Activist Shareholders in Corporate Governance: Lessons from Australia

Much of the debate about activist shareholders is informed by experience in Northern Hemisphere markets, particularly the United States. In my recently published book, I examine the topic from an Australian perspective.

Australia is ideal for exploring shareholder activism for several reasons. It has a substantial share market, and its pensions and fund management industries are some of the largest in the world and own a considerable proportion of Australian listed equities. Australia’s public companies tend to have an ownership structure that is conducive to activism because of a low incidence of controlling blockholders. Australia also provides shareholders with generous governance rights, including a mandatory statutory right to replace directors without cause by an ordinary majority vote and the power to initiate changes to a company’s constitution without the support of the board of directors. When exercising their governance rights, Australian shareholders do not face the complications that confront activist shareholders in the United States, such as proxy solicitation and filing regulation, proxy access challenges, and poison pills. Australian public companies are also subject to some of the strictest disclosure requirements in the world, providing activist shareholders with ample information to inform their activism.

Yet, these conditions do not result in the assertive shareholder activism common in the United States. Aggressive interventions are uncommon; in particular, it is unusual for shareholders to exercise their rights to replace directors and amend the corporate constitution. Despite predictions to the contrary, hedge fund activism is, in fact, infrequent, with domestic funds unable to raise sufficiently large amounts of capital to play a prominent role. Offshore hedge funds reportedly struggle with time-zone differences, a seemingly insular local corporate and financial community, and slimmer pickings than in major Northern Hemisphere markets. Assembling a slate of credible alternative directors for a proxy fight is also difficult. Australian public companies typically adopt a conservative approach of recruiting non-executive directors from a relatively small cadre of professional directors. Members of this exclusive community are generally unwilling to jeopardize their standing by participating in a proxy fight as an activist board candidate.

This does not mean, however, that activism is absent from the Australian market. Australian shareholders are in fact activist, though in a less overt and interventionist way. Techniques include voting against management-tabled resolutions at annual shareholder meetings and engaging in private with boards and corporate managers. Institutional investors in particular favor these techniques and are assisted by a significant supporting cast of representative organizations and service providers, such as advocacy bodies, investor networks, engagement firms and proxy advisers. Australia’s substantial industry superannuation funds (pension funds) are some of the most engaged investors in the market, guided by a distinct organizational ethos that prioritizes meaningful oversight of investee companies.

Institutional investors tend to use the voting power associated with their significant shareholdings in a demonstrative but restrained manner. “No” votes are often material and have been increasing in recent years. However, voting dissent is too low to routinely threaten the passage of resolutions at shareholder meetings. Institutional investors also prefer to signal voting dissent on non-binding (or “precatory”) resolutions. On average, the annual, non-binding “say on pay” vote attracts some of the most “no” votes, and shareholders use it to signal concerns about overall corporate performance rather than just the remuneration of corporate executives. Investors’ preference for demonstrative but non-disruptive voting is further highlighted by their calls in recent years for law reform to facilitate the filing of precatory shareholder proposals and for energy and resources companies to introduce a periodic, non-binding “say on climate” vote.

What accounts for the nuanced nature of Australian shareholder activism? A key reason is that significant shareholders generally regard interventionist activism as a difficult, risky, and disruptive governance tactic. Shareholder representatives point out that the close-knit nature of the Australian corporate and financial sectors, which are concentrated in Sydney and Melbourne, significantly increases the reputational risks of aggressive activism. Some industry commentators claim that there is a pervasive cultural aversion to overt activism. Institutional investors also make it clear that they regard shareholders’ rights to replace company directors and initiate amendments to company constitutions as impractical and “blunt” governance responses which, if used, are likely to generate unwelcome instability and uncertainty. In recent years, political scrutiny may also have had a constraining effect. In 2021, a sometimes-hostile federal parliamentary inquiry into institutional investors and an attempt by the then-government to impose significant new regulation on proxy advisers highlighted the very real risk of political push-back.

What are the key comparative insights from the Australian experience? First, activist-friendly laws and capital market structure do not necessarily result in material levels of assertive shareholder activism. The Australian market’s more muted style of activism reflects the constraining effects of a close-knit and geographically isolated market, cultural and political factors, and institutional context. In these circumstances, shareholders prefer more subtle governance mechanisms, such as expressing dissent through their non-binding “say on pay” than exercising their mandatory rights to remove directors or amend corporate constitutions. This holds lessons for lawmakers and researchers in other jurisdictions who are interested in how legal settings affect shareholder engagement and activism.

Second, the Australian experience highlights how the implications of increasing institutional investor share ownership can vary between markets. Professors Ronald Gilson and Jeffrey Gordon have characterized such ownership in the United States as “agency capitalism,” which they argue creates risks for efficient corporate governance because institutional investors have constrained incentives to participate in corporate governance. They also point out, however, that activist hedge funds can play a systemically significant role by launching interventions that compel institutional investors to focus on their investee companies’ affairs and prospects. Even though Australia has similarly high levels of institutional investor ownership, “agency capitalism” in Australia differs in distinctive ways. In particular, hedge fund activism is not prominent and institutional investors (particularly local pension funds) play an active role, aided by representative organizations and service providers. These differences show the risk of generalizing from another jurisdiction’s experience of increasing institutional investor share ownership.

Third, the Australian experience highlights the important role of representative organizations and service providers in supporting institutional investors’ corporate governance activities. Proxy advisers, engagement firms and representative organizations not only help Australian investors achieve efficiencies in voting and engaging with companies across their portfolios, they also enable investors to speak with a common voice and leverage their influence over corporate managers. The significance of such organizations in Australia echoes the findings of recent scholarship that has highlighted the importance of representative organizations and investor networks in other jurisdictions.

Much recent scholarship alternates between concerns about disruptive, myopic shareholder activism and passive and uninfluential investors. The Australian experience is more nuanced and reveals a market in which shareholder-company interactions occupy an intermediate position between disruptive activism and shareholder passivity.

This post comes to us from Dr. Tim Bowley at Monash University’s Faculty of Law. It is based on his recently published book, Activist Shareholders in Corporate Governance: The Australian Experience and its Comparative Implications, available here.