THE key problem with this week’s Productivity Commission report on executive pay is its reliance on increased shareholder power as the weapon, when shareholders already have plenty of power but don’t use it.
The concept of corporate democracy has real limits, and while the governance debate has made real progress, shareholder activism is an unreliable weapon to curb corporate excesses.
The PC report had some useful governance recommendations — such as banning the no vacancy rule on boards and forcing funds to declare their voting records — but inexplicably missed one of the biggest rorts. Boards can currently buy stock to reward executives while diluting other shareholders, without first requiring shareholder approval.
Hopefully, the final report will redress this balance.
After a year in which company boards have sat back watching investment banks earn $1.8 billion for selling deeply discounted stock, diluting small shareholders to the benefit of the big shareholders, it is surely time to draw a line in the sand.
This week’s battle for Macquarie Airports highlighted the problem with corporate democracy when the challenger Mike Fitzpatrick withdrew in part because he owned less then 1 per cent of the stock against Macquarie Bank’s 25 per cent and couldn’t attract another shareholder to publicly back his cause.
Old-timers in the game, such as GPG, manage to win some battles because they have real skin in the game, significant shareholders, serving as a rallying point for others, and upset at a company’s underperformance.
Most fund managers will simply sell their stock and move on if they don’t like what the board is doing so are unlikely to engage in a big fight.
The theory is if everyone sells then the share price will fall to the level that invites action internally or externally.
The government would be wrong to give shareholders more power for the sake of it and declare victory because, the truth is, there is a huge gap now between what shareholders can do and what they actually do.
Shareholders can call meetings and dump directors at will — and indeed they are starting to exercise their power led by the industry fund members of the Australian Council of Superannuation Investors.
Voting at annual meetings has increased from an average 35 per cent five years ago to 55 per cent and, increasingly, remuneration reports are being defeated while director elections are also challenged.
The power of incumbency is still very real and some fund managers are unwilling to publicly attack a company for fear of losing access and deal flow, as well as simply being left outside the club.
Increased information obviously helps encourage debate about governance issues, but the game has just started. Improving this position is more complex and takes more time than simply giving shareholders power.
In Australia, it is compulsory to vote in public elections but passive equity holders don’t have to vote and many don’t.
This also explains why banks are more powerful, because equity holders allow board incompetence, but debt holders rarely let the same mistake happen twice.
Delayed disclosure
THE federal government has caved in to fund manager demands in its short selling disclosure regime by allowing a four-day delay between the transaction and the aggregate reporting of the sale.
The new regime, due to start next year, follows concerns during the market collapse that the market was not properly informed because short selling was not disclosed.
Financial Services Minister Chris Bowen has effectively put in place what ASIC already requires now, which is reporting short selling transactions, but with a new element of delayed reporting of net short positions.
Still to come is the regime for stock lending disclosure by the RBA and the thresholds for individual short sales.
In Britain, by way of example, if an individual sells more than 0.25 per cent of a stock this must be disclosed. ASIC is yet to opine on this matter and the reporting obligation is on the transacting stockbroker with the net position being in aggregate form so no one knows if any one trader has a big short position.
The heat has gone out of the debate since the market crash earlier this year because stocks have recovered a touch with last quarter’s 20 per cent gain the best for 22 years.
Still, stock lending activity, a loose proxy for short selling, is increasing with an estimated $18bn now on loan compared with $60bn at the top of the market and $10bn at its bottom.
Stock lending is used as a proxy for short selling because you need to own stock before you can short sell, so traders tend to borrow stock first. The ASX noted recently during ASIC’s ban on short selling earlier this year that spreads widened considerably, confirming overseas experience that banning the practice makes markets inefficient. Traders sell stock short if they think it is overpriced — just as they buy stocks they think are cheap. But short selling got a dirty name because it was claimed it was used by heinous hedge funds who sold stocks short, spread false rumours then sold some more.
So far ASIC is yet to actually nab anyone for this practice and, ironically enough, some of the companies which complained the most are now out of business, such as Babcock & Brown and Allco Finance.
The new rules provide for immediate disclosure of actual short selling but the net position will be delayed for four days.
Reporting the initial transaction is potentially misleading because someone may short sell a stock at the opening and then close it out by day’s end, which means in net terms they are still long on the stock.
The net position will be reported in four days but, importantly, this means the market will be told there are “x” number of BHP Billiton shares sold short.
The short seller’s identity will not be revealed, unless they have a big short position, which makes you wonder why the need for the delay in disclosing the net position.
The reason, of course, is the big fund managers like anonymity, and demanded the delay lest someone got some idea what they were up to.
Some might point the finger at the heinous hedge funds, but the reality is most of the big houses run long short books and so it was the mainstream managers who demanded the secrecy.
They claimed if a big short position was revealed in BHP then everyone knew it was, say AMP, doing the shorting — which is a stretch — but was enough to convince the government.
It’s all a long way from the days where broker numbers were attached to each trade — the lines between brokers and exchanges are fast blurring.
Family line
MIKE Fitzpatrick and Macquarie Group took opposing sides in the MAp battle but they agree on the talent of Mike’s son, Will, who will start working with Macquarie next year.
Separately, a point of clarification from yesterday’s note on Macquarie’s purchase of Ford Motor Credit’s $1bn car leasing book. Ford is remaining in the wholesale dealer financing market, but with backing from the federal government’s OzCar program.
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