Stewardship and Collective Action: The Australian Experience

Tim Bowley is a Sessional Lecturer in the Faculty of Law at Monash University and Jennifer G. Hill is Professor and Bob Baxt AO Chair in Corporate and Commercial Law in the Faculty of Law at Monash University. This post is based on a chapter in Global Shareholder Stewardship: Complexities, Challenges and Possibilities (Dionysia Katelouzou and Dan W Puchniak eds, Cambridge University Press, forthcoming). Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

The global financial crisis gave rise to competing narratives about shareholders and their engagement in corporate governance. According to one narrative, which was common in the United States, shareholders were complicit in the crisis, by placing pressure on corporate managers to engage in excessive risk-taking to increase profitability.

An alternative narrative prevailed in other jurisdictions, such as the United Kingdom and Australia, where the real problem was perceived to be lack of shareholder participation in corporate governance. According to this narrative, greater engagement by shareholders is a beneficial corporate governance technique.

Institutional investor stewardship codes (“stewardship codes”), which now exist in many jurisdictions, embody this second, more positive narrative regarding the role of shareholders in corporate governance. Stewardship codes reflect the growing importance of institutional investors in capital markets, and a belief that increased engagement by institutional investors can improve corporate decision-making and provide protection against inappropriate risk-taking by corporate managers.

From the perspective of the positive narrative, there is considerable sense in institutional investors undertaking their stewardship activities collectively. By acting collectively, investors leverage their power, pool their resources and share costs, thereby making stewardship more feasible and less speculative. Consistently, the stewardship codes of many jurisdictions refer to, and implicitly support, collective action by institutional investors.

Our recent Working Paper, Stewardship and Collective Action: The Australian Experience, examines the role of collective action as a form of stewardship. We pay close attention in our paper to Australia, which provides an interesting case study concerning the potential of collective action as a stewardship tool. Australia has a capital market structure that is conducive to investor stewardship—in particular, it has high levels of institutional ownership and relatively low levels of controlling stakes held by non-institutional blockholders. In addition, Australian law provides favorable shareholder rights. These conditions suggest that it would make sense for institutional investors in Australian listed companies to undertake their stewardship activities collectively.

A more complicated reality

Our paper’s research reveals, however, a nuanced image of the practice of collective action in Australia.

Australia’s stewardship codes, which, unlike many other jurisdictions, have been developed in a piecemeal fashion by organizations representing the interests of shareholders, address collective action only briefly and in very general terms. Market data also indicates that investors in Australian listed companies generally avoid engaging in overtly aggressive forms of collective action; interventions, such as board spills and other high-profile public campaigns, are not common. Australia has experienced relatively low levels of hedge fund activism, and has not, to date, witnessed to any significant degree the type of interaction between hedge funds and institutional investors, described by Professors Gilson and Gordon in the US context as “agency capitalism”.

Evidence also indicates that Australian institutional investors do not routinely coordinate their voting. Although Australia’s acting-in-concert rules can constrain such behavior, this, of itself, does not explain institutions’ reluctance to form voting blocks. This is because a safe-harbour existed for nearly two decades, which explicitly permitted such coordinated voting by institutions. Yet, in 2015, the Australian securities regulator reported that it was aware of only one instance of institutions relying on the safe-harbour during that 20 year period.

Although overt forms of activism are not prevalent, evidence indicates that there is a significant amount of private interaction (or “engagement”) between institutional investors and their investee companies in Australia. It is, nonetheless, unclear to what extent institutional investors seek to leverage their influence by undertaking these engagement activities collectively. In recent years the financial press has highlighted cases of institutional investors acting collectively to effect changes in the affairs of prominent listed companies. However, investors’ disclosures issued pursuant to the Australian stewardship codes suggest that institutions only undertake collective behind-the-scenes engagement on an exceptional basis, primarily as a mechanism to escalate major governance concerns.

Intermediaries play an important role in channelling the collective influence of institutions

Our paper concludes, therefore, that Australian institutional investors do not appear to use direct forms of collective action as a routine or default form of stewardship tool. We present evidence which suggests that, instead, Australian institutional investors routinely channel their collective influence in corporate governance through intermediary organizations. These organizations include proxy advisers, industry lobbying bodies, and service providers that undertake behind-the-scenes engagement with corporate managers in the interests of their institutional investor clients.

This finding is not wholly unexpected. It makes good sense for institutions to undertake their stewardship activities collectively through intermediary organizations, as opposed to forming ad hoc coalitions and engaging directly with companies. By acting through an intermediary, an individual investor does not need to assume the role (and directly bear the cost) of initiating and coordinating an intervention. Moreover, free-riding concerns are mitigated where an intermediary organization can draw on a significant membership or client base. Finally, since intermediaries specialize in representing the interests of institutional investors, they may accumulate knowledge and expertise, enabling them to achieve valuable economies and to adopt a more strategic approach to governance activities than would be possible for ad hoc coalitions of investors.

Implications of these insights

The nuanced image of collective action emerging from the Australian experience reveals that collective action by institutional investors is by no means a one-dimensional governance phenomenon. Our paper discusses the regulatory implications of this insight. It argues that policy makers, regulators and researchers in other jurisdictions need to be alert to the nuances of collective activism across different jurisdictions. This may require, for example, that issuers of stewardship codes consider in more particularised terms what forms of collective action they wish to encourage investors to undertake in their particular jurisdictional setting. The significant role played by intermediaries in facilitating institutional investors’ participation in corporate governance also suggests that regulation constraining the activities of such intermediaries needs to be fine-tuned and enacted with caution. Finally, our paper observes that regulators must have a careful understanding of collective action when considering to what extent acting-in-concert and group-aggregation laws apply to such conduct. The extent to which investors engaged in collective action should be subject to legal constraints and disclosure requirements has been a live issue in the United States, Europe and Australia in recent years. The possibility that investors wield their collective influence in corporate governance in quite varied ways, potentially giving rise to different levels of risk, suggests that this form of regulation may need to be more discerning in its application to collective action.

The complete paper is available for download here.

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