The new face of shareholder activism

The scene outside the Melbourne Concert Hall on May 22, 1996 had turned ugly. Coal miners from RTZ-CRA’s (now Rio Tinto) Vickery mine in NSW had gathered in numbers outside the hall.

They presented a human gauntlet through which shareholders had to pass to attend the annual general meeting. Little old ladies expecting tea and bikkies were accosted by screaming unionists. A 62-year-old shareholder suffered a heart attack and was rushed to hospital. Inside, CRA chairman John Uhrig postponed the 11am meeting for around 45 minutes. Once the meeting started, around 25 members of the Construction, Forestry, Mining and Engineering Union managed to enter the hall to shout abuse at all directors including those from the London-based RTZ Corp. It was another chapter in the turbulent history of Rio Tinto shareholder meetings. JOHN ARBOUW reports.
Next month the dramatics and the battle lines that have characterised Rio Tinto AGMs will have an added twist as union movement tactics change from in-your-face confrontations to tabling shareholder resolutions and demanding a vote. The CFMEU, the principal union representing Rio Tinto's workforce has joined with the ACTU, the Trades Union Congress of Britain, the American Federation of Labor and Congress of Industrial Organisations (AFL-CIO) and the International Federation of Chemical, Energy, Mine and General Workers' Union in a global shareholder activism strategy. They have gathered 100 shareholders (the unions paying for shares) in both the UK and Australia to support the tabling of two resolutions at this year's AGMs in both Brisbane and London. These unions represent a total of 41 million workers. The unions estimate that, either directly or indirectly through union super funds, they account for 19 percent of Rio Tinto's shares – worth about $US3.2 billion – mainly held through nominee accounts.

"Our members have both capital equity and sweat equity invested in Rio Tinto," says CFMEU national secretary John Maitland. It is the first time the trade union movements of several countries have combined in a shareholder campaign and it represents a new facet of shareholder activism of which the boards of companies with a large union-based workforce need to be aware. The easy thing would be to dismiss union shareholder activism as merely another tactic to gain publicity and support for the union campaign to oppose individual workplace agreements, particularly in Australia. Rio Tinto and the CFMEU have a long-running dispute over the issue of individual contract labour versus collective bargaining. The issue is whether workers will be worse off making individual contracts with the company or having the union bargain on their behalf. What is certain is that the power of union management will be diminished under individual workplace agreements. The view that union shareholder activism is a publicity stunt is easy to form, but it ignores a more fundamental and global trend in terms of increased shareholder activism on every level. The two union-based resolutions to be put at this year's AGMs provide interesting reading. The first resolution – covering corporate governance – is decidedly non-union. It states the appointment of a deputy chairman shall be "independent of management and free from any business or other relationship that could materially interfere with the exercise of his or her judgment." The resolution also calls for the annual report to contain the board's view of the independent status of each individual non-executive director (NED), and define an independent non-executive director as one who has not been employed by Rio Tinto or an affiliate in any executive capacity within the last three years.

It also calls for the annual report to fully disclose any information by which shareholders can determine whether each NED qualifies as independent by listing all relevant contractual, financial, professional, personal or any other connection held by the director with the company. The CFMEU argues the current Rio Tinto board has an executive chairman, and a majority of the current board are executive directors. The union suggests one way to counterbalance the powerful executive team of chairman and CEO is to appoint one fully-independent deputy chairman who is also a senior NED. The union believes this argument is supported by the findings in the Hampel Report which recommends independent NEDs and says occasions may arise "when there is a need to convey concerns to the board other than through the chairman or CEO". This could be done through an independent deputy chairman. Rio Tinto has recognised this and Richard Giordano, the senior NED was appointed last year by Rio Tinto as deputy chairman. The union resolution targets CEO, Leon Davis who retires this month but who will remain on the board as a NED and become its second deputy chairman based in Australia.

While Rio Tinto's corporate governance practices in this instance are in line with the Combined Code of Corporate Governance of the London stock exchange, they are slightly out of kilter with Australian practice. The second CFMEU resolution at Rio Tinto AGMs is more predictable and calls on the board to "adopt, implement, enforce and monitor through systems open to verification, a creditable code of labour practice" in line with UN International Labour Organisation principles. In particular the resolution wants the Rio Tinto board to accept the right of all workers to "form and join independent trade unions and to bargain collectively". (For the Rio Tinto board response see box story) If the union-based resolutions were all there was to it, they could be handled in the normal course of an AGM where the majority shareholders have the numbers to control any or all resolutions. The criticism is that minority resolutions (if they are based on a single issue) represent a nuisance value and take up valuable AGM time.

What the unions have now recognised is that they can wield significant institutional shareholding power through their union-controlled super funds. While the custom in Australia is for institutional investors not to vote their shares, they do wield tremendous influential power. As well, institutions are now quite prepared to vote their shares if the issue on the table (ie a strategic acquisition) warrants intervention. The changes of management and directors on companies such as Coles Myer, Goodman Fielder and BHP was brought about primarily through pressure from institutional investors. Shareholder activism on any level does little for the company's market perceptions. The share price of those blue chip companies in the so-called old economy sector are already under selling pressure without the added factor of taking industrial relations from an operational issue and turning it into a shareholder dispute. Rio Tinto's public response to the union's shareholder activism tactics is primarily through the prism of the industrial relations dispute. The company believes this to be just another tactic in the long-festering industrial relations sore between it and the CFMEU. Rio Tinto company secretary, Ian Falconer (MAICD) who is also chairman of the Legislation Review Committee of the Chartered Institute of Company Secretaries in Australia has a keen interest in the issues surrounding shareholder activism. He was part of a presentation to a parliamentary committee on the need to put safeguards into the requisitioning of company meetings. (AICD made a separate submission). What the industry and professional groups want is tougher requirements for requisitioning a meeting. There have been instances where special interest groups have acquired 100 holdings of one share each and demanded an extraordinary general meeting to have their grievances heard. Their view is by allowing minority (single parcel) shareholders to call an EGM or table resolutions at an AGM it is not representative of the vast majority of shareholders, yet it is a cost borne by all shareholders.

However, Rio Tinto's Falconer accepts that the first resolution put forward by the union has some merit in terms of Australian corporate governance. "Rio Tinto has complied with the UK code of corporate governance in relation to board balance and has a strong independent element but you could say that we are not in line with practice in Australia. For example, the National Australia Bank has one executive director and the rest are NEDs, BHP has two executives and nine non-executives including the chairman and we are somewhat out of kilter in terms of numbers but our NEDs play a strong role at our meetings," says Falconer. "The unions are quoting the corporate governance principles of IFSA which call for the majority of directors to be non-executives and independent. In the case of Leon Davis he will become a second deputy chairman and this is set out in our response. "Leon will be based in Australia while Dick Giordano is the deputy chairman based in the UK and he is also the senior NED. We currently have eight independent non-executive directors including Gary Pemberton (Qantas, TAB, QIC) and John Morschel (Westpac, CSR, Cable & Wireless)." While ASX listing rules have changed and now require a share transfer to be at least a marketable parcel ($500), the end effect of this is merely to raise the hurdle but it does not eliminate the potential for abuse of shareholder rights. According to Falconer, there were 75 share transfers of a marketable parcel put through in February to union representatives. This was following an attempt in August to put through 93 transfers of one share each. Vocal minorities of all sizes and shapes have made significant inroads into politics, education, religion and social standards. On the corporate scene shareholder minorities have pressed for changes to corporate governance, ethical and environmental responsibilities of global corporations. The views surrounding shareholder democracy are wide, varied and often heated. Rio Tinto supports the recommendations of the Companies and Securities Advisory Committee report, released in September 1999, that the 100 shareholder threshold be removed both for putting resolutions to meetings and for requisitioning EGMs. The report recommends the sole test should be 5 percent of issued capital.

"What this means is that with 5 percent you have a greater chance of getting something through than just holding 0.001 percent of shares as is the case with the requisitioners their resolutions," says Falconer. "My belief is that eventually all companies will hold shareholding information meetings prior to the AGM in which there is discussion about the company affairs and the items that will be presented at the AGM. "You can then hold the AGM two weeks later but the way things are going you might even be able to dispense with the AGM as we know it because all shareholders will be able to vote electronically through to the share registry. This is starting to happen in the US and takes all the heat out of the traditional AGM." In the meantime, the Rio Tinto AGM in May promises to have the usual dramatics as union shareholders demand acceptance of their resolutions. The proxy vote may have replaced the picket line but the underlying context of the industrial relations dispute is never far away.

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