In the many years I’ve been involved with ASX listed public companies there is one lesson that I’ve seen time and again – don’t take your shareholders for granted.
Shareholders are the owners of an organisation who have risked their funds to see it be successful. Although they have no part in the day to day operations of the company they shouldn’t be ignored at any time.
CFO’s who are also Company Secretaries of public companies need to recognise the true power shareholders hold particularly when organised together. The CFO’s job is not only to report financial and other matters to the CEO and board of directors but to also assist them in shareholder relations. Stability of the company is vitally important.
Unfortunately, many companies forget about their shareholders. They do so often at their peril focusing on new investors while ignoring the existing shareholder base, often their biggest and most long standing supporters.
Shareholder Rights – Strength in Numbers
I’ve witnessed shareholder backlash in some companies, not from mismanagement necessarily, but from perceived exclusion and poor communication. Shareholders do not like being taken for granted.
Unless the directors have a substantial shareholding, they are at the mercy of the shareholders at least once a year at the Annual General Meeting (AGM).
One of the most vulnerable times for boards is the passing of the annual Remuneration Report, which must be detailed in the Annual Report and given the nod by shareholders at the AGM. The directors and their shareholdings (direct and indirect) are excluded from voting on Remuneration Reports.
If the Remuneration Report is not passed by at least a 75% majority, the ASX puts a black mark against the company. If the resolution fails to reach over 75% again the next year, the board must call a meeting to elect all director positions (excluding the Managing Director). As you can imagine, these events are mightily disruptive to business and can destabilise the company.
In addition to the AGM, disgruntled shareholders, who together hold more than 5% of the company’s shares, can request a General Meeting of shareholders. At such a meeting, they may put up resolutions to change the board of directors. This can be undertaken for any reason.
If the shareholder mix is not right (and they are not communicated with effectively) boards can easily find themselves removed.
Getting the right shareholder mix
In terms of shareholder mix, having institutions as investors, particularly in the top 20, favours the board of directors because institutions tend to generally vote with management.
I know of a company that has a few thousand shareholders, some are professional investors but most are “mums and dads”. The company also has many “day traders” as transient shareholders which makes for an eclectic shareholder group.
This company’s board of directors was perceived as largely dysfunctional by a group of likeminded shareholders, who together held over 5% of the shares. Through a process, they managed to force change. Since then, the composition of the board of directors has completely changed, as has the business strategy. It was disruptive to the company at the time but something the group of shareholders believed had to be done and succeeded in doing.
Following the board of directors’ upheaval, a more formal database and communication platform was developed for concerned shareholders, with the blessing and support of the company. The platform is managed through a website and is independent of the company and its communication initiatives.
The platform has now become a structured sole purpose Shareholder Association whose membership has grown to a significant number of shareholders. With the support of the company, the association facilitates face to face presentations around the country annually.
To further demonstrate the power of a focused shareholder group, this Shareholder Association (when considered as a voting block) is actually the largest shareholder in the company. By voting as a block the members have been able to keep the board “on its toes” and where warranted, provide an overwhelming mandate. The group has also been able to block a cheap takeover attempt, demonstrating the power of the shareholders when organised for a single objective.
Tips for Good Shareholder Communication
For a large majority of smaller listed companies, shareholder communication and management primarily rests with the company’s share registry. The registry takes instructions from the Company Secretary who, in many instances, also acts as CFO, amongst other administrative roles!
With limited resources, shareholder communication can be a challenge. However, following a few simple tips can make the process less onerous and help you keep shareholders on side:
- Direct shareholders to a user-friendly company owned website. Online communications can be useful for reaching a wide audience in a timely and low cost manner. Just ensure the information is regularly updated.
- Maintain an email database of shareholders for distribution of regular ASX announcements and press articles.
- If resources allow, engage in-house investor relations personnel (or consider outsourcing) to keep in touch with shareholders and to arrange regular face to face presentations
The message ringing loud and clear for all companies is don’t underestimate the power of your shareholder base. Treat them with respect, communicate with them and they’ll back you when things get tough. To ignore and take them for granted is to do so at your peril.