates that far from shaking up pyramid firms, e-voting more likely supports them. The introduction of e-voting leads to more excess control of controlling shareholders, which subsequently impacts on firm performance.
That the adoption of e-voting in board elections subsequently harms firm performance is seemingly a counter-intuitive development to our understanding of shareholder democracy, especially as online participation for shareholders becomes an increasingly common practice.
Far from regulating governance practice, it raises doubts about the efficacy of e-voting as a means of reforming governance.
Schwarz says exploring e-voting is a reminder that company vested interests and shareholders were originally viewed as partners and were given rights and veto powers.
But the theory on how to govern organisations changed in the 1930s, advocating the separation of ownership and control. Ever since, shareholders (owners) have delegated decision-making responsibility to executives within the firm.
This became a basic feature of understanding the governance relationship between the two groups: boards are independent of shareholders, but accountable to the firm and to share-owners who only get a voice through voting at the annual general meeting.
That shareholders can only react to board recommendations has led to dissatisfaction with this inequality in modern times and to calls for increased shareholder voting power.
Shareholder voting is the most visible manifestation of the shareholder activism that takes place in general meetings. During those, shareholders are empowered to approve annual reports, distribute yearly earnings, amend corporate articles, adjust capital and shares, elect directors and so on.
In theory, shareholders dissatisfied with management can sell out, initiate takeovers or, more likely, add their voice in general meetings, vote to reject management-sponsored proposals, or negotiate with management behind the scenes.
In practice, however, shareholder democracy through voting has not borne out this potential. Research shows that the shareholder voice at public general meetings is rarely heeded, and boards still tend to cultivate majority voting support for proposals and recommendations, underplaying the value of shareholder power.
Although considered a powerful manifestation of shareholder rights, and despite the recent Australian experience, voting is still a limited, restricted mechanism of shareholder participation.