The executive director of the Australian Investment Managers' Association talks about corporate governance down under
Ian Matheson and his colleagues at the Australian Investment Managers' Association (Aima) have not been shy of courting publicity for their cause. Corporate governance has been top of the agenda and Aima has made plain its views on what constitutes good practice. If that means riling the likes of Rupert Murdoch or ex-prime minister Paul Keating, then so be it. You don't up the ante by taking a back seat.
Aima was established in 1990 when corporate governance was virtually unheard of in Australia. In fact, the origins of the association lay in a distinct lack of governance: rogue players and financial scandals which rocked the country's capital markets and scared off international investors. Domestic institutions decided that something had to be done to protect the integrity of their market so a dozen or so of them clubbed together to lobby for change via a united front.
The first few years of Aima's existence saw some long overdue moves on regulatory issues, says Matheson. Not, he adds, all down to the work of the association by any means: Aima remained a fairly loose, informal grouping until 1993. But it was in a position to offer some meaningful thoughts from the institutional investors' viewpoint. One of the key changes came in 1989 when the federal government brought corporate and securities regulation under federal control and installed the Australian Securities Commission at its head.
Matheson believes that the ASC has done a sterling job to date of helping to ensure that both domestic and international investors have faith in the country's capital markets. It was not until late 1992 in his capacity as public affairs director at the Institute of Directors that he really came into contact with its work.
'Corporate governance issues were hotting up,' he recalls and that led to the establishment of a committee at the IoD to look at the field. One of the members was also a member of Aima which was looking to beef up its own operation by establishing a permanent secretariat. Matheson was invited to apply for the post of executive director and, a few months later, he was behind the desk getting to grips with Aima's goals and institutional membership.
In May 1993, when he took up the position, Aima had 38 members all of whom had a minimum of A$500 mn under management and an investment office in Australia. Those criteria still stand today, but the membership has spiralled up to 63 institutions who managed a whopping A$323 bn at the last count.
So what, apart from the highbrow talk about the 'integrity of the Australian capital market', keeps these institutions together? Not a lot, would probably be the truest answer. But if there's something likely to affect the investment management industry on a generic basis then the institutions want some collective body through which to make a point of principle. It's easier for Aima to speak out on such matters. That's especially true on matters of corporate governance although the association tries to stay out of company specific issues. Easier said than done, however, notes Matheson.
Indeed, in the high profile cases it is almost impossible for the association not to get involved. When a company proposes something which goes against the corporate governance grain, it's pretty difficult for Aima to stand up and claim it's only making a point of principle. It's fairly obvious what is being referred to. Take Rupert Murdoch's attempts to introduce super-voting stock at News Corporation in October, 1993 - soon after Matheson had joined the association.
'It was the first time we had been really active,' he says. 'And it was the first real big test of the solidarity of Aima.' Murdoch's plan in his position as founder and controlling shareholder at the company was to issue stock to form alliances without diluting his holding in the company. According to Matheson, while the stock exchange 'rolled over and accepted' the proposal, the institutions were dead set against the idea.
Coincidentally, Aima had arranged a corporate governance conference for around the same time at which Richard Koppes, then counsel of the giant Californian pension fund Calpers, was to speak. Aima arranged for Koppes to do a satellite TV interview with a leading Australian business programme before he arrived in the country and primed both sides to talk about the super-voting share issue. Koppes said that Calpers would be against increasing its investments in Australia if the super-voting regime went through.
'That was very useful for us,' says Matheson. 'We were able to say that the view we were expressing was not just a domestic, parochial view.' With continued pressure, the government came round to the institutions' viewpoint, the stock exchange did a U-turn and Murdoch backed down.
Australia's corporate governance agenda has moved on since then, of course, and Aima has actively worked to bring standards up to an international level. Last year the association released a corporate governance guide incorporating sections on best practice for both money managers and companies.
For fund managers it covers 'the whole issue of proxy voting, their role and the fact that they should have proper procedures in place to deal with the issue,' says Matheson.
The second section is headed Recommended Corporate Practice which Matheson describes as setting out the views of investors on what they would like to see companies adopting as best practice. It is a series of 15 guidelines covering issues such as disclosure, composition of the board of directors and independence of the chairperson. By all accounts, it is a comprehensive guide for Australian-listed companies and has the backing of other groups, such as the Australian Shareholders' Association and the Australian Institute of Superannuation Trustees.
The publicity Aima sought over the release of its guidelines meant that when the next big public interest story involving corporate governance issues broke, the media was on the phone to Matheson and his colleagues immediately. Poor corporate governance at Australian retail giant Coles Myer dominated the business headlines for a month or so in the fall of last year and Aima was dragged into the thick of it.
Matheson describes the Coles Myer case as 'a real threshold issue.' The company's chairman, Solomon Lew, announced that he was moving from a non-executive to an executive position. 'In the US the notion of executive chairman is not considered inappropriate,' says Matheson. 'But in Australia it is pretty much frowned upon.' Couple that with allegations of corruption from a former CFO, shady related-party transactions and other issues surrounding Lew's significant shareholdings in the company, and the media had a real story.
'The whole governance scene at Coles Myer was not good,' comments Matheson. 'If ever you could draw a relationship between poor governance and poor performance of a company that was it. Underperformance, together with the market's perception of the board structure, meant that the share price had been marked down for a long time.'
Lew's appointment as executive chairman was the final straw for institutions; and in the absence of any positive response from the company, three major institutions announced they were going to requisition a meeting to 'spill the board and get rid of three non-executive directors.' At this point the whole story snowballed, recalls Matheson, with other high profile characters getting involved. Ironically, Rupert Murdoch appeared on television accusing the Coles Myer board of 'thuggish behaviour.' And the then prime minister Paul Keating accused the money managers of being a 'bunch of donkeys'.
Matheson responded to the prime minister's outburst in a television interview by suggesting that Keating's comments 'obviously had more to do with his friendship with Lew and others than with the issues concerned.' Aima then upped the pressure once more by polling its members to find out who were shareholders in Coles Myer and how they would vote.
A staggering 96 per cent of members supported the actions of the three large institutions and Aima immediately let that figure be known publicly. Lew and his colleagues backed down soon afterwards.
'That's the sort of role that Aima can play in these situations: coordinating members and articulating the principles involved,' says Matheson.
Since the success of its corporate governance guidelines Aima has been busying itself with two other areas: executive remuneration and proxy voting. As in many other jurisdictions, executive remuneration has come under the microscope in Australia of late and Aima has been giving guidance on the structure of incentive-based option schemes and improved remuneration disclosure.
Matheson says that getting companies to disclose all the details of executive remuneration is an uphill struggle. 'The disclosure rules in Australia are inadequate and have not kept pace with modern remuneration practices,' he says. 'We're now saying don't come back to our members with blanket resolutions seeking approval for the schemes. We want to know how they relate to company performance and to the other remuneration that executives are getting.'
On the proxy front, Aima has been working hard on the mechanics of the process. For example, it has developed a model proxy form, been lobbying for voting to be changed to proxy only and arguing for an extension to the period in which companies have to send out the notice of meetings to shareholders. Matheson refers to the latter as the proxy loop and believes that the current notice period of 14 days for an ordinary resolution and 21 days for special resolutions is just too short. Aima has been calling for 28 days on all resolutions, although it now looks as if the government will settle for 21 days across the board.
Matheson is particularly vociferous on getting voting changed to proxy only. The current situation calls for a show of hands at a meeting although someone can call for a poll by proxy - as long as they can gain support at the meeting.
In Matheson's book that just isn't good enough. It may take a long time to get the situation changed but, judging by past experience, Matheson and Aima are ready for a fight on behalf of the members.