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 This idea has my vote - Eureka Report article 

This idea has my vote

By Scott Francis
January 31, 2011

PORTFOLIO POINT: In this electronic age, investors should be able to cast their AGM votes as they like, whether they own the shares directly or as part of a pool.

Votes at shareholder meetings have become increasingly important in the past few years, particularly around the issue of executive pay where draft legislation released before Christmas will cede more power to shareholders than ever before.

This can be seen as a “good thing” for the most part. It should connect shareholders with their role as a part-owner of a company and so help them influence issues important to them, such as board makeup and excessive payouts to departing executives.

The draft legislation on executive pay, for example, would impose a “two strikes rule” requiring directors to stand for re-election if the company's remuneration report receives a no vote of 25% or more in two consecutive years.

The figure of 25% was presumably arrived at because this is a rough approximation of the retail shareholder base. What it fails to recognise is that the bulk of institutional holding – which account for around half of all shares on offer – is also owned by retail shareholders, albeit through superannuation and managed funds.

The institutional investment managers have a very influential vote simply as a consequence of managing other people's money. So is it an altogether unreasonable suggestion that retail investors be able to cast their votes however they like, regardless of whether the shares are directly owned or part of a pool?

In the electronic age surely there is no reason an electronic portal could not be set up to allow managed fund investors to exercise their vote. Companies like Computershare (CPU) have had enormous success implementing their model of online share registration around the world. It’s hard to see how this would be much more difficult.

A frequent criticism of the financial services industry is the charging of percentage-based fees, the argument being that managing $1 million is essentially no more different than managing $10 million and yet the same percentage fee applies to both sums of capital.

These criticisms are usually targeted at financial planners, but most managed investments – from industry super funds through to retail managed funds and wraps – also tend to charge a percentage fee. Here is a way that investment managers could justify the higher fees for larger clients – by seeking the voting intentions of their investors and then submitting them at company meetings.



The current situation has an inherent conflict that is worth revisiting The large fund managers in Australia, who all control billions of dollars of assets, are also large publicly listed companies such as the Big Four banks (ANZ, CommBank, NAB and Westpac) which control vast amounts of money under such umbrellas as BT, Colonial First State and MLC.

Combine these forces with the other well-established distribution networks such as AMP, AXA, Suncorp-Metway and Macquarie Group and you have quite a formidable bloc of votes. The conflict of interest is this: Are large financial services companies such as CommBank, NAB, AMP and Macquarie – which all control large portions of the shareholder vote – ever going to aggressively stand up to an issue like excessive executive pay?

After all, these companies are run by boards and executives who benefit from higher levels of remuneration. CommBank chief executive Ralph Norris was paid $16.2 million last year. Macquarie Group chief executive Nicholas Moore was less fortunate, having to make do with $9.5 million.

So when Don Voelte departs from Woodside in the second half of 2011– with the Woodside share price about the same as five years ago – can we really expect to see the institutions using their vote to agitate for more modest executive and board remuneration?

Probably not. Instead we are facing a situation where, should the legislation get up, retail shareholders will need ensure a huge turnout – not one, but two years running –to prevent excessive remuneration.



Another conflict of interest relates to the use of managed fund holdings to secure board positions.

Hunter Hall, which owns about 20% of the listed company Kresta, is looking to appoint two directors at the expense of two current directors. Such a move would provide Hunter Hall with enormous power in the company – and of course the directors would collect director’s fees.

Institutional investors will argue that their ability to vote shares – and in more extreme cases to secure board positions – is an important part of their ability to influence the best outcomes for investors in their managed investments.

This might well be the case, but the question remains as to whether the underlying investors like you and me, whose money it is, shouldn't have the right to vote the shares that they own.

Perhaps there needs to be a minimum effective shareholding – say $2000 in any one company – where the right to vote is offered to shareholders. If managed fund investors choose not to vote their holding (and I suspect many will not want to vote on most occasions) then the vote can revert back to the fund manager.

This issue of voting rights has become more important as moves have been made to increase the influence that shareholders have over executive salaries. When you invest in shares you become a part owner of a company, which brings the right to vote at company meetings.

Until now fund managers have exercised that right on behalf of their investors – and with it earning a deal of influence – however, in the high-tech world it should be both possible and desirable to offer electronic voting rights to managed fund investors for holdings over a threshold amount, allowing small investors to regain some power, and make decisions in their best interests based on the money that they have invested.
Scott Francis' articles in the Eureka Report 

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