Companies listed on the Australian Stock Exchange are the stewards of more than $1 trillion of investors’ savings. How these companies conduct their affairs will profoundly influence the lives of this and ensuing generations. Capital must be raised and risked in an environment of trust. Ownership Matters believes investors should not give their trust recklessly – capital markets serve us better when trust is earned, not assumed, and tested regularly.
In an ideal world, funds would always be optimally allocated; directors and management would maintain uniform standards of diligence; regulators would be adequately resourced for their appointed tasks. But of this desirable state, shades of human nature are inclined to get in the way – not merely avarice, vanity and hubris, but a culture of entitlement and of status seeking. Incentives for independent thinking are few; the risks of outspokenness spring far more readily to mind. Ownership Matters aspires to know no such inhibitions, and has no economic view beyond that providing more informed choice and more disinterested analysis, of companies, of information, and of personnel, leads to better decision making.
Corporate Australia annually enlists investors in acting out a polite fiction, convening general meetings at which chairmen are applauded for tactful responses to rambling questions and directors are re-elected by overwhelming majorities. The illusion is that such mandates are deserved, when common sense says that boards and executives vary in aptitude as much as individuals in most walks of life, and that a certain proportion will be demonstrably poor. These figures remain entrenched thanks to the captivity of the constituencies that should reveal them: the Australian Stock Exchange, compromised by its for-profit status; the Australian Securities and Investment Commission, constrained by its scarce resources; auditors and independent experts, beholden to boards for their fees; stockbroking analysts and the financial press, keenest to preserve their access and safeguard their future careers; investment banks, remuneration consultants and management consultants, interested primarily in deal flow; government, that has electoral priorities. In theory, competition between companies promotes improved performance by ruthless Darwinian selection; in practice, competition among other actors in the market impairs their monitoring capacities.
On institutional investors, this has left a disproportionate burden, reluctantly borne. Voting with your feet is such an easy option whereas holding the interest necessary to wield influence on an underperforming board is to encumber a fund with underperforming stock. Active exercise of an interest is to incur costs unevenly distributed, at a time when there is pressure to keep costs down by automating trading and replicating indices. Shareholders regarded as nuisances can find themselves punitively diluted under Australia’s laissez-faire regime for capital raising. Institutional investors are readily disenfranchised; more often than not, they do it to themselves. Yet they underestimate their potential for engendering change. And if they don’t behave as owners, who will?
Our conviction is advertised in our name: ownership does matter, and for the market to operate effectively involves responsibilities as well as rights. That conviction is based on many years of daily observation and interaction with boards, executives and shareholders – and also the practical experience of running and owning our business. We hold ourselves to the same ideals we expect from others, and we are conscious of our limitations – of resources, expertise and experience.
Conflict and censure can make for tense relations in the closed circles inhabited by the great majority of corporate decision makers. But the embrace of dissenting views is necessary to preserve trust as a bulwark of the free market system and to protect the savings of the ordinary people entitled to expect decent returns on their hard-earned money. And ultimately it’s for those people that, on behalf of the intermediaries acting for them, we work.
There should be no pretence that corporate decision making is easy. But that is all the more reason to hold those so empowered to the highest standards. After all, chief executive officers are comfortably Australia’s best-rewarded citizens, with great effort put into the design of their remuneration packages to ensure they have the requisite motivation to perform. The assertion that pay drives behaviour, in fact, is also a case for minute examination of how that pay is designed, whether targets are a genuine incentive to outperformance or simply designed for ease of hitting, whether risks are truly shared with other shareholders or crudely skewed.
We hold no illusion that a corporation is a democracy. It must simply observe certain inalienable democratic principles: it must provide reliable information about its affairs; it must respect the law and honour obligations; it must accept the primacy of its owners and not ride roughshod over minority interests; and it must be amenable to reform by open, fair and arms-length processes, independently arbited. Too often are shareholders deflected by boards’ assertions of self-estimated morality. How could you doubt their judgement or competence? How dare you impugn their honesty? Yet imagine if we accepted the bromides of politicians, whose every word today is treated as a lie or an advertisement, with such complaisance. And imagine if politicians enjoyed such invariable landslides at the polls.
Directors are invidiously placed. They do not meet often. They have direct oversight over decisions only of a certain size. They are enjoined to think individually and collegially, to exercise vigilance and discretion. They read papers prepared by management, while being aware that the higher information rises in an organisation the greater the filtering of bad news. They must come at problems from a variety of angles, while not themselves being very various: while there have been some changes to the composition of Australian boards in the last decade, they remain overwhelmingly the preserve of privileged white males over the age of fifty – an ever-more-curious convention in an increasingly diverse country.
All the more reason, then, to examine boards and management critically, and to insist on optimums of transparency, of accountability, of common sense, of conscience (which, as Mencken observed, is the inner voice that reminds us someone may be looking). By each question we ask, each recommendation we make, each reform we advocate, Ownership Matters seeks simply to contribute to the contest of ideas – the contest that nurtures the trust from which prosperity springs.
….capital markets serve us better when trust is earned, not assumed, and tested regularly.