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People power finds its voice in the boardroom

The annual reporting season has begun, providing investors with the opportunity to confront their company directors over issues of concern. But new strategic tactics are emerging this year, driven by the Wilderness Society and managed funds. Gary Kleyn reports.

SHAREHOLDER activism is slowly changing the way many of us think about investment. Whereas investment decisions traditionally were based on a company’s performance, share-holders today may be driven by other motives.

Shareholder activism has entered the sphere of annual general meetings, with unhappy shareholders using their united voice to push for company change in terms of corporate governance or core business.

The evolution of shareholder activism has been relatively rapid.

In 1998, Amcor was put under fire from shareholders over its harvesting of native forests. North Ltd, which was acquired by Rio Tinto, was also in the firing line for its development of the Jabiluka uranium mine. The woodchip operations of subsidiary North Forest Products Pty Ltd also attracted criticism.

And, in 1999, the Wesfarmers board was forced to call an extraordinary meeting because of concerns over its woodchip operations. As a result, Wes-farmers split its forest product business from Bunnings and formed SOTICO, promising a decline in the reliance on old-growth forests.

The Australian Shareholders Association emerged during this time, although it has refused to go beyond the scrutiny of a company’s financials, saying in a statement earlier this year that it would not be drawn into evaluating triple bottom line accounting performance indicators.

Today, activist groups have formed, or are able to form, around many of Australia’s largest corporations.

BHP Billiton is dealing with BHP Shareholders for Social Responsibility over the company’s interests in Papua New Guinea’s Ok Tedi mine. Boral Green Shareholders has expressed concern over the company’s woodchipping of old-growth forests in New South Wales, while Wesfarmers has the WISE group – the Wes-farmers Investors and Shareholders for the Environment group. Gunns also has a group

of shareholders pushing for change in that company’s operations.

The Wilderness Society, meanwhile, has changed tactics. Not only is it taking on individual companies for what it considers to be bad company practices, it is also moving in on financiers, supplies and clients of the offending company. Since March, the Wilderness Society has galvanised around it the shareholders in Tasmanian firm Gunns Ltd, as well as shareholders in the major banks that provide Gunns’ finance.

Challenge Bank CEO Tony Howarth has been keenly watching the whole sustainable and ethical issue unfolding.

Speaking to WA Business News recently, Mr Howarth acknowledged that while banks were concerned about their reputations, it would be highly unlikely that what some would term “unethical practices” would influence a bank’s investment decisions.

“Obviously though, we don’t finance things that are illegal,” Mr Howarth said.

“But that said, there is anecdotal evidence that those companies that consider sustain-ability often put up the best business cases.

“We might look at environmental issues the company faces only to see if it will have an impact on the company’s assets.”

Part of the difficulty, as Mr Howarth sees it, lies in determining what constitutes unethical behaviour. Due to differences in interpretation, Mr Howarth believes it would be wrong to go down the legislative path.

While pressure is being exerted on ‘unethical’ companies by tackling their debt-

ors, it’s the other side of the ledger that may hold the most sway.

Not only are concerned individuals rising up against companies, but the managed fund and superannuation industry is also playing a part. With around $650 billion invested through the funds – a figure growing significantly each year through compulsory superannuation – it’s a force companies must reckon with.

The peak body of the fund managers, Investment & Financial Services Association Ltd, recently released a report Shareholder Activism Amoung Fund Managers, which sought to address the responsibilities fund managers have in exercising this newfound power.

“The rise in institutional share-holding in Australia, as well as globally, has produced a new avenue for ensuring that the views of company decision makers are aligned with shareholders,” the report says.

The report found that around 96 per cent of fund managers have close contact with companies or other forms of shareholder activism.

On average, 84 per cent of companies with a manager’s portfolio are contacted three times per year.

One justification for the overt influence over companies was that “direct contact is more proactive, pre-emptive and informal”.

“It is clearly more cost-effective and less damaging to shareholder value to deal with significant issues before they reach the stage of a controversial resolution at an AGM,” the report says.

Whatever side of the ledger is pushing companies to act in the investors’ interests, many agree that companies ignore it at their peril.

Addressing a recent JB Were luncheon, former Premier Richard Court said triple bottom line reporting was an important part in the process of recognising a company’s influence on the community, both socially and environ-mentally.

“It’s extremely important for companies to build up their social capital. Their brand would mean nothing if they lost that capital,” he said.

Mr Court said those who chose to ignore the growing activism and concerned stakeholders would not be able to operate as effectively as those who embraced the movement.

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