Direct news: Shareholder-friendly companies outperform

Saturday, 01 December 2001


    A summary of what you need to know

    According to a report in the November 9 edition of the Financial Times, companies that engage in such pro-management provisions as poison pills, super-majority votes, golden parachutes and classified boards averaged annual shareholder returns that were 8.5 percent less than shareholder-friendly firms. The FT was reporting on a survey of 1500 companies authored by Wharton School of Business Finance Professor Andrew Metrick and Harvard University's Paul Gompers and Joy Ishii. The survey deducted points for every company by-law that worked against shareholder value. Those companies that most empowered shareholders – Hewlett-Packard (HWP), IBM, Wal-Mart (WMT), DuPont (DD), Southern Company (SO), and Berkshire Hathaway (BRKa) – outperformed the S&P 500 by 3.5 percent from 1990 to 1999. More pro-management companies – GTE, Waste Management (WMI), Time Warner, Kmart (KM), and United Telecommunications – trailed the S&P 500 by 5 percent from 1990 to 1999.

    Change of reporting for SMEs

    From mid-2002, nearly one million proprietary companies will no longer need to provide ASIC with an annual return. These companies will only need to alert ASIC of changes to their address or directors. ASIC will also cap fees at $200 and documents can be lodged over the Net. ASIC also intends to set up a Business Advisory Board which will include representatives of small business.

    Takeover relief options

    ASIC has released a paper on relief for investment funds from the takeover and substantial holding provisions of the Corporations Act. Takeover provisions prevented funds from investing in companies where the group has holdings in the company near the threshold of 20 percent and that the investment fund may incur additional costs because substantial holding disclosure signals the fund's investment moves to other traders.

    Bringing options to account

    More than 80 percent of financial analysts and portfolio managers around the world who responded to a survey believe any stock options granted to employees are compensation and should be recognised as an expense in the income statements of the companies that grant them. The Association for investment Management and Research conducted the global survey.

    ASX listing rules

    The ASX has introduced amendments to its listing rules on September 30 in relation to continuous disclosure, disclosure of directors' interests, employee incentive schemes, options, restricted securities and voluntary escrow, proxy forms and trusts. Details are available from the ASX web site.

    Boardroom self-evaluation

    According to the National Association of Company Directors in the US nearly 91 percent of directors favour regular board evaluations. Boards must also establish a continuous-improvement culture that openly evaluates its successes, failures and overall effectiveness. In addition to the right culture, a high performing board must also include the right directors, the right issues and the right evaluation process to meet its performance goals. US directors are also becoming advocates for greater board accountability and independence including independent compensation committees.

    Economic Buffeting

    Writing in the December 10 edition of Fortune magazine, Warren Buffet provided his views on what investors can expect in 2002. He says people's attitude to the stock market (including large institutional investors) is like buying hamburgers. When the price of burgers goes down we rejoice but when they go up we start whingeing. "For most people, it's same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don't like them any more". He labels the current stock market "hamburgers" because it is cheaper and investors can get more for their money.

    Parachute? What parachute?

    A report from USA Today says Kenneth Lay the CEO of the Enron power company (that has just gone into Chapter 11) didn't pull the rip cord on his golden parachute that would have given him $US80.8 million. Lay stood to receive $US20.2 million a year through 2005 once Enron finalised its $US10 billion merger with Dynegy. Apparently, he was responding to employee concerns when he made the decision.

    Corporate manslaughter: It's a crime!

    The Victorian Government intends to introduce a new criminal offence of corporate manslaughter in respect of death caused by a corporation's gross or criminal negligence and a further offence of negligently causing serious injury. A corporation could be fined $5 million for the death of a worker and $2 million for serious injury. For directors and senior officers, the proposed maximum penalty in cases involving death is five years imprisonment and/or a $180,000 fine. In cases involving serious injury, the proposed maximum penalty is two years jail and/or a $120,000 fine. The Bill had its first reading on November 21. AICD and other industry groups have lobbied extensively against this Bill believing that it will create uncertainty simply because some it fails to define essential terms such as what is a "body corporate". More importantly, the insurance industry has already expressed concern about providing professional indemnity to cover directors under these circumstances. (see Early Warner and Law Reporter this issue; and a report in the February issue)

    Resilience will see you through

    You need resilient people if your company is to successfully execute change, says Daryl Conner, a world authority on managing change in the workplace. Conner recently flew in from his Atlanta headquarters to address AICD members in Sydney and Melbourne at events, sponsored by Novell Inc, Unity Development and ODR Inc, on "Managing at the speed of change and leading at the edge of chaos". With over 25 years experience in the field, Conner was quick to point out that people will do anything to avoid change, even positive change. He spoke of how staff who experience 8-10 change "projects" will suffer from "future shock" whereby they can no longer "execute" change. To overcome this paralysis one must create a "nimble environment" for change and a key to creating such an environment is to employ people with not only technical competence and values consistent with your company's culture, but people who are naturally resilient.


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