Small investors claim they are all partners

Militant shareholders are debating their rights. ELLEN READ reports.

Small shareholders are on the march.

In recent years the sight of small shareholders using company meetings to express their frustrations has become increasingly common.

Last week more than 100 of them gathered in Auckland to form the New Zealand Shareholders' Association to fight for their rights.

But while there appears to be uniform enthusiasm for the formation of a small shareholders' organisation, there is debate within the commercial community about exactly what those rights are.

Judging from the speeches at the association's inaugural meeting, the issues that excite small shareholders include the suggestion that a majority stake in a company should attract a premium (although this argument will become irrelevant with the introduction of the takeovers code on July 1), the role and responsibilities of fund managers in monitoring corporate governance and the claim that small shareholders get a free ride on the back of the expertise provided by larger investors.

New association chairman Bruce Sheppard certainly disagrees with the last suggestion. In his view a successful business requires both capital - which shareholders provide - and management expertise to exploit an opportunity.

"If you don't have capital then the opportunity has got no means to be exploited and management have got no resource to apply," he said.

"There are no free rides. It's an inextricable partnership and we could argue that the exorbitant pay packages that management seek to extract from some businesses is a free load on the investment capital that's been trusted to them.

"We expect to be treated as partners.

"If we're all taking the same equity risk, which we are, we should all get the same return."

On the argument about whether a controlling stake merits a premium, Mr Sheppard said that "arguably major shareholders take a lesser risk because they're effectively insiders.

"There is a commercial argument that a major stake is worth more because it has the ability to exert control, but the moral argument is that if we are partners treat us as partners and give us the same return."

Institute of Directors chief executive David Newman agrees.

"A share is a share," he said. "We take a view that shareholders should be treated equally."

Mr Newman said the institute hoped to work with the new association to educate people on the role of company directors.

"We'd very much like to engage with them. We're not a body that is here to defend directors, but more importantly to ensure that boards understand their corporate governance responsibilities."

However, he warned the shareholders' association to "avoid concentrating on personalities."

"It needs to look at positive ways of getting the message across so that we don't use emotive language like scallywags, thieves and burglars."

But Mr Sheppard said if the association found "a completely inept individual" in office then "bringing personalities into it isn't such a bad thing ... "

Mr Newman said the Institute of Directors was familiar with the Australian Shareholders' Association which, after a couple of years of difficult gestation, is seen as a positive voice in the corporate world across the Tasman.

The Australian association provides information, runs meetings, arranges proxies and monitors company activities. Formed in 1960, it has more than 6000 individual and 180 corporate members, mainly listed public companies.

Chairman Ted Rofe is enthusiastic about the formation of a New Zealand association, saying many of the challenges to be faced are the same on both sides of the Tasman.

One of the ASA's big issues has been the pursuit of equal access to information for all shareholders, also an area of concern to many small shareholders in New Zealand.

But the ASA doesn't agree that the best way to achieve things is to talk tough. Its advice to its New Zealand cousin is to work on developing relationships with other industry bodies.

"I'd say the expression that you catch more flies with treacle than with vinegar is true," said Mr Rofe. "We've found over the years that talking to people and working together with them is more productive in the long run than just standing and throwing stones at them."

The ASA cooperates on many issues with the body for Australian fund managers, the Investment and Financial Services Association, although they are not always in perfect harmony.

Mr Rofe said the ASA "continues to be critical of them in not voting sufficiently at company general meetings."

That could happen in New Zealand, although Arcus Investment Management equity head Simon Botherway doesn't see the need for a formal role for fund managers in the new association.

"We may consult and cooperate on some issues, but fund managers are generally big enough and ugly enough to fight their own battles," he said.

The ASA is also keen for the New Zealand Shareholders' Association to have a good relationship with the New Zealand Stock Exchange.

This is welcomed by stock exchange managing director Bill Foster, who believes the association will help overcome the common complaint that small shareholders contribute little, but benefit from, the work of larger shareholders.

"I think the concept of a shareholders' association is a good idea, to represent the interests of shareholders who don't have controlling interests in companies and to express their views about corporate governance matters."

Mr Foster said the association could become an influential force in New Zealand investment.

"As I have always said, the difficulties with such bodies is that it's hard for them to maintain a consistency of philosophy and purpose because people have so many different views.

"But if they can [achieve that consistency] then they can potentially be quite a significant influence on company governance."

TOMORROW - Bruce Sheppard and New Zealand Business Roundtable chief executive Roger Kerr outline their views on the new association.