Insider trading rules are stymieing shareholder activism in Australia, fostering a culture of bad management in the nation’s listed companies and curbing growth, investor Mark Carnegie said.
Shareholders trying to shake up underperforming boards struggle to build support among fund managers, who are prevented from buying or selling stock if they know a deal is planned but hasn’t been announced, Carnegie said in an interview in Sydney yesterday.
“The sorts of unofficial communications that happen in the U.S. and England are unable to happen in Australia,” said Carnegie, 52, whose advisory firm Carnegie, Wylie & Co. was sold to Lazard Inc. in 2007. “You need to be very, very sure of your ground in terms of the number of shareholders who will vote with you before you start your campaign, and that’s what people have found hard.”
In the U.S., investors such as Carl Icahn and Kirk Kerkorian have used minority shareholdings to push for changes at companies including Apple Inc. and General Motors Co. The dearth of such activism in Australia had led to a lack of board accountability, contributing to investment capital being misspent, Carnegie said, pointing to wasteful spending in the country’s natural gas export projects.
Australian companies would be more likely to spend wisely with shareholder activists on their case, said the managing director of MH Carnegie & Co.
Carnegie sought to change Qantas Airways Ltd.’s strategic direction in 2012 alongside former airline executives. That year, he also teamed up with Australia’s richest woman Gina Rinehart in an attempt to influence Fairfax Media Ltd., publisher of the Sydney Morning Herald newspaper.
Weak capital productivity pulled about A$43 billion ($40 billion) from Australia’s economic growth between 2005 and 2011, according to a 2012 report by McKinsey & Co. That was masked by surging investment in the country’s mining and energy sectors to meet China’s demand for commodities, according to the report.
“Australia is basically two cities where everyone knows each other, and that doesn’t create a culture of boat rocking,” said Stephen Mayne, a spokesman for the Australian Shareholders Association, which represents small investors.
“The big four banks dominate funds management,” Mayne said, referring to Sydney-based Commonwealth Bank of Australia and Westpac Banking Corp. and their Melbourne-based peers Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. “If they start trying to sack directors they’ll very quickly lose any sort of corporate banking relationships they have with that company.”
The annual return on equity of the S&P/ASX 200 index, Australia’s main stock benchmark, has averaged 10 percent over the past five calendar years, according to data compiled by Bloomberg. That falls short of returns of 14 percent generated by the U.S. S&P 500 index and 13 percent by the U.K.’s FTSE 100 over the same period.
Carnegie, who lost out to London Mayor Boris Johnson for the presidency of the Oxford Union and became treasurer instead in 1986, said fund managers have “shown a history of talking big in quietened rooms and then acting cowardly when it’s been time to vote.”
It would take a “glaring case of corporate malfeasance” for a successful challenge, he said. That would encourage more investor activism as “it will be a different world in terms of your return profile.”