Australia is ripe for shareholder activism

Shareholder activism is growing worldwide. Heino Kalis/Reuters

Australia is ripe for shareholder activism

Compared to other developed financial markets, Australia’s conditions favour shareholders when it comes to engaging with the companies they invest in. This is not only because of the rules in Australia’s Corporations Act of 2001, but also because of the large and growing pool of superannuation savings.

Like many other countries, shareholders in Australia vote on executive remuneration reports, commonly known as “say on pay”. This is helped by an increased amount of quality information disclosed to shareholders and companies prioritising shareholder engagement before annual general meetings.

Shareholder activism is done mainly in meetings closed to the general public. Information is only made public if it’s strategically beneficial to someone in the meeting. So it’s hard to verify the exact role shareholder activists play.

According to FTI Consulting, Australia ranks third in the world on the “activism threat level”.

Australia’s investing conditions

The greater power afforded to shareholders partly comes down to the Corporations Act of 2001.

The first power is the two-strike rule, which allows just 25% of shareholders to vote down a company’s remuneration proposal and ultimately spill the boards of directors. According to a study based on 4,145 say-on-pay votes between 2011 and 2013, 306 (7.4%) firms received first strikes, of which 51 (16.7%) received second strikes. This resulted in 12 board spills, with all but 8 directors returned to office.

The study also showed that directors’ accountability increased as shareholders were allowed to vote on remuneration. However, the market considers this type of action, especially when shareholders vote against remuneration, as destroying some of the value of the company. This is reflected in a negative market reaction.

Another measure that affords shareholders some power is the relatively low threshold of 5% of issued shareholdings that’s required to call an extraordinary general meeting. These meetings are used to convey shareholders’ dissatisfaction and demand a change in board composition, or to force strategic business decisions, such as closing down an unprofitable business unit.

One more aspect of Australia’s financial landscape that makes it attractive to shareholder action is its pension savings pool. It’s the fourth largest in the world, at approximately A$2 trillion (forecast to be about A$6 trillion by 2035). These super funds have the voting power to exert influence on board decisions and, given their long-term investments, they have genuine interest in the success of the firm.