by Helen Dent ASA Chairperson

ASA 50^th anniversary dinner, Perth 5 May 2010

It's a salutary experience reflecting on the 50-year history of our Australian Shareholders' Association. Coincidentally, we share this significant milestone with two other important players in the financial sector in Australia, the Reserve Bank of Australia, with its responsibilities maintaining financial system stability; and the Centre for Economic Development of Australia (CEDA), an independent think-tank promoting Australia's sustainable and socially balanced economic development. These are fitting company for the ASA to be bracketed with in reflecting on, and indeed celebrating, ASA's ongoing and substantial contribution.

I have deliberately couched my address tonight in terms of a question. Are we and the company boards and management we focus on allies or combatants? I have done this since some people, including members, consider that the ASA fails in its mission if it says or does things perceived as being positive about companies. Some don't think it is ASA's job to praise companies. Indeed some accuse ASA of being too friendly to business; too close to companies; in their thrall; ‘bought off'; not looking after the interests of our constituents, our members; insufficiently aggressive; not often enough providing the eye-catching, controversial headlines; too timid; not robust enough in attacking shareholders' ‘real enemy', company directors and executives. 

Unsurprisingly, I reject these views as unsoundly based, counterproductive and short sighted.

ASA wields influence

The ASA is a legitimate, and I would contend, influential player alongside the likes of the Reserve Bank and Centre for Economic Development of Australia, and with the rest of the alphabet soup of associations, regulators, advisory bodies, lobby groups and companies, large and small, that operate within Australia's economy, including such entities as the BCA, AICD, ASIC, and a myriad of others.

It wasn't that way, of course, when the ASA was founded in September 1960. Shortly after its inception when the ASA committee decided it needed to provide that section of its members not steeped in stocks and shares with basic market information, it faced concerted opposition from the stock exchanges (then state based) and brokers (with a monopoly on exchange dealings). These august men (and we can probably confidently assume they were all men) considered the fledgling organisation for small shareholders to be unnecessary, in fact, redundant. After all - didn't they adequately and appropriately take care of the interests of all shareholders? The stock exchanges took their opposition to an absurd extreme by refusing to provide to the ASA even the most basic educational information - a list of terminology and acronyms together with definitions they had prepared for their own usage![1]  The ASA's interactions with the ASX have thankfully developed into a mature, mutually respectful and constructive relationship; witness the ASA/ASX jointly arranged and run investor hours in the capital cities around Australia.

I will just take a moment to acknowledge the source of this snippet of ASA history, Nick Renton, ASA's 1960 founding chairman, and for many years its driving force. Sadly for all of us, Nick passed away a few short weeks ago.  Not only the ASA, but large numbers of Australian investors owe an enormous debt to his wisdom, intellect, foresight and pragmatic determination, not to mention his eclectic mind.  Nick authored more than 70 books and ebooks, and numerous other publications from Understanding the Stock Exchange (now in its 4th edition) to Using YouTube as a cost-effective public relations tool.  If you'd like to check out this extraordinary individual, go to his (personally built and maintained) website (nickrenton.com) which contains 161 web pages, three fractal galleries, one slide show, a screensaver, 38 movies, a web log and 10 of Nick's podcasts. The latter includes an address to the ASA Ballarat group in 2005 when he spoke about the ASA's early history.  I'm pleased to say, Nick's legacy lives on with great vigour.

ASA has grown to exert far more influence than its 8,000 member base suggests. It has done so because of whom it effectively represents, and because it is in the business for the long haul.

ASA's capacity to represent shareholders effectively is underpinned by its ever-increasing ability to aggregate large numbers of small shareholders' votes at company general meetings.  No other organisation does this for this particular constituency from an independent, unconflicted base.

For example, in the last 2009 reporting season at the annual and extraordinary general meetings ASA attended, the proxies of well over 60,000 shareholdings were entrusted to the ASA. This amounted to a market value greater than $4 billion - almost doubling the ASA's 2008 proxy holdings data - and approaching 400 million shares.

These are indeed impressive numbers, but more impressive are the figures that are materially significant to boards and company executives are the cases where ASA holds proxy votes equivalent to those companies' top 10 or 15 shareholders. 

Can you see Woolworths ignoring their 9th largest shareholder voting at their AGM?  That's the size of the shareholding ASA represented at the Woolworths AGM last year. Similarly, ASA's proxy holdings were equivalent to the 10th largest shareholding vote for both the Commonwealth Bank and Wesfarmers. And the equivalent of the 11th largest shareholder vote for what is still the Big Australian, BHP; and the same level for Westpac.

Your Association is indeed a serious player, with important messages to send and be listened to by the companies you own. What may amount to less than one percent of a company's share register can have a critical impact on how resolutions pan out at AGMs.  Just ask Wesfarmers; it was ASA proxy vote holdings of just under 1% of total shares issued that tipped the Wesfarmers remuneration report vote across the 50% against line at their 2008 AGM. 

With a record like this, company boards and executives cannot ignore the ASA with impunity.  Note that the figures cited just now refer only to the larger ASX 200 listed companies; there are many more examples from the smaller end as well.

As a footnote to the proxy data, we in the ASA cannot say for sure why there has been such a huge increase in the value of the proxy votes coming our way.  Perhaps it is a reflection of the degree of shareholder mistrust generated towards companies by their actions during the financial crisis. It may in particular arise from the nature of the capital raisings that so disgusted many, previously, loyal shareholders surveying the wholesale dilution of their interests in their portfolios' mainstays. It is surely a point worthy of note for company boards, and it is one to which ASA company monitors will be giving special attention this year.

The excuses that boards have been peddling for their equity raising actions are just not acceptable, and in some cases derisory. If Rio was able to raise significant tranches of capital by following the equitable UK laws (as of course they must), there can be no acceptable excuse for other Australian companies not to follow this lead, despite it not being mandated in Australia.

Shareholder activism in practice

In addition to the ASA's influence based on proxy vote, it is essential that all players in the market consider the ASA to be a body with which they can reason and participate constructively. ASA works out in the open at AGMs and public meetings, as well as behind the scenes including liaising with and representing shareholders on numerous bodies that over time shape the environment within which companies operate.

If we are seen only as a body out to grab the quick headline or sound bite, we would not and could not effectively negotiate with company chairs and directors; we could not participate in the many forums affecting the market place such as on accounting standards, with regulators, lawmakers, industry groups and financial industry bodies. 

Here is a small test: What are the two most expensive commodities associated with the ASX? What do you think these might be - gold, oil, platinum...?

You'd be wrong if you thought it might be any of these. But right if you nominated integrity and transparency as the two most expensive commodities.

Now let me remind you why, in economic terms, these two commodities are so rare and therefore, expensive. Demand for them is always sky high, and supply of them can be remarkably scarce when you go searching for them.  Why so scarce? Because it is often in the short, medium or long term economic interests of key players to make them so; at the expense of most if not all other participants in the marketplace.

And what might be the cheapest commodity on the stock market?  Try conflicts of interest.

Why? Because unlike the rarity driven high price of integrity and transparency, conflicts of interest are ubiquitous. They are everywhere you care to look; that is, in huge supply, with just about everyone capable of exploiting the opportunities, getting in on the act - and thus, cheap as chips.

ASA's objective is - given time - to reverse these two relationships.  For 50 years, we have been striving to lubricate market forces using the instrument of transparency, first to reveal and then to drive out conflicts of interest; thereby paving the way where increases in the supply of integrity can be nurtured.  That translates into:

• making the practices involving conflicts of interest prohibitively expensive
• rebalancing supply and demand in these essential commodities in the interests of better corporate governance
• for all shareholders; small and big, and all companies.

ASA receives a lot of criticism for its brand of shareholder activism, focusing as it often does on spotlighting conflicts of interest - and making their users uncomfortable. Much of that criticism asserts that our aims and actions tip the balance too far in the interests of small shareholders at the expense of wider company and market place interests - usually assumed as holding a superior place compared with that of small shareholders. 

I will illustrate this with several examples of recurring themes in ASA's monitoring work.

On linking pay to performance, the November 1999 issue of Equity included the following:

 "In 1999, of the top 50 Australian companies, only two executives did not receive either a bonus or some other performance related incentive; yet fully one half of these companies either experienced a decline in share price or profits (or both) between the beginning and the end of the financial year.... If the new disclosures proposed by the Parliamentary Joint Committee on Corporations and Securities are implemented, companies will have to discuss in the annual report the board policy on remuneration and the relationship between the policy and company performance. At least it will then be embarrassing for companies to confirm what many shareholders already know, that there is little, if any, correlation between levels of executive remuneration and company performance."

11 years later, and in the same vein, I included in an address I gave to a Centre for Economic Development of Australia  luncheon on the Productivity Commission's then draft executive remuneration report late last year, and incidentally when I shared a platform with the about-to-be-appointed President of the Business Council of Australia, Graham Bradley, I said:

"ASA considers shareholders' chief concerns as regards executive remuneration include:

•            Getting the best top executives and retaining them in their companies

•            Paying them appropriately to achieve this end

•            Not paying top dollars for average or below average performance

•            Feeling they can trust their boards to be honest and deal openly with them."

ASA's push to align executive pay with company performance is perennial, and will remain so until there are demonstrably clear relationships between the two.  This focus will endure so long as we continue to identify that executives have self interested short term motivations contrary to shareholder longer term interests in striving for sustainable growth in profits and returns.

While the 1999 promise of mandated company reporting on remuneration has been legislated and institutionalised, and we have seen some advances, such as companies now pushing long term incentive periods out to three years, and some notable ones beyond that to five or more years, and the removal of most non-executive directors' non-statutory retirement benefits, there remain a myriad of conflicts between directors and executives as agents of their shareholder owners. We still have uphill battles to fight including retention bonuses, golden hellos (sign on benefits) and golden goodbyes or non-statutory termination payments. Yes, the government has moved to stamp out the latter, but it did not take long to see the entirely predictable growth in base pay substituting for the often discretionary termination payments. Black letter law and regulation rarely meets the test of time in effectiveness.  ASA's strong preference, schooled in the world of pragmatism, is for self-regulation rather than legislation.

In this context, it is worth mentioning the Government's response to the Productivity Commission's executive remuneration report, accepting all but one of its recommendations (with the rejected recommendation being a matter for ASA's, and others', regret).  In announcing its decisions, the Government indicated its intention to legislate to ‘claw-back' executive bonuses where the benefits received were based on material misstatements in financial accounts.  While not having yet seen the rationale or detail of what the government intends introducing, can I say that this area is one where self-regulation may prove far more effective than legislation.

The issue and re-pricing of executive options under poorly constructed long term incentive plans was quite common 10 to 15 years ago, and included companies such as Harvey Norman, Southcorp and Patrick Corporation. In 2003, ASA adopted the tactics of making an example of Harvey Norman, mounting a high profile media campaign that resulted in the proposal to re-price being withdrawn and a new (acceptable) long term incentive plan being introduced at the company. As a result shareholders enjoyed a number of years where comparatively fewer companies attempted to re-price (the then less popular) executive options.

But how times change! Harvey Norman moved a month ago to resurrect its old, bad ways - opting to resort to a shareholder costly staging of an extraordinary general meeting to vote on re-pricing options.  Exactly 4 weeks after this announcement and 3 days before the meeting was due to be held last Friday, Harvey Norman chairman Gerry Harvey, withdrew the resolutions and cancelled the EGM. Perhaps he was concerned that the ASA would reverse its previous support for the company's remuneration report and vote against this repeat of their 2003 attempt. And there are signs that Harvey Norman is far from alone in back-sliding on the corporate governance front, courtesy of the wash-up from the effects of poor management impairing companies' capacities to withstand the financial crisis.

Allies or Combatants?

I'd now like to return to my theme of allies versus combatants.  I'd ask you please to listen to this quote and see if you can guess who said it:

"Active and vigilant shareholders exercising their ownership rights in a responsible manner is a very good thing. It will be a spur to better governance and will help ensure that companies are managed in the interest of shareholder wealth creation. It also helps ensure more efficient and fair equity markets in the interest of all investors...

...It is good business for public company boards to embrace an approach to corporate governance characterised by three features:

More open, transparent and regular communications with shareholders.

Greater answer-ability and accountability by directors for company performance.

More consultative involvement of shareholders in corporate governance issues....

...Shareholders should expect an AGM worth attending. I have heard a disappointing number of directors disparage the usefulness of annual general meetings in recent times. I believe this view is misplaced. The annual general meeting is an important occasion for the board of directors to answer to its owners for its stewardship of the company and its assets. Answer-ability is an important spur to good corporate practice. "^[2]  

This was not a statement from the ASA Chair or CEO, or a company monitor.  Nor was it a statement from a government minister wanting to rein in company power.  Mr Graham Bradley, now President of the Business Council of Australia, made this statement in August 1999 in a speech in Sydney to the ASA NSW Branch, while he was Managing Director of Perpetual Trustees.

While a great deal of water has flowed under the bridge of our securities' marketplace in the past 11 years, I believe the sentiments of an MD of a single company then, should be no different now from the President of the BCA, an entity established in 1983 as a forum to contribute to public policy debates for Australia's business leaders, the CEOs of Australia's top 100 listed companies.

But my real purpose in drawing Graham Bradley's eminent sentiments to your attention is that they indeed could well have been uttered by anyone in an official position in the ASA, as being ASA's agreed position on key corporate governance issues then and now.  They illustrate well my contention that the ASA and companies are allies rather than combatants in their efforts to produce ever better performance through better corporate governance.

ASA has forged constructive relationships with peak bodies in this space.  One such has been a long term association with the Australian Institute of Company Directors (AICD).  In 1993, ASA, AICD and the Australian Employees' Ownership Association banded together to determine the most desirable practices and protocols for introducing share ownership for employees and directors. By the end of that year, the committee they had established had completed its task with the production of what became a jointly agreed ASA paper^[3].

While the purpose specific employee entity's job was complete, ASA and AICD determined there were many benefits to be gained by continuing and developing a close communication between the parties.  The intent was not just to exchange views on matters of concern to both shareholders and directors. It was also to develop consensus views wherever possible and to be clear about differences where full agreement may not be possible; to develop joint position papers on matters of corporate governance and to contribute to the development of each other's papers; and to share views on proposals from other organisations, particularly the ASX, the then Australian Securities Commission, subsequently ASIC, and accounting bodies.  While the structures adopted to deliver regular meetings to achieve these aims have varied in the past 17 years particularly in terms of the mix of organisations directly involved, with its most recent structural change occurring last month, the relationship has proved enduring and successful.

Some of the early fruits of this relationship were, in 1994, a joint paper issued on The Conduct Of Annual General Meetings: Code of Best Practice, followed by an ASA issued paper prepared on the consultative basis for a code of best practice on counting votes at company meetings.  Subsequently, the AICD used the same mechanism to issue corporate governance papers on non-executive remuneration guidelines and the Institute's code of conduct.  Close relations with AICD have continued, as have many others.

There have been significant gains made over the years to bring us to the position we enjoy today. Just think of the creation of the ASX Corporate Governance Council and its principle of ‘if not, why not', a powerful aid in the battle to force transparency where it is much needed. The big wins in 2006/07 are important; with corporate proxy representatives facilitated, audit independence  involving partner rotation, banning of certain practices such as involvement of the auditor in both preparing and subsequently auditing accounts, statement of auditor independence, gaining the right for shareholders to question auditors at AGMs, and reporting of non-audit services provided by auditors. Then there's the non-binding vote on remuneration, the culmination of many years of pressuring companies to disclose what and how they pay their executives and to be accountable for these decisions. And the now widespread use of performance hurdles. We should acknowledge that the majority of US shareholders would give their eye teeth to have performance hurdles against which to hold their top executives accountable; particularly given the intense pains experienced in the last two years. And they would really like to have the same powers as Australian shareholders to elect and dispose of their company directors; a power we have had for over a hundred years. We should maintain our sense of perspective here. 

However, I wouldn't like to leave you with the impression that it's all sweetness and light. There's a great deal of, shall we say, creative tension out there. And there remain areas where battlegrounds do exist. One such is the existence of mandated AGMs as a primary instrument of board accountability. As Graham Bradley said, AGMs are an important way for directors to answer and give account of their stewardship to their company's owners. In the best of all possible worlds, we might foresee mandated AGMs superseded. However, I don't believe we'll see such a world any time soon. It certainly didn't exist 50 years ago when it seems that some board chairs either didn't bother to attend AGMs or strove to finish them off in less than 10 minutes[4].

The existence of mandated AGMs is a serious issue that goes beyond the bare legislative requirement. And their chief purpose is not just to convey information - or communicate with - shareholders. Even with perfect communications between companies and shareholders, AGMs would remain an essential tool in the armoury of shareholders, and in the capacity of the ASA to be effective in working to protect shareholder interests. Without AGMs, shareholders, and the ASA, would have little if any effective capacity to influence companies; moral persuasion alone, even together with sound economic arguments, would render shareholders and ASA impotent.  This would be to the detriment of all market players.

I would be suspicious in the extreme of any person or company claiming their actions and considerations are motivated by what is in the best interests of shareholders, simultaneously advocating removing the linchpin on which shareholders' influence and power depends. Removal of AGMs would reduce shareholders and their advocates to mendicants tugging at the hem of powerful boards and managements.

What do such advocates really think would happen if the mandated AGM provisions were removed now?  How much influence do they believe either the ASA or the uncoordinated general body of shareholders would genuinely have with company boards? And had it not existed for the last 10 to 20 years, how much of the positive changes that have occurred (albeit on occasion seemingly at a glacial rate) would still have occurred?  Mandated AGMs are an essential component ensuring at least a minimal degree of balance between small company owners and their agents.

ASA in Western Australia

I acknowledged at the AGM the exciting role we have seen the Western Australia (WA) Branch develop. It's not just that WA is our fastest growing branch. It's the breadth of visionary developments created. The institution of company analysis discussion groups was a highly creative way of combining education experiences with sheer fun. And growing out of these, the desire to learn much more and to broaden endeavours into extensive company monitoring, and a whole set of offshoots where members can pick and choose how much or how little they want to become involved in the ASA and to learn to be better or wiser investors.

The ‘just go and do it' approach has been an eye opener for all ASA.  I want to thank Tom Herzfeld for his ideas, energy, commitment, sheer bulldog determination to bring better outcomes for our WA members in the first place, but then apply these to the broader ASA membership. He's a man I admire deeply and whose company I feel privileged to have been afforded. And I also want to thank Doug Armati. While his sometimes overwhelming enthusiasm can be daunting, without his sheer professionalism and drive, ASA would be the loser.  I'd also like to thank, on behalf of the board, each of the incredibly hard working and enthusiastically committed ASA WA team and the people here for their warm welcome to the whole board while we have been in Perth. And finally, if I can be forgiven for singling out one individual, I would like to pay a tribute to Jill Stuart who has organised so much of the events of the last few days as well as the education seminar tomorrow. Tonight she must be feeling relieved to see this fantastic turnout and the obvious enjoyment we have all had in the evening. Jill is not just a wonderful asset to the ASA she is a wonderful person.

My thanks to all of you; and I look forward to returning on many occasions.

[1] Address by Nick Renton, first chair of the ASA, to the Ballarat regional group, 10 August 2005, Is a Shareholders' Association really necessary? http://nickrenton.com/934.htm

[2] Graham Bradley, then Managing Director of Perpetual Trustees Australia Limited, now BCA President, Share Activism: How to Make Shareholder Participation Effective and Contributory to the Success of Companies. Address to ASA Sydney August 1999, reprinted in Equity Nov 1999.

[3] Letter from then ASA Chairman Ted Rofe to AICD National President John Ralph, 19 May 1997, ASA records.

[4] Ibid., Renton.