The Government wants to change the rules on who can call a company meeting. Joe Hockey puts the case for reform.
People who invest in shares do so because they want to increase their wealth. They put their investment in the hands of a company's manager and directors with the hope of making a decent return. And to keep the company accountable, they attend the annual general meeting.
But over the last 5 years, there has been a heated debate over who can call a meeting and what should be on the agenda at the meeting. Increasingly, bands of vigilante groups environmentalists, unionists and other political activists have banded together and taken advantage of our corporate laws to force extraordinary general meetings.
This has come about because under existing laws only 100 members are needed to call a general meeting. That meant any 100 people with just a handful of shares can hold a company to ransom and impose on it any agenda it wanted environmental issues, union politics, globalisation, to name a few.
These spurious general meetings have come at considerable cost to corporate Australia and its real shareholders often up to $1 million for some large corporates and forced boards to deal with issues way outside their normal ken and that have nothing to do with creating shareholder wealth.
Some argue it is the company's responsibility to engage in this activist process. Some say that such goings-on by shareholder buccaneers provide an early warning about changing standards and that they may be doing the company a favour by alerting it to future challenges.
This situation really centred on the questions: what is the purpose of general meetings? How should meetings be conducted?, and what rights should shareholders have to pursue specific concerns?
These were the kinds of questions considered this year by the Companies and Securities Advisory Committee (CASAC) in a recent report. Few areas of the CASAC report have received as much attention as the recommendations on the capacity of shareholders to call a general meeting. Currently the law requires directors to hold a general meeting on the request of either 5% of members or at least 100 members.
CASAC recommended that the sole test for calling a general meeting should be members holding 5% of the capital. The Parliamentary Joint Statutory Committee on Corporations and Securities endorsed CASACs recommendation.
In response to these two recommendations I have proposed the retention of a two-tiered test. The 5% rule would remain, but the arbitrary 100-member test will be replaced with a new "square root" rule. The number of members required to call a company meeting will now be members owning 5% of voting shares or the square root of the total number of members of the company.
So if a company has a million shareholders, then 1000 members would be needed to call a meeting.
The square root rule is a fair, objective and simple formula that links the required number of shareholders with the size of a companys shareholder base. Shareholder democracy is not sacrificed.
The Government wants to protect the rights of bone fide minority investors. But there must be a balance between individual shareholder rights and the ability of companies to get on with the business of making money for all its shareholders.
Remember that Australia has become a nation of shareowners. Directly and indirectly 54% of Australians or around 7.6 million adults are now involved in the creation of wealth through investment in listed companies. In other words, Australians are a nation of investors, not political activists.
Our corporate law gives shareholders many ways to have their say, including compulsory annual general meetings. But we do not believe that companies should be run by shareholder referendum. Nor should general meetings be turned into a circus where mavericks with no interest in creating shareholder value, can throw their weight around to the detriment of the women and men who have invested their savings in these companies.
Joe Hockey is the Minister for Financial Services & Regulation, and is responsible for the Corporations.