Shareholder revolt

Simon Botherway

Contact's proposed merger with 51 per cent owner Origin was a very big deal. It would have created Australasia's largest integrated energy company, an $8 billion giant with 2.6 million customers and $6.7 billion of sales.

The problem was it didn't look so good to Contact's minority shareholders. They would have gone from holding 49 per cent of a stable, strongly performing energy generator and retailer to just 24.3 per cent of the inherently riskier merged entity.

Institutions believed the figure should have been more like 29 per cent. Furthermore, they didn't like either the sleight of hand which would have let the merger proceed with much less minority shareholder support than a takeover, or the complicity of Contact's so called independent directors.

So Contact's institutional shareholders flexed their muscle.

The resulting decision last week to abandon the proposal in response to concerted opposition from Contact's minority shareholders was probably the most significant victory for institutional shareholder activism in this country.

Rickey Ward of Tyndall Asset Management says the deal was clearly the biggest one ever scuttled by the combined efforts of New Zealand's fund managers.

"People actually all joined forces and sang from the same hymnbook. Every institution without fail that I spoke to believed that this was a full takeover dressed up in a different way, and wanted to see an independent report prior to making any final decision, and it wasn't forthcoming at the end of day."

While the the defeat of Origin's plan hardly ranks alongside the storming of the Bastille in terms of stakeholder activism, Tyndall and the other funds are still hoping heads will roll. Namely, those of Contact's independent directors Phil Pryke, Tim Saunders, and John Milne, who have refused to release the independent report into the proposed deal.

Even as the Contact/Origin saga was unfolding, Telecom chairman Roderick Deane announced in mid-May that he would resign within a year after the Government's unbundling decision. Many thought he would go soon rather than later. As it turned out, he was gone in little more than a month.

"We were instrumental in that," says a senior executive at one of New Zealand's largest fund managers, a group who are collectively flexing their muscle more than ever, and learning how to wield it on behalf of their investors.

"We organised the institutional pressure, I had contact particularly with the other large local institutions and the larger Australian holders," says the executive, who does not wish to be identified.

"We wanted him to go now, and rather than having Rob McLeod as chairman, we wanted Wayne Boyd. It was more about who was the right man given Telecom's situation. We were very happy with the outcome."

Telecom denies Deane's early departure was the result of shareholder pressure.

That the institutions were able to scuttle the Contact/Origin deal and apparently claim Deane's formidable scalp demonstrates not only the power they have arguably always had, but a growing willingness to use it.

When pressure from shareholders, including institutions, was followed by the resignation of controversial former BNZ chief executive Lyndsay Pyne from Telecom's board in 2004, retail investors' advocate the Shareholders' Association said shareholder activism had "come of age".

This week, association chairman Bruce Sheppard observed, it had "continued to accelerate" in the past two years as institutions became "phenomenally active".

That's good news not only for investors whose funds the institutions manage, but also for direct retail investors who more often than not have a common interest.

"What we do is complete waste of time unless we can get the votes, and we can get the votes if we wake the institutions up. Well now they're awake," says Sheppard.

But the benefits of institutions taking a public stance work both ways, says Ward.

Often in takeovers, retail investors who don't individually have a powerful voice or considerable analytical resources are collectively the deciding shareholders.

"As institutions become more public in their stance, there's more chance that the retail investor will listen to a more active-type investor."

According to Sheppard, the emergence of a greater willingness on the part of institutions to be more active owners is a rightful acceptance of their responsibilities.

He believes that portfolio theory - which emphasises diversification to reduce risk and is widespread in the funds management industry - has "sent all the owners on holiday" as managers eschew their rights to vote relatively small parcels of stock.

"When you have a business with no owners that care, it's small wonder that the people running companies get the opportunity to steal the money."

Brook Asset Management's Simon Botherway also points to past institutional apathy towards ownership duties. "They sat back and waited for the tickets to the rugby to arrive in the post."

Botherway has been one of the more visible activists, spearheading institutional opposition to a string of deals. Brook manages $1.1 billion in Australasian equities for its investors and he believes it's his job to bat for them.

"In our view, institutions have a fiduciary duty to vote. Companies are set up the way they are to facilitate ownership by shareholders and the board is there to represent shareholder interests in the company.

"If institutions don't vote, then investors and trustees should be asking why."

Ward puts it this way: "We've got investors' interests to protect, people that we manage money for who pay us a very good fee. We've got to manage it in the best possible way we can. It doesn't always involve standing up in an AGM but it doesn't involve sitting on your hands."

Some of the increasing activism has come as fund managers eye developments overseas.

Botherway says Calpers (California Public Employees Retirement System) in the US has set the pace for institutional activism.

"They're very active and take an interest in the governance of their underlying companies. They have specific remuneration policies, constitution policies and so on. There has been success from institutions exerting pressure and getting some results and there is now a realisation that there is that power."

Carmel Fisher of Fisher Funds Management believes the increasing professionalism of the industry is driving the increase in activism rather than its being a reaction to widespread corporate governance shortcomings.

Fisher Funds had not been one of the more publicly activist institutions, but it was vocal about its concerns over Waste Management's recent merger with Transpacific.

Institutions were realising that activism could drive returns, said Fisher. "Particularly when it's resisting a takeover offer or something like that because you realise there might be more value left in the tin."

That was the Accident Compensation Corporation's motive in its legal challenge of the level of minority shareholder acceptance required to approve the Origin/Contact deal.

ACC investment manager Nicholas Bagnall says fund managers' primary role is to select attractive securities to invest in on behalf of its clients.

"But another way [of increasing returns] is to improve the outcomes from the companies they are invested in, and shareholder activism is one way of achieving that."

While active ownership has always been a tool for extracting greater value from investments, he says institutions are going about it with more vigour.

However, Bagnall says that while the occasional instance public stand is "necessary for companies to realise there is a bite behind the bark", the higher profile recent instances of activism belie the amount of activity taking place behind the scenes. For example, ACC had not intended to go public with its proposed legal challenge to the Contact deal until it was revealed by the Business Herald.

"A lot of proposals never see the light of day because companies realise they will have an issue if they tried to go ahead knowing how institutional investors are likely to feel about them."

AMP equities manager Guy Elliffe, who until five years ago managed a large US investment fund, says the average New Zealand institution is probably more on top of corporate governance than their American counterparts.

He puts that down to the relatively small size of the market here, which means investment managers and analysts have more ability to directly influence boards and management.

"Certainly, as a New Zealand investment manager you meet much more frequently with top management than you do in the States, where you tend to be intercepted by the investor relations departments."

AMP, where Elliffe has worked for the past 18 months, has $800 million in New Zealand equities and votes stock with regard to its actively managed equity portfolio but not its passive portfolios.

"We've certainly been relatively active since I've been here. Certainly where we think management's not representing our interests, we'll make it very clear to them, both through direct interaction and through the proxy AGM processes."

While the defeat of Origin's proposed Contact merger may represent the highpoint so far of institutional activism, Botherway believes it is a phenomenon that will inevitably increase.

"If it's not a tidal wave, it's a groundswell, and it's coming this way."

THE GATHERING PACE OF INSTITUTIONAL ACTIVISM

2001
* Institutions lead opposition against Contact majority owner Edison Mission's lowball $4.25 a share takeover offer.

2002
* Fund managers, shareholder groups and Guinness Peat Group successfully lobby against the sale of the Central North Island Partnership forests to a Hong Kong-based associate of Chinese investment company Citic and Fletcher Forests.

* Arcus Investment Management rallies shareholder opposition to Contact's bid to increase investments in Australian joint ventures with Edison Mission.

2003
* Institutions including Tower Asset Management, AMP Henderson, Brook Asset Management and Alliance Capital Management successfully hold out for a better price from Toll for their Tranz Rail holdings although the increased offer falls short of an independent valuation.

2004
* Controversial former BNZ chief executive Lindsay Pyne resigns from Telecom's board after pressure from the Shareholders Association and institutions.

2005
* A group of institutions led by Brook Asset Management's Simon Botherway successfully push for changes to Kiwi Income Property Trust's trust deed to make it run more like a listed company.

* Tyndall Investment Management unsuccessfully pushes for a higher takeover offer from Graeme Hart's Rank Group for Carter Holt Harvey.

2006
* Fisher Funds Management, while ultimately supporting the deal, raises concerns that the "amalgamation" of Waste Management with Transpacific Industries is a "takeover in disguise", helping prompt a Takeover Panel review of the relevant regulations.

* Institutions claim they expedited Telecom chairman Roderick Deane's resignation.

* Fund managers successfully lead opposition to Origin's "merger" with Contact Energy despite Contact's independent directors endorsing the deal.