The Australian Shareholders Association has recently released a list of poorly performing companies to target during 2000. Here are some of the ASA comments.
The 44 companies have been chosen on an objective basis from Shareholder Rate of Return (SRR) calculations carried in the Australian publication Shareholder Scorecard. The SRR is a composite of movement in share price, dividends and imputation tax credits and is calculated for each company over periods of one, three, five and ten years. Each company is shown within its industry sector and the calculations include sector averages. The SRR takes account of changes in capital and is defined as the annualised total return to shareholders from maintaining their investment in a stock over the various periods. All of the companies showed a negative or very low rate of return to shareholders over the three years to 30 June 1999. All performed at levels no better than the average of their industry sector and in most cases well below the average. The movement in the share price of these companies since 30 June 1999 has not justified their exclusion. Only companies with a market capitalisation above $50 million were chosen.
The ASA's intention is to put pressure on the boards of the companies selected, with the objective of improving operating and financial performance. Shareholders are above all concerned about the size of their dividend and growth in share price. It therefore makes sense for the ASA to take up performance related issues on behalf of shareholders, in particular those effecting medium to long term shareholder returns. Clearly the ASA cannot be involved in any way in the management of companies and nor does it want to be. However, directors are accountable to shareholders and if the company is not performing well, shareholders should be exerting pressure on boards to lift their game. The ASA wants to get behind a lot of the marketing hype and motherhood statements in annual reports and get to the real reasons why these companies are failing their shareholders. The ASA will be asking boards to explain what went wrong and why. Who was responsible? Why were the problems not foreseen? Why did it take so long to initiate corrective measures? Why has the board allowed the situation to develop? What has been done to prevent a recurrence? If action has been taken, what are the results? What will the outcomes be over the longer term?"
The ASA will also be asking about returns on significant investments or acquisitions made over the past few years. Are they in line with projections. If not, why not? Companies may be asked quite detailed questions about overseas operations, non-performing assets, product mix, marketing strategies, intangible assets, financing and risk management. If we are not satisfied with responses to questions of this nature we will be assessing the performance of long-serving directors submitting for re-election to the boards of the poor performers. We would like to see shareholders consider very seriously which way to cast their vote when a director has been involved in decisions that have had an adverse impact on company profitability. The re-election of directors is the one big opportunity shareholders have to express their disapproval when company results are unacceptable. Too many directors are re-elected automatically to the boards of companies that have failed their shareholders. The ASA encourages all shareholders, before deciding to vote for the re-election of a director, to seek answers to the following questions. Has this director been party to decisions of the board that have led to declining performance? Does this director bring an appropriate level of skills and experience to the board table? Will this director act in the best interests of all shareholders?
It is very difficult to find answers to fundamental questions of this nature. Annual reports could be far more enlightening about the contributions and experience of those directors submitting for re-election. When a company has performed poorly over a period of years those directors who have served during this period should make a big effort to justify their re-election. Shareholders should be presented with an explanation and an independent assessment of the contributions of each director in such circumstances.
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