The AGM is badly broken

Australia needs new laws around corporate disclosure to save the annual general meeting from being a backward-looking waste of investors’ time.

Annual general meetings are badly broken. As a company director I love the idea of AGMs – rubbing shoulders with shareholders, being held accountable in a face-to-face forum – but the repeated anti-climax of experience suggests that’s mostly a romantic fiction. Virtually no one comes to AGMs and the shareholders who stay away do it rationally. The fact AGMs are not working doesn’t mean we should toss them out. It means we should fix them.

Why shareholders don’t bother coming is, I suggest, because AGMs are crammed full of stuff they’ve already heard and they’re mostly empty of what people really want to know.

Reports from both Computershare and Link on 2012 AGM attendances show that the proportion of shareholders who bother attending is under 0.2 per cent of shareholders, and it’s been falling for years. More than 99.8 per cent of shareholders don’t attend.

Even Australia’s largest companies are lucky to get a few hundred turning up out of hundreds of thousands of shareholders, if not more.

Last year, according to media reports, BHP Billiton got a little under 500, NAB got 300, and Telstra got 700 (out of 1.4 million).

At the AGMs of the companies whose boards I sit on, 150 attended QBE’s (out of 155,000 shareholders), and 60 attended WorleyParsons’ AGM (out of 27,000).

The bulk of an AGMs time is filled with a chairman and a chief executive making quite formal and heavily scripted addresses about the various agenda items. A Remuneration Committee chairman might also speak, but the rest of the NEDs sit mostly mute.

Shareholders do ask questions but even that offers limited opportunity for real engagement.

Yes, there is the famous cup of tea and sandwiches where the board, management and shareholders mingle afterwards. Not that I’m desperate for a cup of tea, but I relish the opportunity to hear what shareholders really think or want to know.

But how many shareholder shoulders can one director possibly rub in that limited time? Three? Five?

An entire board of eight to 10 directors would be lucky to speak to 30 or maybe 50 people, negligible numbers considering there might be hundreds of thousands, or even more, of them in total.

Engagement like that is more effective than politicians who breeze through shopping malls, but not much more.

What can we do to fix this, to make shareholder engagement more meaningful?

To start with, we need an acceptance of what I wrote at the start: that we cram AGMs with conversations that no one needs to hear, because they’ve already heard them.

What I mean is that the vast bulk of an AGM’s agenda is taken up with history – the past year’s results in particular– but these days the bulk of that information has already been in the market for ages, and long absorbed by it.

This focus at an AGM was appropriate in a horse and buggy era when the accounts were presented only shortly before an AGM.

But how extraordinary is that in a modern world when:

– The past results have been in the market for weeks, if not up to two months beforehand

– Management presentations of those results, or at least the slideshow presentations, have been freely available at the ASX and on corporate websites for the same period

– The full annual report, for larger companies, is published the same day as the annual results

– For many companies, the media and a myriad of investor newsletters and websites give almost immediate added colour and insight to the results

– Management have conducted roadshows speaking to/engaging with major investors in Australia and for many companies, overseas

– Every serious fund manager and analyst interested in the stock has sliced and diced the results inside and out for their constituencies,

– Any serious retail investor will have received analyses from their stock brokers or newsletters, and

– Importantly and finally, by the time of the AGM the market has already taken all that historic information into account.

Given all that, why do shareholders put up with the torture of having that same material regurgitated at them – at length – at AGMs? The answer, of course, is that most don’t, because they stay away, knowing they’re unlikely to learn much they don’t already know.

The question AGMs should spend less time on is, 'what happened?'

The question they should spend more time on is, 'what’s likely to happen?' – ie information that’s more pertinent to why shareholders might wish to keep their shares.

If AGMs did that, shareholders – even institutional shareholders – would see more value in attending.

In other words, we should encourage companies to discuss more about their strategy, and to spend more time on their future prospects.

But for this change to happen, it requires brave boards, leadership from investor groups, and some change to the law.

Much of the historic stuff we cover is required by statute, though not necessarily the time we spend on it. Without an investor groundswell, few boards will risk being the vanguard that cuts down on it.

Doing this also needs a change to the law.

Australia needs a coherent, simple 'business judgment' rule, one applying consistently to all corporate statements and conduct.

It’s largely because of the current legal miasma that boards keep their mouths clamped shut as far as possible about a company’s future prospects.

If a board talks about them in takeover or prospectus documents yet they turn out to be wrong, they’re theoretically off the hook if they based their comments on reasonable assumptions.

But at AGMs, in annual reports and continuous disclosure, boards don’t even have the cosmetic protection of a reasonable assumptions defence.

And the reason I say they’re only theoretically off the hook in takeovers and prospectuses is because class action suits don’t bother so much with those provisions. Instead, they take the easier course of suing under more general “false and misleading” provisions, simply because they contain no protection for a board’s reasonable assumptions.

This mess is a joke that isn’t funny, and its ripples hurt shareholders because the outcome is shareholders don’t get told what they’d love to hear.

If you were a director, why would you utter a peep about future prospects if you didn’t have to?

It’s a disgrace that, for twenty years or more, the corporate community has been asking successive governments for a proper, single, workable “business judgment” rule to cover what companies do and say, yet we still don’t have one. 

If the market seriously wants boards to give more than scanty information about future prospects, this needs fixing.

One model we could look to is the US – in Section21E of their Securities Exchange Act – which has a market-oriented “safe harbour” rule.

There, if boards express views about their companies’ future but caveat it with appropriate cautions, the law expects the market to be savvy enough to accept that boards aren’t seers guaranteeing the future, but are merely expressing opinions based on their honest knowledge at the time.

Thus, a US board can be confident when making a forward-looking statement that even if it turns out to be wrong, a legal action against them will fail unless the plaintiff can prove the board had actual knowledge its statement was false or misleading.

In Australia, where a safe harbour like this doesn’t apply, being sued for a forward-looking statement is a frighteningly time-consuming and costly prospect, especially with class action suits bandied about so often.

Australian directors are rational people who take a rational approach: they say as little about the future as possible.

What sane person would willingly assume the risk of being buried in a legal avalanche when they don’t have to?

A comprehensive, all-encompassing business judgement rule is long overdue. Investors should be calling for it as much as their directors are.

Of course, if a regime like this applied, and a board honestly made a statement that later turned out to be wrong, the market would want them to correct it under continuous disclosure as soon as they knew they’d got it wrong.

A safe harbour business judgement rule will encourage more disclosure, whereas the heavy threat of legal actions discourages it. That is neither in the market’s nor investors’ interests as much as it’s not in directors’ interests.

John M. Green is a leading company director, commentator and novelist. This article is based on an address John M. Green gave last week to the Annual Conference of the Australian Council of Superannuation Investors in Melbourne. The views expressed here are his personal opinions, not necessarily those of the companies whose boards he sits on.

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