09 July 2021
Shareholder activism is on the rise in Australia and it’s here to stay. Recent trends in the US and Europe coupled with an increased focus on climate change activism suggest that the relatively ‘docile’ form of shareholder activism that we have seen up till now in Australia is likely to change in the near future. Boards need to take action now to equip themselves to deal with this changing – and indeed challenging – landscape.
Shareholder activism takes many forms, but the two main types of shareholder activism that we envisage will be more prevalent in corporate Australia in the near future are:
Whilst we have seen some social activism in Australia (largely through attempts to put forward advisory resolutions or constitutional changes), there has been a relatively limited amount of economic activism compared to other jurisdictions such as the US. Instead, much of what we have been exposed to in Australia is what we would term ‘reactive governance’, where shareholders who are dissatisfied with the management of a company use their requisition and voting rights to remove directors from the board or vote against remuneration reports.
In the US, there is also a growing trend that shows that a high proportion of shareholders are now prepared to exercise their voting rights in order to drive change rather than consider withdrawing investments from companies. These trends are likely to be emulated in Australia, which means that companies can no longer ignore the demands of shareholder activists and will have to address these matters proactively.
Australia’s regulatory regime is generally conducive to shareholder activism.
The current landscape allows a degree of shareholder activism in that clear statutory rights are afforded to shareholders with a relatively small shareholding, such as calling shareholder meetings, nominating and removing directors and requisitioning resolutions.[1]
However, it is difficult for activists to definitively dictate the direction of a company even with these statutory rights as case law has confirmed that the management of a company ultimately belongs to the board.[2] This is because a company’s constitution will generally vest the power of management in the board. If a requisitioned resolution seeks to direct the board on the exercise of its powers of management, the board is entitled to dismiss the resolution and is not required to put this to shareholders for consideration. This can make it difficult for shareholder activists to effect any change unless the company’s constitution is amended. However, for this to occur, a special resolution is required which is even more challenging and these are rarely successful given the significant threshold required.[3] It is however still possible, especially if there is strong shareholder support.
This regulatory framework means that shareholder activists in Australia typically promulgate their proposals for change on a number of different fronts: through publicity and the media, through constitutional and advisory resolutions (including voting on remuneration resolutions), and ultimately, through board change.
A clear and detailed strategy for shareholder activist engagement is a time-consuming but critical aspect of a board’s role in the current environment. Implemented correctly, however, active shareholder engagement can be a powerful tool to not only deflect criticism but improve outcomes for shareholders generally. A well-considered strategy for engagement also reduces instances of crisis management, and what has occasionally been described as a ’whack-a-mole’ approach to managing shareholder activism.
Set out below are some practical suggestions or ‘rules of engagement’ for boards to effectively interact with shareholder activists:
Ideally, companies should arm themselves with a team that has expertise in identifying different shareholder activist agendas, managing communications and preparing appropriate response strategies. Make shareholder engagement a regular agenda item at board meetings.
It is important that, as part of this strategy, a board understands not just its short-term value propositions but also the medium- to long-term plan for the company (e.g. carbon transition strategies). This can be particularly challenging for companies which face shareholder proposals that appear to be fundamentally inconsistent with the core business of the company but the ability to innovate and adapt is ultimately critical to the survival of a company. In this regard, shareholder activists can sometimes even bring a different perspective or add value.
Shareholder activism is undoubtedly becoming a major challenge for directors in Australian boardrooms. Early preparation and the implementation of appropriate response strategies will enable directors to engage effectively and deliver better outcomes for all shareholders.
[1] Under s 249D(1) of the Corporations Act 2001 (Cth), a shareholder or group of shareholders, can requisition a general meeting of a company’s shareholders provided that they hold 5% of the votes in the company.
[2] Australasian Centre for Corporate Responsibility v. Commonwealth Bank of Australia [2016] FCAFC 80.
[3] s 136(2) of the Corporations Act.
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