Big institutional shareholders continue to dominate the investment landscape, but retail shareholders should not be ignored, writes Ben Power.
In the depths of the global financial crisis (GFC) many companies were forced to raise big sums of capital. They turned to institutional investors that controlled hundreds of millions if not billions of dollars. Those investors, which include the likes of superannuation funds, could quickly write big cheques. There was no time to muck around with the slow process of tapping retail, or mum and dad investors, for cash.
That big investor bias has persisted, partly reflecting the decline in share market ownership by retail investors. “The focus was very much on institutional investors, almost at the expense of retail,” says Ian Matheson FAICD, CEO of the Australasian Investor Relations Association (AIRA).
But almost a decade on from the GFC, many company boards are beginning to reassess this big investor favouritism. While big investors were their best friend during the GFC, and obviously continue to play a vital role, they can also be short-term and ruthless. Retail investors can be loyal and provide a good counterbalance to institutional investors.
But engaging a disparate group of shareholders presents unique challenges that require a rediscovery of old techniques such as media relations, in addition to the adoption of cutting-edge technology.
Chairs and directors, particularly those sitting on the board of an ASX300 company, need to become acutely aware of the split between retail and institutional shareholders, Matheson says. “You may need to rebalance your share register a bit; it may have become too institutional.”
The rise of the big shareholder
According to the ASX, retail investors’ total participation in the share market has been falling over the past 10 years. The proportion of adult Australians owning listed investments declined from more than 50 per cent in 2004 to 36 per cent in 2014.
Matheson says on an average basis, the rise of super fund ownership means there has been a long-term fall in the percentage of issued capital that retail owners own in most ASX200 companies.
Voting at annual general meetings (AGMs), it is the institutions that dominate. “Nine times out of ten they [institutional investors] will determine the outcome of a vote at a shareholder meeting,” Matheson says.
Institutional investors have also come to dominate capital raisings. “It’s easier for companies to go to institutions to raise capital,” Matheson says. “They can write out a cheque more quickly.” Downer EDI’s recent capital raising to fund its $1.2 billion bid for Spotless was a disaster when it came to retail shareholders. They made up just $5.2 million of a $254 million raising.
But that doesn’t mean retail shareholders don’t matter. Despite the decline, that 36 per cent, or 6.48 million Australians, remains one of the highest levels of share ownership in the world.
Companies need retail shareholders to vote on resolutions including scheme of arrangement meetings, or to approve mergers, Matheson says, noting the threshold for achieving a successful vote is 75 per cent of shareholders.
Retail investors can provide a bulwark against short sellers who try and drive the company’s share price down for their own profit. Institutional investors are much more likely than mum and dad investors to lend shares (for a fee) to hedge funds for short selling. “If companies balance their shareholder registry and keep a reasonable percentage of retail holders, it’s probably a good thing to try and keep hedge funds at bay because there will be less stock available to borrow,” Matheson says.
But perhaps the biggest benefit is that retail shareholders are ‘sticky’. “They tend to buy shares and hold them usually for a longer time,” Matheson says. “It applies particularly where a company pays a good, fully franked dividend.”
The retail challenge
Unfortunately, many companies have run down their engagement with retail shareholders. Continuous disclosure means companies are providing more information to all shareholders, including retail.
“I’m surprised more companies don’t make a more sustained effort to engage with retail investors,” says Martin Cole, managing director of Capital Markets Communication and the former head of investor relations at CSR and Goodman Fielder. “Too many companies just tick the box for their AGM and think that’s their retail shareholder engagement done for the year.”
Warwick Bryan, an adviser at independent capital advisory service, Reunion Capital, and the former head of investor relations at Commonwealth Bank of Australia (CBA) for a decade, says many companies are trying. “But companies are frustrated by the difficulty of actually getting to retail shareholders.”
He says there is recognition that self managed super fund (SMSF) investors are active managers of equities with significant sums. “But it’s difficult to get to them.” Despite the challenges, there are ways that boards can maximise their company’s engagement with retail shareholders.
The return of traditional strategies
Cole says successful retail shareholder engagement begins with fairness. “If retail is a major component, then boards need to ensure retail holders are treated equitably, particularly in relation to equity raisings where a share purchase plan and some element of renounceability of entitlements should feature.”
It also means ensuring that channels traditionally used to engage with retail are still being used effectively, or if they’ve been dropped, that they are reinstated. That includes regular interaction with the large, retail-based stockbroking firms such as Morgans, Bell Potter, Ord Minnett and Baillieu Holst.
Many companies have scaled down their corporate public relations activities. But according to the ASX, traditional print and broadcast media is retail investors’ primary source of information when they’re seeking general advice and information (50 per cent compared with 28 per cent for the internet and social media), but also when it comes to making investment decisions.
Cole and Bryan both say companies should be leveraging traditional business media to engage with retail shareholders.
Making AGMs more useful
The AGM has been the traditional arena for retail investors to voice their concerns, but AGM attendance has slumped 25 per cent in the past 10 years, according to Computershare, which estimates less than one per cent of security holders attended company meetings in 2015 and only five per cent of shareholders voted.
AGMs should be more interesting, Cole says. The Australian Shareholders’ Association (ASA) chair, Diana D’Ambra MAICD, wants companies that are serious about retail engagement to provide time for investors to speak with company management, including divisional heads, and not just the board.
Cole agrees that retail shareholders want access to broader information.
“There seems to be this mindset that shareholders will only be interested in the financials, which I think is short-sighted. In my experience, shareholders are keenly interested in new products coming to market, industry trends and other company news.”
Macquarie Bank and CSR are two companies that have allocated time after the formal part of its AGM for shareholders to probe and hear views from not just the board, but also management.
A number of companies, particularly listed investment companies, are also opting to hold meetings outside of AGMs to provide shareholders with more information. The Australian Foundation Investment Company for example, has unit holder meetings in most cities around Australia. Management presents on the performance of the fund in front of hundreds of unit holders.
Giving shareholders choice
Perhaps the biggest change is in the use of technology to engage retail shareholders.
With the decline of AGM attendance, more companies are looking at hybrid AGMs, where companies provide a webcast and shareholders can vote simultaneously as well. Companies are also providing more information online and through social media.
“There are a lot of shareholders who don’t necessarily want to be engaged,” Matheson says. “It’s all about giving shareholders choice these days. Digital is a big part of that.” D’Ambra says technology has a key role to play, particularly in engaging young shareholders.
NAB and CBA have developed apps where investors can listen to presentations and download results, annual reports, announcements and presentations.
Cole says smaller companies could also be more effective in generating content to maintain an ongoing dialogue with their shareholders.
With the continuing rise of big institutional shareholders, retail shareholders may never regain their clout. Despite this, “there are good reasons for companies and boards to be aware of retail shareholders,” Matheson says. “But most companies with a higher number of retail investors are likely to need to more in terms of proactive engagement with retail shareholders.”
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