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29 June 2008

Shareholder activism

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File photo, Dean Lewins, AAP

As corporations collapse while executives are paid huge salary packages, shareholders are taking a greater interest in just how companies are run. But they face a wall of complexity, and legalistic and business jargon which is almost impenetrable. Reporter: Erica Vowles.

Transcript


Transcript

This transcript was typed from a recording of the program. The ABC cannot guarantee its complete accuracy because of the possibility of mishearing and occasional difficulty in identifying speakers.

THEME

Erica Vowles: Around the world, shareholders are reeling from the tremors of the stockmarket. In Australia, the Stock Exchange's value has dropped by 20% since late last year. Needless to say, shareholders from both the big end of town and the smaller Mum and Dad holdings are paying rather more attention than usual. But there's a limit to what they can do.

Nevertheless, they can vote at annual general meetings, and there's evidence they are making their presence felt in board rooms around Australia.

The Australian Council of Superannuation Investors, or ACSI, represents a group of super funds that control $250 billion worth of superannuation savings.

At a recent conference on investing for the future, it was clear these big shareholders are beginning to use their economic clout. CEO, Anne Byrne.

Anne Byrne: Yes, they are becoming more engaged. I think in 2000 there was about 30% of shareholdings that were voted and that's now gone up to about 65% or 70%, and that's a huge increase over that particular period. There are many more discussions now with companies.

Erica Vowles: You're listening to Background Briefing. I'm Erica Vowles.

Australian superannuation funds have bags of money to invest, $1.2 trillion to be precise. They need to park it somewhere that will get the best returns on people's money. Anne Byrne says that through ownership, shareholders can also change company practices.

Anne Byrne: If you want to make a change in a company, become a shareholder, you have the opportunity for a greater say, and that's been generally superannuation funds approach. And then their approach is to go and talk to those companies about those particular governance issues, and there have been major changes in Australia.

Erica Vowles: The kind of changes investors have been seeking are more information and better checks and balances on things like how the company is audited. But they're also concerned with the pointy end: power. And thanks to shareholder activism over the past decade, there's less concentration of power at the top. Anne Byrne.

Anne Byrne: There now are very few companies who have the Chairman of the Board also being the CEO, which has been a fundamental difference in Australia to some US companies, so it's about really talking and trying to resolve issues rather than setting up a conflictual situation.

Erica Vowles: One of the funds that is taking a more active interest in the companies it invests in is CBUS, a super fund for workers in the construction industry. CEO David Atkin explains the increased interest.

David Atkin: Well I think it's the recognition that we are there to protect the long-term interests of our members, that the markets are very short-term focused, that we want them to be thinking about good governance, we want them to be thinking about identifying the environmental and social issues that might impact upon profitability, and other issues as well, in the longer term. So from our point of view, we've become active because we believe that the market is too short-term focused and we believe that we need to lift their horizons and we need to get them to be thinking about a broader range of risks that could impact upon profitability.

Erica Vowles: Superannuation funds, funds managers and ordinary Mum and Dad shareholders become part owners when they invest in listed companies. This means they have a vote that can take company directors on and off boards, and a say towards assessing how executives are paid.

The recent market downturn has made a lot more people interested in taking part.

RECEPTION GREETING AT ASA

Erica Vowles: Hi there, I'm here to see Stuart Wilson.

Receptionist: OK

Erica Vowles: CEO [of the Australia Shareholders Association, or ASA] Stuart Wilson says membership figures have grown as a result of the fall in share prices.

Stuart Wilson: It's around about 6% in the last year. We of course would love it to better reflect the average Australian who owns shares and is massive, but typically the type of member we attract is a self-funded retiree with a large portfolio and they want to make sure nothing goes wrong with it.

Erica Vowles: And in terms of the reasons why your membership is growing and there is an increase in shareholder activism at the moment, what do you put that down to?

Stuart Wilson: Well I think that shareholders have become more intelligent about their investing, they understand that they own a portion of a business, not simply a piece of paper or a share price that moves up and down in the paper, and they are taking a greater interest in it. In addition to that, the market has been very volatile in the first half of this year, and as a result it makes people more wary about what's going on with their companies, and combine that with a few high profile share price collapses and it puts people on edge, so they want to make sure that there is a watchdog out there, looking after them.

Erica Vowles: Our legislators have also been focusing their minds on shareholder participation. This week the Federal parliament released its report called 'Better Shareholders - Better Companies'. There will be a link to that report on the Background Briefing website.

There are hundreds of fund management companies that invest money on behalf of families, individuals and other companies.

GREETINGS AT 452 CAPITAL

Erica Vowles: One, called 452 Capital, is a well respected player, and it's found that many investors big and small only really begin to take an interest when there's a bust. Investment Director, Peter Morgan.

Peter Morgan: You know, when times are good and everyone's making a lot of money and share prices are going up, Erica, that you know, greed, success, tends to hide things, and I think in some ways it's sad that when times start getting tough and people start losing money, questions start being asked in a lot greater fashion, and I think in any sort of market that it's appropriate throughout a cycle to ask companies what's going on with the company, and have every right at an AGM or via letter, or via a phone call to ask a Board, particularly a Chairman, as to what's going on with their company.

Erica Vowles: So even though institutional investors have been voting more, voting rates have gone up from 30% to 60%, 70%, you feel that even institutional investors perhaps have been a little bit slack about really keeping an eye on their companies?

Peter Morgan: The interest from institutions and big shareholders is lifting, but it's coming off a very low base.

Erica Vowles: One of the best-known names in shareholder activism in Australia is Stephen Mayne. He started the online newsletter, Crikey.com and now runs The Mayne Report, a website which investigates shareholder activism and corporate governance. It includes all sorts of video clips from AGMs and articles by Stephen Mayne and his staff.

Stephen Mayne: I'm Stephen Mayne, welcome to The Mayne Report. Like most of you out there, I was absolutely shocked to discover that Alan Bond, that appalling corporate crook, was back on the BRW Rich List, with a fortune of $265 million and a big two-page spread ...

Erica Vowles: Over the past 10 years, Stephen Mayne has built up a reputation as a formidable opponent of directors at AGMs. He says he has the world's largest small share portfolio. This basically means he owns a small amount of shares in a lot of companies, and this makes it possible for him to put pointed questions to directors and executives.

Stephen Mayne's home is in Templestowe, suburban Melbourne. His business is based on his role as a provocateur on issues around shareholder rights. Still, his critics accuse him of grandstanding.

Stephen Mayne: I get accused of everything from self-publicist and grandstanding and trying to promote his business and all that sort of stuff, and I simply say that I've actually probably gone backwards substantially from shareholder activism, and I believe that raising these issues and trying to generate publicity around it, is actually a public benefit. So when people say 'You're seeking publicity', I'll often say, 'Well yes', I mean like any activist you want to draw public attention to something which you think is fundamentally wrong. So I plead guilty to that charge and say my job is to try and shine a light into dark corners, sunlight is the best disinfectant, disclose, disclose, disclose, and then it all comes down to the execution and sometimes I might go on too long, ask too many questions, but the vast majority of the feedback that I get from shareholders, and there was probably more than 10 at the Babcock and Brown AGM last Friday who said, 'Thank you for coming; I learnt a lot, I really appreciate your questions, please come again', and I get that from more than 90% of the people who I talk to at AGMs.

Erica Vowles: Shareholder pressure takes many forms. It covers everything from fireside chats between big investors and directors, to Mum and Dad shareholders getting along to an AGM to put a question to the board. Stephen Mayne says the whacking that the Stock Market has received will prompt more shareholders attend AGMs this year.

But it's a reality that not everyone has time to come along to meetings, which happen during working hours. Those who do tend to turn up are retirees and others who have the time and inclination to come along to a meeting during the day. And sometimes this group is not in the best position to tackle executives who know how to spin a tricky situation.

Stephen Mayne: Retail investors are collectively as a group, very passive, and often very polite. I often look at them and hear their questions and wish that you could have a few more people who were sitting in the outer at the football, or who were getting involved in a union stopwork, or were just generally more aggressive or better informed. Often at annual meetings of listed companies, you get lonely, or eccentric, elderly people who've got a bit of spare time on their hands, but don't always have the information to ask the penetrating questions, and will often buy the story that is served out from the podium by the sharp suits, talking and using all the jargon. And it is quite overwhelming when you have this spin coming at you, and it is quite challenging to get up and to tackle it when all you've really got is the annual report and maybe some newspaper reports to go on.

Erica Vowles: But Stephen Mayne says that investors have been having some important wins. On the issue of pay, or 'the remuneration report' as they like to call it, shareholder activism has shone a bright and sometimes unflattering light on excessive executive pay schemes.

Stephen Mayne: I think the introduction of a non-binding vote on a remuneration report has been the single most important reform for shareholder engagement, and the market is now working very well. The companies are having to provide detailed reports on their remuneration policies, the shareholders are focusing on it. Quite a number of these reports have had large against votes, most notably the likes of Telstra and Suncorp and Oxiana, and Macquarie Bank. And then we have seen subsequent amendments to pay policies after these protests were sent. So I'm very happy with the situation in Australia on executive pay and the debate and the engagement around it.

Erica Vowles: A change in the Corporations Act a few years back gave shareholders the right to vote on a company's pay policy.

You'll hear Stephen Mayne use the term 'proxy advisory firms'. These are simply the firms that give advice to large investors about how to vote at AGMs. And he mentions 'Risk metrics'. This is one of these proxy advisory firms. Stephen Mayne says companies like Macquarie Bank decided to change their remuneration or pay policies, when shareholders kicked up a fuss.

Stephen Mayne: The big one is the 'Millionaires Factory', Macquarie bank, which had a battle with one of the proxy advisory firms Risk Metrics in 2007. They suffered an Against vote of more than 20% on their remuneration report because too much of the bonuses were paid in cash, short-term bonuses, and when Nicholas Moore was appointed the new CEO a few weeks ago they changed the policy, and they are issuing far more shares as part of a long-term share incentive scheme and far less cash, and that's a good result for all concerned, and the Macquarie remuneration report in July will be back to receiving 95% support this year.

Erica Vowles: One spectacular example of a company coming up against shareholder displeasure on their executive pay packets was Telstra.

Donald McGauchie: Well good morning, ladies and gentlemen. I'm Donald McGauchie, the Chairman of your company, and I welcome you to the 2007 Annual General Meeting of Telstra Corporation.

Erica Vowles: Last year, shareholders were asked to vote on the company's pay policy.

Donald McGauchie: Can we have those proxy numbers put on the board please, put on the screen?

Erica Vowles: And 66% of shareholders voted against these pay policies. That is, two-thirds of shareholders voted against the way the company was planning to pay its executives. Even though it was clear that the resolution had failed, the vote was then put to those in the room, as a courtesy to those shareholders who had sat through the six hour meeting.

Donald McGauchie: I will now put the resolution for Item 2, that is the remuneration report, and I would ask those who are in favour to raise their voting card. Those against?

Erica Vowles: One group who was against the package was Risk Metrics, one of those companies that advise large shareholders on how they should vote on a range of company resolutions.

CALLING DEAN PAATSCH

Erica Vowles: Asia Pacific Director of Risk Metrics is Dean Paatsch. He says Telstra's pay structure was hard to fathom.

Dean Paatsch: Frankly, you didn't know on what criteria the bonuses would be paid; you can't vote for something that you don't know what the reason is, and we absolutely expressed those views to Telstra.

Erica Vowles: Risk Metrics was also concerned that there weren't enough built-in hurdles to encourage executives to improve Telstra's performance and returns to shareholders. Dean Paatsch says they asked Telstra for a compelling reason why the performance hurdles were set so low.

Dean Paatsch: If there is no compelling commercial reason we are compelled to make a recommendation against, and that was certainly the case there. And the Telstra numbers speak for themselves. Since the CEO was appointed, the share price has actually gone down over the long term.

Erica Vowles: Background Briefing contacted the Chairman of Telstra, Donald McGauchie, for comment on this issue, but he was unavailable. At the AGM he and other directors defended the plan and maintained it was rigorous. But he stated it would be difficult for those not involved in the drafting of the pay policy to understand it.

Earlier this year though, the company released its current pay policy, six months ahead of schedule. Some of the plan has been simplified, and performance hurdles improved, showing the shareholder activism did have some effect. However, CEO Sol Trujillo's pay details have not been changed.

On the whole, the fact that shareholders can have a say in executive pay packages has been a good thing. From the Australian Institute of Company Directors, John Story.

John Story: It's been a good exercise for companies in setting out the remuneration report in conveying to shareholders the objectives which they're seeking to achieve.

Erica Vowles: John Story says though that the process is proving to be too complex.

John Story: I think one of the difficulties has been the prescriptive nature of the information that is required to be included in the remuneration report, that has tended to obscure rather than to reveal, but I think it has enabled a dialogue between companies and the shareholders with respect to what companies are seeking to achieve in relation to their remuneration policies. I think in most cases, boards are listening carefully and are taking on board the message which is being conveyed.

Erica Vowles: A constant complaint is that the pay structures of 'remuneration reports' are incredibly complex, perhaps deliberately so. And the legal jargon used is beyond most people. From the company 452 Capital, Peter Morgan.

Peter Morgan: It's becoming difficult to get through, it's becoming a legal minefield. I've always had the view that if you have things, the more concise it is and why it can't be put on one page is still beyond me with regard to remuneration reports. We've now got the ridiculous situation of some remuneration reports going to 40 or 45 pages with every legalistic word you can think of and now you've almost got dictionaries being put in there. So without being too long on it, I mean it's just becoming more and more complicated.

Erica Vowles: One of the biggest share price collapses in the past year was that of the big shopping centre corporation, Centro. Here's Brendan Trembath reporting on the collapse on 'PM' last December.

Brendan Trembath: The credit crunch hit home today. The local stockmarket suffered a three and a half per cent slide after a key property company revealed it can't refinance debt. The name Centro would be familiar to many Australians who like to shop. Its shopping centres are found across Australia as well as New Zealand and the United States. Today it downgraded its profit outlook and conceded it may be forced to sell assets. In response, its share price fell by more than 75%.

Erica Vowles: Companies like the Centro Properties Group have an incredibly complex structure, making it very difficult for shareholders to find out exactly how much debt was being hidden inside the company. Dean Paatsch.

Dean Paatsch: In some of these very complex structures like Allco, Centro, MFS, City Pacific, an argument's made that the auditors should have applied much more scrutiny to the consolidation of accounts across these sprawling group structures, and often it's as in Centro's case, the hidden debt that's blown up, that has caused the extraordinary shock for shareholders.

Erica Vowles: Infrastructure funds are another group of companies with complicated structures. These are those big bags of money that are invested in things like toll roads and power stations. And they've been given a special name by Risk Metrics, Governance Frankensteins. These creations go against normal concepts of company structures that enshrine shareholder rights.

Risk Metrics released a report on infrastructure funds earlier this year. It argued that these models were against shareholder interests. Dean Paatsch.

Dean Paatsch: Well a lot of the listed infrastructure funds in the Australian environment are Governance Frankensteins. They have been constructed in a way that turns traditional notions of corporate governance on their head.

A good example would be Babcock & Brown Power, whereby the rights to manage the assets that Babcock & Brown Power own have been awarded to a related company, which is Babcock & Brown for 25 years. Now you'd think if you owned an asset, you've got the right to determine who manages it. If you remove the manager, you are forced to pay 25 years worth of management fees. This is the same as if you owned a house, that at the time you bought the house, you entered into a 25 year contract with the real estate agent that the real estate agent could determine which tenants they let in, and that if you wanted to sack that agent, you would have to pay that agent 25 years worth of fees. So our view is that these Governance Frankensteins that are emerging are not in the long-term best interests of shareholders.

Erica Vowles: Risk Metrics' report was released in April. In June, Babcock & Brown's share price halved, plummeting from $12 to around $6. The share price of its related company Babcock & Brown Power, also dropped. Background Briefing contacted Babcock & Brown to get their reaction to Risk Metrics' comments. They replied with this statement.

Reader: Our governance, management and structure policies are framed around the protection of investors' and other stakeholder interests and are well documented and widely available to all prospective investors. It is worth noting that these governance structures, which have been around for some time, were not criticised by the likes of Risk Metrics while share prices were trading above nett asset values.

Erica Vowles: We put to Risk Metrics the claim that they were not making criticisms while share prices were high. Risk Metrics gave Background Briefing critical reports dating back to 2006.
You're listening to Background Briefing on ABC Radio national. I'm Erica Vowles.
A buzzword you will often hear when discussing shareholder rights is Corporate Governance. At its best, this expression means a lot of good things. Corporate Governance guidelines say the majority of directors on a board should be truly independent of management. Pay structures should be transparent and motivate boards and executives to act in shareholders' interests. When implemented properly, Corporate Governance also means more checks and balances. Things like ensuring that the accounts are vigorously scrutinised and risks are weighed up and balanced appropriately.

At its worst, Corporate Governance can result in hundreds of pages of complex information, which becomes so legalistic it is meaningless.

In June, the Australian Council of Superannuation Investors held a conference to discuss Corporate Governance and investing. Analyst Martin Lawrence from the company Risk Metrics, stressed to the conference attendees that good Corporate Governance practices are of course important. But he said much of the information released by companies about their Corporate Governance practices is now being drafted by the lawyers, and the language is becoming predictable. You'll hear Martin Lawrence used the phrase 'REM reports'. That stands for the reports on executive pay.

Martin Lawrence: Nearly all the governance disclosure we get in Australia is pretty much useless. Personal bugbear, as someone who reads something like 200 REM reports a year, you can actually work out after a while which law firms have written which REM reports, because if you read four or five in a row, you start noticing the paragraphs are identical.

Erica Vowles: Corporate Governance is in danger of becoming a motherhood statement. But Peter Morgan, speaking at the offices of his company, 452 Capital, says that while Corporate Governance is ill defined, it is important that it is there as a reminder of shareholder democracy as well as investor responsibilities.

Peter Morgan: Well I think in a lot of ways, the two words Corporate Governance are undefined. Your word of motherhood is perhaps the right word. I think at the end of the day, shareholders have got the right to try and protect their investments, and I think that's all part and parcel of Corporate Governance, and I think you can't just sit in an office or sit in a silo and forget about your democratic right or your entitlement to try and protect your investment.

Erica Vowles: There's been a lot of disclosure around Corporate Governance attached to the ASX, attached to the Stock Exchange, companies have to say whether they comply with the Corporate Governance guidelines or not, has that produced any useful information for investors at all?

Peter Morgan: Well I think you're getting perhaps like the Remuneration Reports, you've got the Corporate Governance statements when you go across 20 companies, are so similar that it's become a template. I think it's performed an important function, you know, there is some legalistic responsibility that if you put something in an annual report that you have to stick to it, but far too often it's becoming too generic and at the end of the day, whatever is written on paper can be got around, it's not as - there are no replacements for commonsense and doing the right thing, I don't think.

Erica Vowles: Part of the trend in shareholder activism is to take matters to the courts. Here's Mark Colvin with a PM report from earlier this year.

Mark Colvin: Angry shareholders may bring class actions against three big Australian companies accused of misleading the market. The litigation funding firm IMF Australia plans to help shareholders who bought shares in Centro, Allco and MFS late last year and early this year. They accuse the firms of releasing optimistic financial reports as their funds were drying up.

Erica Vowles: The rise of shareholder class actions is a development that shareholders and boards alike are grappling with.

A class action happens when a group of individuals, who feel they've been wronged by a company, band together to launch one suit against that company.

Two firms that have been behind the rise of shareholder class actions in Australia are Slater & Gordon and Maurice Blackburn Cashman. These firms have pursued actions on behalf of a number of shareholder groups.

Bernard Murphy from law firm Maurice Blackburn Cashman, has been at the forefront of this form of shareholder activism in Australia. His first case on behalf of shareholders of GIO was launched in 1999. A lot has changed since then, says Bernard Murphy.

Bernard Murphy: The landscape has changed remarkably in that period. I remember stumbling around the streets of Sydney trying to find an institutional investor who would join that shareholder class action. We ended up having 22,000 clients and I think only two institutions participated in the case, so all the victims were Mum & Dad investors who'd lost $3,000 and $5,000 and $15,000. Now when we start a court case like Centro, something in the order of $500 million to $700 million, most of which is institutional investors, sign up these cases. So what's changed is the preparedness of these institutional investors to instruct Maurice Blackburn, to use litigation funders and to pursue their rights, which means that the main part of the capital mark is now behind these cases.

Erica Vowles: The class action case Bernard Murphy started in 1999 was seeking compensation from GIO after it told shareholders to reject a takeover bid from AMP.

The case was settled four years later in 2003, and shareholders received an out-of-court settlement of $97 million.

One of the rules of the Stock Exchange centres on the continuous disclosure regime and what this means is that companies must keep their shareholders informed about anything that could have an impact on the share price. Maurice Blackburn Cashman now has a class action against the Centro Properties Group, alleging that the company breached these continuous disclosure rules.

Bernard Murphy outlines what their allegations will focus on.

Bernard Murphy: The fairy tale that was being sold to the Centro shareholders was that this was a company which had secured its debt position despite the sub prime crisis, which was rocking the world. It recorded its current debt at a much lower level than it was in reality, so if shareholders had been told that actually this company had a lot of current debt and it had to roll that debt over in the middle of one of the worst financial crises the country has seen, or the world has seen, it would have found that very difficult or very expensive. When they did find that fact out, of course the shareholders revalued the stock and the share price plummeted. So all those people who bought in that period where the truth was not being told, suffered major losses.

Erica Vowles: So this isn't a case of shareholders beware, couldn't it be argued that shareholders should just be looking more closely, more vigorously, and analyse the company and make their investment choices accordingly?

Bernard Murphy: Of course it can. It will always be said that there is an element to this which is shareholders need to be careful. These cases are only successful if we are able to show that there were important material facts which the company knew, which it did not reveal to its shareholders when it had a duty to do so. So we will need to prove either breach of the continuous disclosure regime, or misleading and deceptive conduct. Now if we can prove those things I don't think anyone would say it's the shareholders who should suffer those losses, instead it's the company who should provide some measure of compensation.

Erica Vowles: Still, there is an argument that the threat of law suits and class actions are detrimental to companies already in peril, in that it puts companies like Centro under a cloud and so hastens their demise. Bernard Murphy.

Bernard Murphy: Look, that's always a concern. We have no interest in sending Centro to the wall, but there are competing interests at play here. There are a group of shareholders who were misled, who say, 'I want my money back, and why shouldn't I have it back when you misled me?' And you've got a company that says, 'Don't push us too hard, because if you do we'll fall over'. And there's a balance to be had in this, and we'll need to try and find that balance through this court process.

Erica Vowles: Centro is also facing a second class action from law firm Slater & Gordon. Background Briefing asked Centro how it will defend itself against the class actions, but it declined to comment, except to say that it would be vigorously defending both actions.

There have been less than a dozen shareholder class actions in Australia to date over the last 10 years. By comparison, in the United States there are around 200 cases each year.

Still, in Australia, directors are nervous. They say the increase in litigation is driving up their insurance and driving some people away from the role of company directorship.

The Chairman of the Australian Institute of Company Directors, John Story.

John Story: Look I think it's a major concern, and the real risk to the Australian corporate life and to the economy generally, if directors chose to adopt a risk averse policy. It's very easy to do nothing rather than to undertake corporate activity which invariably has some attendant risk, and it's important for the future of Australia that boards and companies be prepared to take initiatives and to manage those risks effectively. So the risk is that people will become too risk averse.

Erica Vowles: Is there any evidence that this is actually happening?

John Story: Look it's an area where it's very difficult to identify Erica. I think the risk is there, whether it's actually occurring or not I can't say.

Erica Vowles: This balancing act between companies needing to take some risks in business to bring in profits and at the same time not take risks that bring losses to share owners, is a difficult one. And making sure directors are not frightened off any risks in business, and are to a degree protected, has to be addressed by the government, says John Story.

John Story: At the current time we don't believe that the legislation has that fair balance, and we have had discussions with Treasury and we believe that there are positive steps underway to re-right the balance and to move towards a more level playing field.

Erica Vowles: But opinion is divided on whether directors actually do need more protection than currently provided under the law.

The Minister responsible for Superannuation and Corporate Law is Senator Nick Sherry. His office confirmed to Background Briefing that the government is looking into it. Here's a reading from a statement they gave us.

Reader: The government is examining a wide range of issues around the role of directors in Australia's corporate system. Getting the balance right between the responsibilities and sanctions faced by directors and also encouraging them to play a key entrepreneurial role is our major concern. We're also conducting a national survey of directors to make sure we have the views of directors in examining these issues.

Erica Vowles: The current pool of directors in Australia is rather small and shallow.

A recent parliamentary inquiry into shareholder participation was told that 70% of director positions are being filled by directors who already sit on a top 300 listed company. What this means is that many directors on Australian boards are already sitting on other boards. This isn't necessarily a bad thing, says company director Kathleen Conlon.

Kathleen Conlon: In my experience of the things that's really important is the degree of breadth of knowledge that you need, particularly in the top 100 companies. And so I think having a group that's highly experienced is actually critical to the governance. As you add from one board to another board, you bring that experience to the other board.

Erica Vowles: But not all directors, experienced or not, are necessarily good at the job, and some go from company to company just because they have done the job before. Analysts like Dean Paatsch say directors who are part of a revolving door and are not performing, should be brought to account. He argues that there should be much more public information about the calibre of existing directors.

Dean Paatsch: Your chances of getting a board seat on a top 200 company are six times that if you have an existing board seat. So we are all fishing in the same pond here, and I think the time has come for more reflection on just how and who we appoint to be company directors. Is it an unstoppable gravy train, or do we really have the best group of people, and we just don't see that because we're not given a choice.

Erica Vowles: In the absence of real knowledge about the performance of directors, many shareholders seem to be operating on a wing and a prayer, acting on blind faith on the issue of re-electing directors.

Background Briefing paid a visit to one director who has worked on company boards for over 40 years. At 81, Ted Harris has been named as Australia's oldest director by Stephen Mayne. Ted Harris doesn't mind that, but he wants to make a few things clear.

Ted Harris: I'm not surprised that Stephen put me on the list, I'd just like you to verify that when you came in here today, that I wasn't in a wheelchair, or mumbling or stumbling around.

Erica Vowles: Ted Harris believes that while the interests of shareholders big and small must be taken into account, it's a mistake to think that directors are only the representatives of shareholders on the board. Rather than simply being mouthpieces for shareholders, there to carry out what shareholders want, the good ones exercise their own judgement. Competent directors have to balance many needs, says Ted Harris.

Ted Harris: I think the media now plays a more active role in what you might term activism, none of which is a bad thing, providing that it's kept in balance, because a director has responsibilities to shareholders, to employees, to creditors, to customers, but at the end of the day the overriding and all-embracing obligation and responsibility is to the company. And when a director walks into a board room, whether he's an Executive Director of a Non-Executive Director, he throws off all other hats, other than his duty and obligation to the company, because if the company isn't an ongoing, vital entity, then neither the shareholders' wealth nor the employees' future is settled.

Erica Vowles: Late in May, Babcock & Brown had their Annual General Meeting.

Chairman: Good morning. As the Chairman of Babcock & Brown, it's my pleasure to welcome you to the 2008 Annual General Meeting of Babcock & Brown Limited.

Erica Vowles: At the time, the company's shares, which had gone as high as $32 were at $12. Shareholders wanted answers, and were in no mood to be fobbed off. When the CEO made an offhand remark that the share price was down because there were more sellers than buyers, some of the shareowners were annoyed.

Shareowner: I think it's very glib to say when people ask you, why is the share price down, to say, 'More sellers than buyers'. Why are there more sellers?

Erica Vowles: The CEO, Phil Green, gave this response.

Phil Green: Well clearly I agree it was glib but I was trying to provide some light-heartedness, and I apologise if it was taken the wrong way. Clearly there has been some loss of confidence and belief in our ability to continue to grow our earnings.

Erica Vowles: Phil Green went on to discuss plans to restore market confidence in the company.

Also at the meeting was Stephen Mayne, taking the company to task for its business model, with its opaque management contracts and sprawling structures.

Stephen Mayne: We're suffering some pretty serious reputational damage at the moment, particularly from the BBP situation. I've heard commentators say that investment banks are basically capitalised reputation, and if you damage that reputation, you can't be in business in the long term. So I'd like to hear from you, Chairman, and from you, Phil, as to whether you are actually going to acknowledge the elephant in the room here, and accept that there is a fundamental problem with our model as it stands at the moment.

Erica Vowles: CEO of the company, Phil Green, did his best to defend the model in general and then conceded that the company had some serious work to do.

Phil Green: I welcome your comments, it certainly hasn't - the issue is not one that we are ignoring or that we haven't seen coming, and we will be looking at how we approach it, whether it be to just work harder at the current model, internalise, privatise, whatever the appropriate - look we believe in the first instance we need to establish that the underling value of the assets established to security holders, the underling value of the assets is what's reflected in the balance sheet, not what's reflected in the Stock Market.

Erica Vowles: Later, during a break in the meeting, some of the share owners said they were concerned enough about the situation to come to the meeting to find out what had happened. Les Lovell.

Les Lovell: Well yes, this is my first meeting, and I actually did get out of bed with the flu to come here. So yes, there's a time when I would not do that. Now whether it's the market downturn or where it's just me getting a belated interest, but certainly I was stirred to come today.

Erica Vowles: Another shareholder, John, wanted to know what impact other parts of the family of companies, that seemed to be failing, could have on Babcock & Brown Limited itself.

John: I go to select AGMs, I always come to this one because I've got a vested interest in the company, and not only in this company but in the other investment companies relating to it.

Erica Vowles: How do you feel at the moment with the share price dropping?

John: Well I came in at $5, so I'm still ahead. But I'm concerned that an asset which did go to $32 has now dropped to $12 and that was my concern in coming. Not only that, but to see what commitment Babcock & Brown have with Babcock & Brown Power, because in the article in this morning's Sydney Morning Herald, it was stated that Babcock & Brown were going to bail out Babcock & Brown Power to a certain degree of money. I'll sort of keep a very strict eye on what happens in the market in the next few weeks and see just exactly what assets they intend to sell.

Erica Vowles: Twelve days after this meeting, the share price halved, leaving it teetering around $6. In a statement given to Background Briefing the company confirmed that it is restructuring its business. Here's a reading.

Reader: Babcock & Brown was already well advanced on a number of initiatives aimed at restoring value for security holders in our listed funds before the recent market downturn. More recently Babcock & Brown has accelerated this strategic review through the appointment of external advisors to review the current value-restoring initiatives and to respond to market concerns regarding the listed funds.

Erica Vowles: Meanwhile, shareholders will be keeping an eye on other companies that are continuing to struggle with the fallout from the sub prime crisis.

As a fund manager, Peter Morgan from the company 452 Capital, says he will continue to stand up and speak out at company AGMs. But he says the system is still open to manipulation by companies.

Peter Morgan: There is no audit of the votes that are being taken to any extent. I'm still amazed that the way the system works, that companies can still, ahead of a vote, lobby other shareholders so they make sure they get the numbers for certain contentious issues, but having said that, as I said at the start, the level of interest is rising, the level of voting has definitely risen. It's important for that improvement to continue.

Erica Vowles: All most investors ask is that they have all the information they need to make their decisions. They also want to know that others aren't rorting the system, by either holding back that information, or worse, by making their own investment transactions using knowledge that Mum & Dad don't have. That's called insider trading.

There's a separate issue of when and with what knowledge directors trade their share. A report released earlier this year by a group called Regnan showed that many directors are trading shares in between the time when a company consolidates its accounts, called 'books close', and releasing that information to the market.

But the Australian Institute of Company Directors says that this is not necessarily evidence that Australian directors are guilty of insider trading. John Story.

John Story: Now the AICD fully accepts that if directors are trading at the time when they have inside information, then they should be penalised, that is cheating, that is taking advantage of the other party who doesn't have the benefit of that information and we regard it very seriously. Now if ASIC or ASX have evidence where directors are trading with the benefit of inside information, we would support their prosecution. The difficulty we have is that because directors are trading at certain times, it is being attributed to insider trading. And we don't accept that every time a director trades within an arbitrary time period, he is doing so with inside information.

Erica Vowles: The study found that 23 directors of Australia's 200 largest listed companies had actively traded shares during the period between the books-close and the results-release, that was a 15% increase from 2005. You're saying you don't think that's necessarily a concern?

John Story: Erica, what I'm saying is I don't know and I don't think Regnan know, whether those directors had inside information at that time.

Erica Vowles: In general, there's a feeling in the market that insider trading isn't really being pursued that rigorously by the Australian Securities and Investments Commission.

John Story: I think I would share that concern. Now if you look at the share trading in advance of corporate transactions being disclosed to the market, you will see evidence of share price movement leading up to that disclosure. Now I think those matters should be investigated and we fully support ASIC being provided with the resources necessary to do so.

Erica Vowles: ASIC, the Australian Securities and Investments Commission, declined to be interviewed on the issue of insider trading. Earlier this year though, the regulator promised to refocus its efforts on increasing prosecutions in this area.

Stephen Mayne says that prosecutions for insider trading must become a higher priority. When responding to the Regnan report on director trading, he said the whole legal framework around this issue also needs to be revisited.

Stephen Mayne: I was really shocked when I read that report, and I think it really shows that Australia is still a bit of a hillbilly economy and that it was just the law of the jungle. I mean the idea that there can be hundreds of directors doing dealings in shares, buying or selling, after books have been closed for a profit, and before the profit was announced, is for me just a terrible indictment on the overall culture of corporate Australia, and I think that the regulators, the ASX and ASIC need to be coming down with some black letter law on this. Self regulation has clearly failed when it comes to director dealings, and I think it ties into the broader problems with insider trading that people think they can get away with insider trading, directors think they can get away with trading any time they like, even during takeover battles, or before profits are announced, and hence we need a strong regulatory response across that full spectrum.

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Erica Vowles: There will be links to documents on corporate governance and shareholder rights on the Background Briefing website. Background Briefing's Co-ordinating and Technical Producer this week is Leila Shunnar. Research from Anna Whitfeld. Kirsten Garrett is our Executive Producer. I'm Erica Vowles, and you're listening to ABC Radio National.

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