Developments in class actions, tort law and any other corporate legal developments of major interest to the corporate sector: presentation to Centre
Developments in class actions, tort law and any other corporate legal developments of major interest to the corporate sector: presentation to Centre for Corporate Public Affairs - Public Affairs Heads of Function and Senior Practitioners Roundtable
ANDREW LUMSDEN
SHAREHOLDER ACTIVISM
AT GENERAL MEETINGS
Increasingly shareholders seem to be saying that they are no longer content to sit on the sidelines while boards and management run companies. This is a somewhat strange proposition and one that misconceives the function of management in the modern listed public company. Be that as it may it’s a simple fact of our corporate environment and one that needs to be managed. This discontent with passive involvement is in part the cause of, and a result of, the federal government’s moves to give shareholders a non-binding say in the salary packages of executives. But how did it get so far off the tracks and where is it going?
REMUNERATION REPORTING
This reporting season sees the commencement in earnest of non-binding shareholder votes on the remuneration reports of ASX listed companies. From the outset there were concerns about how companies would respond to a vote (even a non-binding one) against the remuneration report.
Interestingly in dealing with the provisions upon which the Australian legislation is based in the UK at GlaxoSmithKline, reports suggest that institutional investor groups which were central to the approval vote failing ultimately acceded to a higher compensation/severance package. This is in preference to the alternative, having the CEO depart, which would have been a significantly worse outcome in terms of the GlaxoSmithKline share price.
How long will it be before an Australian senior executive takes a similar view?
Investors in public companies have a right to full transparency with regard to the remuneration received by the board and by the most senior executives and opportunities for debate and discussion by shareholders of the policies applied by a board in determining remuneration levels. Such shareholder activism is a good thing, but enabling shareholders to vote on a non-binding resolution as a means of demonstrating their disapproval is and will be shown to be fraught with difficulty.
If the vote is non-binding and the members are not intended to have power then its purpose is unclear and potentially misleading. It should be the board of directors not the shareholders that have the authority and responsibility for managing the business of the company. The compensation of executives, while titillating and interesting for others, is part of the day-to-day conduct of a company’s business. Rarely is it significant in the context of overall company finances. Even if you cut the CEO’s salary in half, the effect on shareholder wealth would be very small. However, the decision by senior managers to depart would usually have an enormous impact on value.
Early reports are that this year has seen significant dissent votes. Indeed, recently ASIC has taken an interest in the reporting of remuneration votes in Novogen Limited.
In this recent case, approximately 70% of the proxy votes submitted in respect of the resolution to approve Novogen’s remuneration report were directed against the resolution. At the AGM, the resolution was carried on a show of hands and no poll was called despite the high dissenting proxy vote. ASIC was concerned that the chairman had failed to call a poll, which ASIC considered was “contrary to the duty of a chairman of a meeting (in the absence of a valid request to do so) to call a poll when it is clear that it would produce a different result from a vote on a show of hands.” The second concern related to the disclosure of the vote. In reporting the results of the meeting, Novogen presented the votes against the resolution as a proportion of the total issued share capital of the company (being 12.5%), rather than as a proportion of the number of votes reflected in proxy forms lodged prior to the meeting, namely 70%. ASIC considered this was inappropriate as it created an entirely different perception of the level of disapproval of the remuneration report.
The Novogen case shows the need to carefully deal with the outcomes of remuneration voting even though the resolutions are non-binding. ASIC believes you ought to explain to shareholders what action, if any, you intend to take in response to a negative vote, even though the vote is non-binding.
ASIC is likely to monitor compliance with and the manner in which the votes are conducted and officially announced. ASIC seem to be saying that it believes companies must take into account the views of shareholders, as expressed through the vote (although technically this is questionable if the vote is truly ‘non-binding’).
In planning for the AGM, you need be aware of, and plan for, the potential ramifications of a vote against the remuneration report. At a minimum you should:
Communicate with key shareholders ahead of the AGM to ensure that the board is able to address the key concerns of shareholders regarding the company’s executive remuneration policy in a timely manner. This communication may also amount to proxy solicitation.
Consider how the Board would respond to a ‘no’ vote or a substantial negative vote, including the timing of the response and the manner in which shareholder concerns in relation to executive remuneration will be addressed.
CORPORATE GOVERNANCE SERVICES
Meanwhile a related area is a new industry that is emerging in Australia - corporate governance services. The corporate governance industry is riding a new wave of shareholder activism. Once the preserve of marginalised activists and academic researchers, shareholder activism has morphed into a global business worth $1.3 billion a year, which has permeated the life of most public company executives.
In Australia, Proxy Australia one of Australia's largest providers of proxy-voting research was acquired by the global player, US-based Institutional Shareholder Services. Institutions are increasingly under pressure to use their ownership interest to vote and take a more active role rather than simply selling out of companies they are unhappy with.
There will always be a lot of noise from the corporate governance industry but it’s very difficult to clearly demonstrate that these measures add value either in terms of profitability or increased market value.
One worrying consequence of the industry is that most companies chose to ignore the “comply or explain” flexibility inherent in the ASX Corporate Governance Guidelines, instead, companies feel compelled to comply rather than risk adverse ratings.
WHAT’S CORPORATE GOVERNANCE WORTH?
A recent study by the University of Wollongong’s Sydney Business School, found that firms with “poor” corporate governance standards — non-conformance with the ASX Corporate Governance Guidelines and with significant insider ownership influence — have delivered investors “significantly higher” returns than the stock market over the long term, and better financial performance than other firms. Despite all the noise, might it be that governing well and maximising returns for shareholders are mutually exclusive?
The relationship between performance and governance has been the subject of considerable scholarship in the United States for example Paul Gompers, Joy Ishii, and Andrew Metrick, which supported the proposition that there is a link between corporate governance quality and share price performance and valuation there has been little real scholarship on the matter in this jurisdiction.
That said it is probably wrong, and certainly too late to argue against improving standards of governance as such. The nature of governance is different from performance and in reality; good governance is probably less about performance enhancement and more about catastrophe prevention and has much to commend it if executed in a meaningful and thoughtful way.
TRADE UNIONS, MEETINGS AND THE CORPORATIONS ACT
Protest marchers, strikes and demos. They're the traditional face of trade union activism. But proxy votes and meeting requisitions joined the picket line as a union weapon. More and more, union leaders and delegates are speaking out at company meetings as well as stop work meetings. Australian unions are utilising their individual (though usually not their collective) power as shareholders to pursue employee interests.
In March 2000, the industrial dispute about the move to individual contracts the between the Construction Forestry Mining and Energy Union (CFMEU) and Rio Tinto entered a new phase when the CFMEU launched a proxy campaign against the mining giant. The campaign brought together unions in England, the US and Australia, in an unprecedented global show of shareholder activism. The union moved two shareholder resolutions which one on corporate governance and one was on employment policies, basically saying that the company should respect international human rights standards in the workplace. The vote on the governance resolution was over 20% and over 17% on the employment resolution.
Commonwealth Bank AGM’s the former Chief Executive David Murray was routinely peppered by the Financial Sector Union (FSU) with questions about plans to retrench “thousands of workers” or to ”close branches”.
NRMA patrol officers and Australian Manufacturing Workers Union (AMWU) activists sought to hold a meeting to vote on their conditions of employment through proposed amendments the company's constitution. The NSW Supreme Court rejected the NRMA challenge. Trying to avoid a special meeting that might cost NRMA members $4.8 million to stage, NRMA appealed. However, the appeal was unsuccessful. After negotiations with the AMWU NRMA was forced to modify its proposals to restructure the working conditions of insistence on contracting out; for patrol officers.
These are not one off matters, unions have become increasingly willing to utilise various provisions contained in the Corporations Act 2001 as a new forum for advancing employee interests, Ansett and James Hardie are outriders but they are not one-offs.
You should expect that shareholder activism will be employed with increasing frequency by unions. In comparison with the United States union shareholder activism in Australia is in its infancy. It’s worth remembering that America's peak union body, the AFL-CIO, has had an Office of Investments since the early nineties. It drafts hundreds of resolutions for company meetings, as well as providing detailed advice to pension funds and big fund managers about how to vote on boardroom proposals.
In a similar vein, earlier this week the chair of IAG James Strong tried to stop a meeting of shareholders being high jacked by the smash repairers, despite his protestations that issue and other operational matters should not take up shareholders' time, several smash repairers ignored him and took to the microphones. They persisted with questions and statements about the impact of the system, claiming it was damaging their businesses, IAG's brand name and disadvantaging customers, and was the story in the business pages about IAG’s ability to achieve higher profit margins, how IAG made a record $760 million profit or the 4.5c uplift in the dividend per share to 26.5c? No it was about how the angry protesters had upset the meeting and full details of their claims against IAG.
LITIGATION
The growth of shareholder activism and the growing public interest in board accountability will have an impact on the all types of corporate transactions. In this heightened environment of shareholder activism the shareholder class action has emerged as a new element in the life of corporate Australian corporates need to understand class action litigation as a new element of the shareholder landscape.
The class action, is a private remedy designed to allow individual shareholders to come together to try to access justice in a way that leads to a, hopefully, more efficient use of judicial resources. When investors think things have gone wrong, they may to use class actions to bind together and look for someone to blame using a range of legal avenues available to them.
Some recent examples of this include:
In 1999, GIO, its directors and an independent adviser were sued by Mr King on behalf of 68,000 shareholders who did not accept a takeover offer by AMP as a result of misleading statements in the Part B document. Shareholders settled their proceedings for $112 million. Clearly, the day has arrived when shareholder class actions can be successfully prosecuted in Australian M&A transactions.
Sons of Gwalia litigation where a shareholder class action is proceeding against the company based on a claim that the company engaged in misleading and deceptive conduct by failing to fully disclose its gold hedging commitments. That litigation is reportedly being funded by IMF (Australia) Limited, a publicly listed company providing funding of legal claims and other related services.
At least two litigation funders are listed on the Australian Stock Exchange (IMF Australia Ltd and Hillcrest Litigation Services Ltd). Although the terms of exch deal are bespoke funding in broad terms is provided on the basis that they take something like 25–40% of the proceeds of litigation and that the funder pays any adverse costs order.
Unlike the position in the United States, preliminary processes designed to strike out unmeritorious claims have been largely unsuccessful. One reason for this is that Australian courts have had a pretty liberal attitude to plaintiffs to allow them access to justice. What this means in practice is more cost, more appearances and an endless stream of hearings into preliminary matters.
TORT LAW REFORM
As a result of a growing community perception that the law of negligence was unclear and unpredictable, that in recent times it had become too easy for plaintiffs in personal injury cases to establish liability for negligence on the part of defendants, and that damages awards in personal injuries cases were frequently too high. A series of intergovernmental responses resulted in the Ipp Review.
The Ipp Review was asked to look at methods that limit ‘liability and quantum of damages arising from personal injury and death’. A key element in the Ipp Review’s approach was that reform should be principle based—that is to say that the changes in the law should encompass ‘general rules governing as many types of cases and as many categories of potential defendants as is reasonably possible’. This is to try to avoid forum shopping.
The review was in part the result of a campaign conducted in the newspapers about cases like:
Kevin Presland: the actual decision was fortunately reversed on appeal but this was about a fellow with a self-inflicted head injury. He was later referred as a voluntary mental patient to the James Fletcher Hospital. He was released and then went home with his brother. He became psychotic and attacked his brother’s fiancée, violently murdering her. He was found not guilty by reason of that mental illness. He then sued the Hunter Area Health Service, claiming they had a duty to detain him under the mental health act, and that by releasing him they should compensate him for the pain and suffering occasioned by his murdering his brother’s fiancée and his incarceration. The court agreed and awarded him $225,000 for pain and suffering and another $85,000 for lost earnings.
Guy Swain: the High Court upheld a jury’s decision to award $3.75 million in damages to a plaintiff who was injured whilst swimming at Bondi beach. In this case Guy Swain became a quadriplegic as a result of hitting a sandbar while swimming between the flags at the beach in 1997. Swain sued Waverley Council, alleging that it was negligent in its placement of the flags on the beach on the day of his accident and for not warning of the dangers of the sandbar.
The pork chop case: a patron in a hotel strapped a pair of pork chops to his feet and began moving about the hotel. When the chops broke apart, other patrons picked up the meaty bits and threw them around. Then the hilarity stopped. Another patron, Troy Boron, slipped on the grease trail left by the chops and broke his arm. Boron was awarded $60,000 in damages after the District Court found the hotel had breached its duty of care by failing to clean the area that the patron had made slippery from his pork-fashioned footwear.
The Ipp Review looked at the standard of care which has always been connected with foreseeability ie if a risk is not ‘far fetched or fanciful’. Ipp recommended changes to this rule that only risks held to be ‘not insignificant’ should be regarded as being foreseeable. This has now been incorporated in the law in the various states and territories.
In the area of negligence the review introduced a new test, based on the Bolam test, a UK principle, which held that a doctor could not be held to have acted negligently if the treatment provided was in accordance with an opinion widely held by a significant number of respected practitioners in the field, unless the court considered that the opinion was irrational.
The Ipp reforms have been implemented by the states and territories, key reforms enacted included proportionate liability for pure economic loss; and comprehensive reform of the law of negligence, including clarifying duties of care, provision for waivers allowing people to accept responsibility for participation in risky activities, protection of volunteers and good Samaritans from the risk of being sued, caps on general damages claims and claims for loss of earnings. These changes have had the effect of significantly limiting the amount of compensation that can be claimed by injured persons.
Part of the objective of tort law reform was to make general insurance more affordable. The latest results on the affordability of insurance showed that public liability insurance premiums have fallen by between four and nearly five per cent.
CSR, NOT SUGAR AND NOT VERY SWEET!
There was a time when the initials CSR meant only one thing: Colonial Sugar Refinery, but not anymore! Questions of CSR (corporate social responsibility) have been referred to the Corporations and Markets Advisory Committee for consideration and advice. Simultaneously, the Parliamentary Joint Committee on Corporations and Financial Services is conducting an inquiry into Corporate Responsibility and Triple-Bottom-Line reporting, for incorporated entities in Australia.
Reflecting these concerns, the Australian Financial Review has editorialised that:
Modern capitalism has many strengths but one big weakness. Some executives are so driven to achieve legitimate corporate goals bigger profits, more shareholder value, a critical restructuring that they are able to justify any technically legal means of pursuing them. The risk is that management and board lose sight of a fundamental question: is this just?
In the vast majority of cases managers’ duty to their company and the law are not in conflict and society as a whole benefits from the wealth created. In rare cases, what is legal and what is just are at such odds that strict legal justifications crumble before community outrage and the threat of legislative action.
In recent times there have been growing calls for Australian corporate regulation to reflect ‘modern business needs and wider expectations of responsible business behaviour’? Not long after these phrases start getting used people start to using terminology like “CSR and “stakeholder” terms that are more likely to confuse than clarify. As Bill Beerworth recently noted:
The term “stakeholder” is itself vague and suggests that anyone identifiable as such has an interest worthy of protection.
Similarly, the phrase “corporate social responsibility” implies that corporations are not socially responsible and that they must be forced to become socially responsible.
Increased community calls for some form of corporate social responsibility cannot be ignored, after all these are the ‘cultural norms’ that shape the way corporations are allowed to operate.
In Canada a significant number of Canadians, and a significant percentage of Canadian shareholders, have been found to want business executives of corporations "to take into account the impact their decisions have on employees, local communities and the country as well as making profit," but can they do so if it at the expense of making profit, when can managers deviate from shareholder wealth maximisation?
In Australia some shareholder advocates have suggested that corporate social responsibility or similar is an attraction to shareholders and potential investors and should be supported by managers without qualification for that reason alone. However, recent research suggests that the belief that corporate social responsibility favourably drives community views of a corporation may be wrong.
The surveys seem to show that “corporate citizenship” in whatever form is less important in driving opinions than more traditional issues such as an open and transparent operation, making profits for owners and shareholders and management/leadership strength. Shareholders do not seem to rate highly support for things like sponsoring events of community interest or being a good corporate citizen whatever benefits may enure to the community. Yet when Australian companies donate millions of shareholder dollars to supporting tsunami appeals the protest is at best muted, generally there is a feeling that::
After all can anybody put a value on the impact on a corporate's image (carefully nurtured these days) from being seen to be tight-fisted or stingy?
The anecdotal evidence suggests that the community has a higher expectation of our managers than a simple responsibility for wealth accretion. As with matters of governance more generally the community seems to expect mangers to focus on the ‘vibe’ of the law as well as the letter.
In the community’s mind we seem to be able to see a blending of views, managers must remain focused on maximising the wealth of their shareholders. However, the obligation to maximise profits does not replace the ethics of honesty and competence or of compliance with the thrust of laws regulating our community even if they do not achieve short term wealth accumulation objectives, in some sense the problem is about short versus long term interests of corporations.
There is another aspect to the issue, that is the rise of the socially responsible investor, at some point you can expect directors to take more notice if favour more socially responsible competitors. As a general rule most Australian managers and their advisers favour shareholder primacy, ie the primary goal of management is to maximise shareholder wealth.
In the UK there has recently been new provisions suggested making clear that directors have to act in the interests of shareholders, but also need to pay regard to the longer term, the interests of employees, suppliers, consumers and the environment. Without going into a forensic examination of the legislation, at a macro level the worry with these types of provisions is twofold:
Firstly, that the CSR debate raises expectations beyond what can be sensibly delivered, that managers are hoisted on a CSR petard.
Secondly, that it could lead to greater uncertainty and more capacity for people with only a tangential interest in the company to sue mangers for failing to sufficiently consider their interest or more likely the interests they purport to represent.
Is it really necessary to legislate for CSR? Can you? Australian corporates play a broad role in our society. They do more than simply produce shareholder wealth ,as part of that process they try to keep their workforce safe and happy and they provide their customers with goods or services that bring them back wanting more.
Every day all around Australia the managers of Australian companies, large and small, consider the broader community however; whether companies can or should be made to be responsible for producing positive social and environmental outcomes (the traditional role of governments) is quite another issue.
Andrew Lumsden
Partner
+61 2 9210 6385
andrew.lumsden@corrs.com.au
ANDREW LUMSDEN
SHAREHOLDER ACTIVISM
AT GENERAL MEETINGS
Increasingly shareholders seem to be saying that they are no longer content to sit on the sidelines while boards and management run companies. This is a somewhat strange proposition and one that misconceives the function of management in the modern listed public company. Be that as it may it’s a simple fact of our corporate environment and one that needs to be managed. This discontent with passive involvement is in part the cause of, and a result of, the federal government’s moves to give shareholders a non-binding say in the salary packages of executives. But how did it get so far off the tracks and where is it going?
REMUNERATION REPORTING
This reporting season sees the commencement in earnest of non-binding shareholder votes on the remuneration reports of ASX listed companies. From the outset there were concerns about how companies would respond to a vote (even a non-binding one) against the remuneration report.
Interestingly in dealing with the provisions upon which the Australian legislation is based in the UK at GlaxoSmithKline, reports suggest that institutional investor groups which were central to the approval vote failing ultimately acceded to a higher compensation/severance package. This is in preference to the alternative, having the CEO depart, which would have been a significantly worse outcome in terms of the GlaxoSmithKline share price.
How long will it be before an Australian senior executive takes a similar view?
Investors in public companies have a right to full transparency with regard to the remuneration received by the board and by the most senior executives and opportunities for debate and discussion by shareholders of the policies applied by a board in determining remuneration levels. Such shareholder activism is a good thing, but enabling shareholders to vote on a non-binding resolution as a means of demonstrating their disapproval is and will be shown to be fraught with difficulty.
If the vote is non-binding and the members are not intended to have power then its purpose is unclear and potentially misleading. It should be the board of directors not the shareholders that have the authority and responsibility for managing the business of the company. The compensation of executives, while titillating and interesting for others, is part of the day-to-day conduct of a company’s business. Rarely is it significant in the context of overall company finances. Even if you cut the CEO’s salary in half, the effect on shareholder wealth would be very small. However, the decision by senior managers to depart would usually have an enormous impact on value.
Early reports are that this year has seen significant dissent votes. Indeed, recently ASIC has taken an interest in the reporting of remuneration votes in Novogen Limited.
In this recent case, approximately 70% of the proxy votes submitted in respect of the resolution to approve Novogen’s remuneration report were directed against the resolution. At the AGM, the resolution was carried on a show of hands and no poll was called despite the high dissenting proxy vote. ASIC was concerned that the chairman had failed to call a poll, which ASIC considered was “contrary to the duty of a chairman of a meeting (in the absence of a valid request to do so) to call a poll when it is clear that it would produce a different result from a vote on a show of hands.” The second concern related to the disclosure of the vote. In reporting the results of the meeting, Novogen presented the votes against the resolution as a proportion of the total issued share capital of the company (being 12.5%), rather than as a proportion of the number of votes reflected in proxy forms lodged prior to the meeting, namely 70%. ASIC considered this was inappropriate as it created an entirely different perception of the level of disapproval of the remuneration report.
The Novogen case shows the need to carefully deal with the outcomes of remuneration voting even though the resolutions are non-binding. ASIC believes you ought to explain to shareholders what action, if any, you intend to take in response to a negative vote, even though the vote is non-binding.
ASIC is likely to monitor compliance with and the manner in which the votes are conducted and officially announced. ASIC seem to be saying that it believes companies must take into account the views of shareholders, as expressed through the vote (although technically this is questionable if the vote is truly ‘non-binding’).
In planning for the AGM, you need be aware of, and plan for, the potential ramifications of a vote against the remuneration report. At a minimum you should:
Communicate with key shareholders ahead of the AGM to ensure that the board is able to address the key concerns of shareholders regarding the company’s executive remuneration policy in a timely manner. This communication may also amount to proxy solicitation.
Consider how the Board would respond to a ‘no’ vote or a substantial negative vote, including the timing of the response and the manner in which shareholder concerns in relation to executive remuneration will be addressed.
CORPORATE GOVERNANCE SERVICES
Meanwhile a related area is a new industry that is emerging in Australia - corporate governance services. The corporate governance industry is riding a new wave of shareholder activism. Once the preserve of marginalised activists and academic researchers, shareholder activism has morphed into a global business worth $1.3 billion a year, which has permeated the life of most public company executives.
In Australia, Proxy Australia one of Australia's largest providers of proxy-voting research was acquired by the global player, US-based Institutional Shareholder Services. Institutions are increasingly under pressure to use their ownership interest to vote and take a more active role rather than simply selling out of companies they are unhappy with.
There will always be a lot of noise from the corporate governance industry but it’s very difficult to clearly demonstrate that these measures add value either in terms of profitability or increased market value.
One worrying consequence of the industry is that most companies chose to ignore the “comply or explain” flexibility inherent in the ASX Corporate Governance Guidelines, instead, companies feel compelled to comply rather than risk adverse ratings.
WHAT’S CORPORATE GOVERNANCE WORTH?
A recent study by the University of Wollongong’s Sydney Business School, found that firms with “poor” corporate governance standards — non-conformance with the ASX Corporate Governance Guidelines and with significant insider ownership influence — have delivered investors “significantly higher” returns than the stock market over the long term, and better financial performance than other firms. Despite all the noise, might it be that governing well and maximising returns for shareholders are mutually exclusive?
The relationship between performance and governance has been the subject of considerable scholarship in the United States for example Paul Gompers, Joy Ishii, and Andrew Metrick, which supported the proposition that there is a link between corporate governance quality and share price performance and valuation there has been little real scholarship on the matter in this jurisdiction.
That said it is probably wrong, and certainly too late to argue against improving standards of governance as such. The nature of governance is different from performance and in reality; good governance is probably less about performance enhancement and more about catastrophe prevention and has much to commend it if executed in a meaningful and thoughtful way.
TRADE UNIONS, MEETINGS AND THE CORPORATIONS ACT
Protest marchers, strikes and demos. They're the traditional face of trade union activism. But proxy votes and meeting requisitions joined the picket line as a union weapon. More and more, union leaders and delegates are speaking out at company meetings as well as stop work meetings. Australian unions are utilising their individual (though usually not their collective) power as shareholders to pursue employee interests.
In March 2000, the industrial dispute about the move to individual contracts the between the Construction Forestry Mining and Energy Union (CFMEU) and Rio Tinto entered a new phase when the CFMEU launched a proxy campaign against the mining giant. The campaign brought together unions in England, the US and Australia, in an unprecedented global show of shareholder activism. The union moved two shareholder resolutions which one on corporate governance and one was on employment policies, basically saying that the company should respect international human rights standards in the workplace. The vote on the governance resolution was over 20% and over 17% on the employment resolution.
Commonwealth Bank AGM’s the former Chief Executive David Murray was routinely peppered by the Financial Sector Union (FSU) with questions about plans to retrench “thousands of workers” or to ”close branches”.
NRMA patrol officers and Australian Manufacturing Workers Union (AMWU) activists sought to hold a meeting to vote on their conditions of employment through proposed amendments the company's constitution. The NSW Supreme Court rejected the NRMA challenge. Trying to avoid a special meeting that might cost NRMA members $4.8 million to stage, NRMA appealed. However, the appeal was unsuccessful. After negotiations with the AMWU NRMA was forced to modify its proposals to restructure the working conditions of insistence on contracting out; for patrol officers.
These are not one off matters, unions have become increasingly willing to utilise various provisions contained in the Corporations Act 2001 as a new forum for advancing employee interests, Ansett and James Hardie are outriders but they are not one-offs.
You should expect that shareholder activism will be employed with increasing frequency by unions. In comparison with the United States union shareholder activism in Australia is in its infancy. It’s worth remembering that America's peak union body, the AFL-CIO, has had an Office of Investments since the early nineties. It drafts hundreds of resolutions for company meetings, as well as providing detailed advice to pension funds and big fund managers about how to vote on boardroom proposals.
In a similar vein, earlier this week the chair of IAG James Strong tried to stop a meeting of shareholders being high jacked by the smash repairers, despite his protestations that issue and other operational matters should not take up shareholders' time, several smash repairers ignored him and took to the microphones. They persisted with questions and statements about the impact of the system, claiming it was damaging their businesses, IAG's brand name and disadvantaging customers, and was the story in the business pages about IAG’s ability to achieve higher profit margins, how IAG made a record $760 million profit or the 4.5c uplift in the dividend per share to 26.5c? No it was about how the angry protesters had upset the meeting and full details of their claims against IAG.
LITIGATION
The growth of shareholder activism and the growing public interest in board accountability will have an impact on the all types of corporate transactions. In this heightened environment of shareholder activism the shareholder class action has emerged as a new element in the life of corporate Australian corporates need to understand class action litigation as a new element of the shareholder landscape.
The class action, is a private remedy designed to allow individual shareholders to come together to try to access justice in a way that leads to a, hopefully, more efficient use of judicial resources. When investors think things have gone wrong, they may to use class actions to bind together and look for someone to blame using a range of legal avenues available to them.
Some recent examples of this include:
In 1999, GIO, its directors and an independent adviser were sued by Mr King on behalf of 68,000 shareholders who did not accept a takeover offer by AMP as a result of misleading statements in the Part B document. Shareholders settled their proceedings for $112 million. Clearly, the day has arrived when shareholder class actions can be successfully prosecuted in Australian M&A transactions.
Sons of Gwalia litigation where a shareholder class action is proceeding against the company based on a claim that the company engaged in misleading and deceptive conduct by failing to fully disclose its gold hedging commitments. That litigation is reportedly being funded by IMF (Australia) Limited, a publicly listed company providing funding of legal claims and other related services.
At least two litigation funders are listed on the Australian Stock Exchange (IMF Australia Ltd and Hillcrest Litigation Services Ltd). Although the terms of exch deal are bespoke funding in broad terms is provided on the basis that they take something like 25–40% of the proceeds of litigation and that the funder pays any adverse costs order.
Unlike the position in the United States, preliminary processes designed to strike out unmeritorious claims have been largely unsuccessful. One reason for this is that Australian courts have had a pretty liberal attitude to plaintiffs to allow them access to justice. What this means in practice is more cost, more appearances and an endless stream of hearings into preliminary matters.
TORT LAW REFORM
As a result of a growing community perception that the law of negligence was unclear and unpredictable, that in recent times it had become too easy for plaintiffs in personal injury cases to establish liability for negligence on the part of defendants, and that damages awards in personal injuries cases were frequently too high. A series of intergovernmental responses resulted in the Ipp Review.
The Ipp Review was asked to look at methods that limit ‘liability and quantum of damages arising from personal injury and death’. A key element in the Ipp Review’s approach was that reform should be principle based—that is to say that the changes in the law should encompass ‘general rules governing as many types of cases and as many categories of potential defendants as is reasonably possible’. This is to try to avoid forum shopping.
The review was in part the result of a campaign conducted in the newspapers about cases like:
Kevin Presland: the actual decision was fortunately reversed on appeal but this was about a fellow with a self-inflicted head injury. He was later referred as a voluntary mental patient to the James Fletcher Hospital. He was released and then went home with his brother. He became psychotic and attacked his brother’s fiancée, violently murdering her. He was found not guilty by reason of that mental illness. He then sued the Hunter Area Health Service, claiming they had a duty to detain him under the mental health act, and that by releasing him they should compensate him for the pain and suffering occasioned by his murdering his brother’s fiancée and his incarceration. The court agreed and awarded him $225,000 for pain and suffering and another $85,000 for lost earnings.
Guy Swain: the High Court upheld a jury’s decision to award $3.75 million in damages to a plaintiff who was injured whilst swimming at Bondi beach. In this case Guy Swain became a quadriplegic as a result of hitting a sandbar while swimming between the flags at the beach in 1997. Swain sued Waverley Council, alleging that it was negligent in its placement of the flags on the beach on the day of his accident and for not warning of the dangers of the sandbar.
The pork chop case: a patron in a hotel strapped a pair of pork chops to his feet and began moving about the hotel. When the chops broke apart, other patrons picked up the meaty bits and threw them around. Then the hilarity stopped. Another patron, Troy Boron, slipped on the grease trail left by the chops and broke his arm. Boron was awarded $60,000 in damages after the District Court found the hotel had breached its duty of care by failing to clean the area that the patron had made slippery from his pork-fashioned footwear.
The Ipp Review looked at the standard of care which has always been connected with foreseeability ie if a risk is not ‘far fetched or fanciful’. Ipp recommended changes to this rule that only risks held to be ‘not insignificant’ should be regarded as being foreseeable. This has now been incorporated in the law in the various states and territories.
In the area of negligence the review introduced a new test, based on the Bolam test, a UK principle, which held that a doctor could not be held to have acted negligently if the treatment provided was in accordance with an opinion widely held by a significant number of respected practitioners in the field, unless the court considered that the opinion was irrational.
The Ipp reforms have been implemented by the states and territories, key reforms enacted included proportionate liability for pure economic loss; and comprehensive reform of the law of negligence, including clarifying duties of care, provision for waivers allowing people to accept responsibility for participation in risky activities, protection of volunteers and good Samaritans from the risk of being sued, caps on general damages claims and claims for loss of earnings. These changes have had the effect of significantly limiting the amount of compensation that can be claimed by injured persons.
Part of the objective of tort law reform was to make general insurance more affordable. The latest results on the affordability of insurance showed that public liability insurance premiums have fallen by between four and nearly five per cent.
CSR, NOT SUGAR AND NOT VERY SWEET!
There was a time when the initials CSR meant only one thing: Colonial Sugar Refinery, but not anymore! Questions of CSR (corporate social responsibility) have been referred to the Corporations and Markets Advisory Committee for consideration and advice. Simultaneously, the Parliamentary Joint Committee on Corporations and Financial Services is conducting an inquiry into Corporate Responsibility and Triple-Bottom-Line reporting, for incorporated entities in Australia.
Reflecting these concerns, the Australian Financial Review has editorialised that:
Modern capitalism has many strengths but one big weakness. Some executives are so driven to achieve legitimate corporate goals bigger profits, more shareholder value, a critical restructuring that they are able to justify any technically legal means of pursuing them. The risk is that management and board lose sight of a fundamental question: is this just?
In the vast majority of cases managers’ duty to their company and the law are not in conflict and society as a whole benefits from the wealth created. In rare cases, what is legal and what is just are at such odds that strict legal justifications crumble before community outrage and the threat of legislative action.
In recent times there have been growing calls for Australian corporate regulation to reflect ‘modern business needs and wider expectations of responsible business behaviour’? Not long after these phrases start getting used people start to using terminology like “CSR and “stakeholder” terms that are more likely to confuse than clarify. As Bill Beerworth recently noted:
The term “stakeholder” is itself vague and suggests that anyone identifiable as such has an interest worthy of protection.
Similarly, the phrase “corporate social responsibility” implies that corporations are not socially responsible and that they must be forced to become socially responsible.
Increased community calls for some form of corporate social responsibility cannot be ignored, after all these are the ‘cultural norms’ that shape the way corporations are allowed to operate.
In Canada a significant number of Canadians, and a significant percentage of Canadian shareholders, have been found to want business executives of corporations "to take into account the impact their decisions have on employees, local communities and the country as well as making profit," but can they do so if it at the expense of making profit, when can managers deviate from shareholder wealth maximisation?
In Australia some shareholder advocates have suggested that corporate social responsibility or similar is an attraction to shareholders and potential investors and should be supported by managers without qualification for that reason alone. However, recent research suggests that the belief that corporate social responsibility favourably drives community views of a corporation may be wrong.
The surveys seem to show that “corporate citizenship” in whatever form is less important in driving opinions than more traditional issues such as an open and transparent operation, making profits for owners and shareholders and management/leadership strength. Shareholders do not seem to rate highly support for things like sponsoring events of community interest or being a good corporate citizen whatever benefits may enure to the community. Yet when Australian companies donate millions of shareholder dollars to supporting tsunami appeals the protest is at best muted, generally there is a feeling that::
After all can anybody put a value on the impact on a corporate's image (carefully nurtured these days) from being seen to be tight-fisted or stingy?
The anecdotal evidence suggests that the community has a higher expectation of our managers than a simple responsibility for wealth accretion. As with matters of governance more generally the community seems to expect mangers to focus on the ‘vibe’ of the law as well as the letter.
In the community’s mind we seem to be able to see a blending of views, managers must remain focused on maximising the wealth of their shareholders. However, the obligation to maximise profits does not replace the ethics of honesty and competence or of compliance with the thrust of laws regulating our community even if they do not achieve short term wealth accumulation objectives, in some sense the problem is about short versus long term interests of corporations.
There is another aspect to the issue, that is the rise of the socially responsible investor, at some point you can expect directors to take more notice if favour more socially responsible competitors. As a general rule most Australian managers and their advisers favour shareholder primacy, ie the primary goal of management is to maximise shareholder wealth.
In the UK there has recently been new provisions suggested making clear that directors have to act in the interests of shareholders, but also need to pay regard to the longer term, the interests of employees, suppliers, consumers and the environment. Without going into a forensic examination of the legislation, at a macro level the worry with these types of provisions is twofold:
Firstly, that the CSR debate raises expectations beyond what can be sensibly delivered, that managers are hoisted on a CSR petard.
Secondly, that it could lead to greater uncertainty and more capacity for people with only a tangential interest in the company to sue mangers for failing to sufficiently consider their interest or more likely the interests they purport to represent.
Is it really necessary to legislate for CSR? Can you? Australian corporates play a broad role in our society. They do more than simply produce shareholder wealth ,as part of that process they try to keep their workforce safe and happy and they provide their customers with goods or services that bring them back wanting more.
Every day all around Australia the managers of Australian companies, large and small, consider the broader community however; whether companies can or should be made to be responsible for producing positive social and environmental outcomes (the traditional role of governments) is quite another issue.
Andrew Lumsden
Partner
+61 2 9210 6385
andrew.lumsden@corrs.com.au
posted by Andrew Lumsden @ Tuesday, November 22, 2005
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