Dialogue: Informed activism welcome

By ROGER KERR*

Reputable boards and management can only welcome interaction with alert and informed shareholders with a positive contribution to make to the running of a company.

Likewise shareholders are the owners of the company and directors their agents. Shareholders have every right to monitor their performance and hold them to account.

Professionally run shareholder associations abroad often play a constructive role in the wider corporate governance process.



Where a professional approach is not taken, shareholder representatives do nothing for shareholders and companies.

Many annual meetings have been subject to time-wasting and abusive grandstanding by speakers who have not done their homework and whose motivations often appear to be self-promotion.

There is a tendency for some shareholder activists to mount populist bandwagons. Sometimes these do not reflect the interests of the company or shareholders at large and conflict with the fiduciary duties of directors.

For example, it is perfectly reasonable to scrutinise directors' fee proposals. However, it is not in shareholders' interests if remuneration arrangements do not attract the talent a company needs and provide incentives for performance.

Understanding company performance and the business environment requires skill and experience. There is much mistaken commentary on capital market issues, including tendencies to blame management for company results or overall sharemarket movements that are basically driven by world market trends or national economic performance.

There has also been misguided lobbying by shareholder activists for regulations that have served shareholder interests badly. One example is mandatory disclosure of executive remuneration. Another is takeover regulation. Shareholders recognised that such rules protected incompetent boards and managements. Similarly, although our insider trading law is poorly conceived, at least it provides for shareholder remedies.

It follows that the formation of a New Zealand shareholder association will be a positive move if it helps raise standards of company and regulatory analysis.

There have been encouraging developments. In my view David Zwartz raised important issues about Contact Energy last year.

The credibility of the association will depend on its professionalism.

At the same time, it must be recognised that a shareholder association is only a supplementary discipline on company performance. By far the most important disciplines are the daily verdict of investors (backed by professional analysts) in sharemarket trading, the outcomes of which affect a listed company's supply of capital and the threat of takeover.

By contrast, "voice" mechanisms (like shareholder association representations) rather than "exit" mechanisms (like selling shares) are only crucial where better alternatives are not available, such as with cooperative or mutual companies which do not have freely tradeable shares.

* Roger Kerr is executive director of the New Zealand Business Roundtable.