Let's have real shareholder activism

ON Wednesday, Permodalan Nasional Bhd (PNB) was a central player in two unrelated corporate developments. Of course, the top news of the day was the fund manager's general offer for shares in property developer SP Setia Bhd.

That alone warrants StarBizWeek today offering at least a cover feature and a comment piece. And there will surely be more coverage in the coming weeks as the story unfolds.

PNB's other headline-grabbing corporate manoeuvre on Wednesday was equally intriguing and surprising. At the AGM of stationery maker Asia File Corp Bhd, PNB voted against the reappointment of three independent directors and refused to approve the directors' fees of RM242,000 for financial year ended March 2011.

However, PNB didn't have enough votes to outnumber the ayes, and the resolutions went through. Although the state-owned company failed to change the outcome of the AGM, it certainly made a statement. Only thing is, what was it trying to say?

The Asia File management doesn't seem to know. A daily quoted executive chairman Lim Soon Huat as saying: “They (PNB) decided to request for a poll (to vote on the resolutions) without notifying us ahead of time and we were shocked. The reason given by the representatives who attended the shareholders' meeting was that their boss told them to vote like that.”

The same newspaper labelled PNB's move at the Asia File meeting as “a rare display of shareholder activism”, but that's stretching things a bit.

It's not the first time that shareholders act mysteriously and without warning when there's no indication of any dispute at shareholder or boardroom level during general meetings to block the passage of routine resolutions, such as the re-election of directors.

For example, during the AGM of Chemical Company of Malaysia Bhd (CCM) in April 2003, the voting on the 11 resolutions were by way of poll. Three were not carried, including the resolution to re-elect group executive director Oh Kim Sun, who had been slated to take over as CCM's managing director in October that year. The identity of the shareholder who voted against the resolutions wasn't made public.

There were similar instances last year at the AGMs of Envair Holdings Bhd, Industronics Bhd, Seacera Tiles Bhd and Nakamichi Corp Bhd, when plain vanilla resolutions were defeated. Are these cases of shareholder activism at work too? We don't know the answer because the shareholders concerned haven't come forward to say why they were against the resolutions.

It's a good time to revisit the concept of shareholder activism. For one thing, it takes more than showing up at a shareholders' meeting and blind-siding everybody by silently opposing resolutions.

Instead, it ought to involve active engagement with the relevant parties (the board and management, and other shareholders and stakeholders) to bring about changes in a company's policies and actions. Usually, it's about pressuring company executives, and that requires using the media and mobilising public opinion.

The February 1999 Report on Corporate Governance by the High-Level Finance Committee on Corporate Governance refers to shareholder activism by institutional investors in the context of “demanding and pursuing higher corporate governance standards”.

The Securities Commission's (SC) Corporate Governance Blueprint 2011, issued in July, brings an updated perspective on this topic, plus a deeper discussion. In recommending the formulation of a code for institutional investors, the document says such a step can strengthen the accountability of institutional investors to their own members and investors.

“Responsible ownership requires high standards of transparency, probity and care on the part of the institutions, which may be met by adhering to a set of over-arching principles in the form of a code for institutional investors. There is a need for institutional investors to review their existing practices in the light of growing recognition of the significance of their role and heightened expectations to monitor management and moderate managerial discretion,” adds the SC in the blueprint.

“The new code will require institutional investors to explain how corporate governance has been adopted as an investment criteria and the measures they have taken to influence, guide and monitor investee companies. It is also important for institutional investors to include governance analysis in their investment appraisal to help identify better governed companies.”

The plan is for institutional investors in Malaysia to form a working group to draw up the code. The blueprint lists some areas in which there should be best practices to be incorporated in the code. No.1 is “Commitment to engagement”.

“The code for institutional investors must address the issue of transparency with regard to institutional investors and their agents' commitment to meaningful engagements and whether such engagement policies are effectively implemented,” says the SC.

Hopefully, we don't have to wait long for the code. It tickles the imagination to speculate on the motives behind the strange goings-on at AGMs and EGMs, but people don't invest based on amusement value. It's far better that we work towards having true shareholder activism, when ownership rights are exercised openly and responsibly.