Sydney Law School

Legal Studies Research Paper No. 08/37

April 2008

Institutional Investors and Corporate Governance in Australia

Jennifer Hill

This paper can be downloaded without charge from the Social Science Research Network Electronic Library

at: http://ssrn.com/abstract=1120587.

1

Institutional Investors and Corporate Governance in Australia

Jennifer Hill*

(Chapter 21, Baums, Buxbaum and Hopt (eds), Institutional Investors and Corporate Governance

(Walter de Gruyter & Co, Berlin/New York, 1994), 583-607)

1. Introduction

The changes to the corporate terrain occasioned by the remarkable increase in institutional shareholding have

not been restricted to the northern hemisphere. The Campbell Committee, reporting on the Australian

Financial System in 1981, drew attention both to the rise in institutional investment and to the emergence of

non-traditional financial intermediaries. The trends identified by the Campbell Committee have continued

exponentially.

In the wake of dramatic corporate collapses which occurred in Australia at the end of the 1980's,1 there have

been attempts to enliven managerial accountability. This has been done through, for example, the imposition

of liability upon passive directors,2 increased recognition of the monitoring role of outside directors,

3

proposed legislation imposing more stringent duties on directors,4 and recommendations that there should be

enacted in Australia a statutory derivative action for shareholder suits5

* I would like to thank Patrick Keyzer for his helpful research assistance. Financial support for this research was provided by the

Law Foundation of New South Wales.

1 Perhaps the best known of these was the collapse of Alan Bond's group of companies. This had ramifications in Europe as well as in

Australia. For example, the group, acting through a subsidiary, Bond Finance (DM) Ltd, defaulted on two German bond issues,

which had been sponsored by the BHF-Bank - see "BHF-Bank wirft Gericht Obersehen eines Faktes bei der Urteilsbegrundung vor,"

Handelsblatt, 21 October 1992.

2 An extreme example of this was Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, where a judgment of $97

million was given against an honorary and part-time chairman.

3 AWA Ltd v Daniels (1992) 10 ACLC 933, 988.

4 Corporate Law Reform Bill 1992, Part D.

5 See Companies and Securities Law Review Committee (CSLRC) Report No 12, Enforcement of the Duties of Directors and

Officers of a Company by Means of a Statutory Derivative Action (1990), and Report of the House of Representatives Standing

Committee on Legal and Constitutional Affairs, Corporate Practices and the Rights of Shareholders (1991), Recommendation 26.

2

Within this general framework, there has been considerable interest in, and reassessment of, the position of

institutional investors and their capacity to become another source of regulation of management. This interest

has manifested itself at many levels - in questioning of the traditional presumptions about institutional

investors and their relations with corporate management, in the clearly altered self-perception of many of the

large Australian institutional investors and finally in strong concern about the internal workings and

accountability of the institutions themselves. While the question of the distinctiveness of the role of

institutional investors - the issue of whether the difference between them and other shareholders is qualitative

or quantitative only - lies at the heart of the corporate governance issue, it is underpinned and dependent

upon issues relating to the institutional cultures6

themselves. Matters concerning the regulation and

legitimation of the institutional investors have been at the forefront of several recent Australian discussion

papers and reports on collective investments.7

The purpose of this paper is to examine changes in the role of institutional investors in corporate governance

in Australia. By way of background to this issue, the paper briefly outlines the underlying flow of funds and

patterns of investment in Australia and discusses some important developments concerning collective

investment, particularly superannuation. On the question of greater involvement by institutional investors in

corporate governance, the paper examines some specific instances of investor activism and discusses the

extent to which legal principles present an obstacle to increased institutional investor activity and power in

Australia.

II. Fund Flows and Investment by Superannuation Funds in Australia

The main focus of recent discussions on institutional investment in Australia has been upon pension or

superannuation funds providing for retirement income. Australian household savings have more than halved

6 For an interesting discussion of a sample of US institutional investors from an anthropological perspective, see CONLEY &

O'BARR, "The Culture of Capital: An Anthropological Investigation of Institutional Investment," 70 NCL Rev 823 (1992).

7 See, for example, Australian Law Reform Commission (ALRC) and Companies and Securities Advisory Committee (CSAC) Issues

Paper 10, Collective Investment Schemes, September 1991; ALRC and CSAC, Discussion Paper 50, Collective Investment Schemes:

Superannuation, January 1992; ALRC and CSAC, Report No 59, Collective Investment Schemes: Superannuation, March 1992; First

Report of the Senate Select Committee on Superannuation (Sherry Committee), Safeguarding Super: The Regulation of

Superannuation, June 1992.

3

since the mid 1970's8 and, central to the Labor government's strategy to increase long term savings, has been

a commitment to occupational superannuation.9

Of the three pillars of retirement funding,10

the first, social security, has a somewhat chequered past. In 1909,

the Commonwealth Government introduced an aged pension11

funded from consolidated revenue. For much

of the century since its introduction, the aged pension has been subject to stringent means testing, which for a

long time made it unavailable to a substantial proportion of the aged.12

In the past, there have been a number

of initiatives to replace the non-contributory pension scheme with a new contributory social insurance

scheme paralleling the national superannuation schemes which emerged in Europe, however these were

ultimately unsuccessful.13

Liberalisation of means testing for the aged pension in the 1970's significantly increased the percentage of

the aged population entitled to benefits under the pension, with the percentage covered in 1991 standing at

75.6%.14

Yet, while there is now a broad entitlement to the aged pension, the entitlements, which are paid

from current revenues,15

have been low in relation to many other OECD countries, where substantial social

security contributions are levied.16

Current benefits under the aged pension are approximately 25% of

average weekly earnings.

8 From 15% of disposable income in the mid 1970's to a little over 6% in 1990-91 (Second Report of the Senate Select Committee

on Superannuation, Super Guarantee Bills, p 88.) This slide has also been reflected at an international level. Australia was ranked

7th in OECD ratings for household savings rate in 1974, but in 1990 15th out of 19 countries for which data was available.

9 On the issue of whether Australia truly has an under-saving problem, see FITZGERALD & HARPER,"Super Preferred or Level

Playing Field? Implications for Saving and the Financial System", February 1992, at 6ff.

10 See BUXBAUM, "Institutional Owners and Corporate Managers: A Comparative Perspective," 57 Brooklyn L.Rev. 1 (1991).

11 The legislation introducing this age pension was founded upon s 51 (xxiii) of the Australian Constitution, which enables the

Commonwealth to make laws with respect to invalid and old age pensions.

12 See JONES, The Australian Welfare State: Growth Crisis and Change, at 113, (Allen and Unwin, Sydney, 1983), stating that on its

introduction, the aged pension was available to approximately one third of the aged population and that this figure had risen to only

45.8% in 1957.

13 On the economic, social and political reasons for their lack of success, see CARNEY & HANKS, Australian Social Security Law,

Policy and Administration, at 22-24, (Oxford University Press, 1986).

14 SHERRY COMMITTEE, Safeguarding Super: The Regulation of Superannuation, June 1992, para 2.4. According to the

Committee (para 2.12), as at June 30 1991, 1.41 million people were in receipt of the aged pension and overall government pension

outlays for 1991-2 were $12.06 billion.

15 See Security in Retirement: Planning for Tomorrow Today, Statement by The Honourable John Dawkins MP, Treasurer of the

Commonwealth of Australia, 30 June 1992, p 1.

16 See VANN, "Fiscal Law", Law and Legal Thinking in the 1980's: A Collection of Australian Contributions to the 12th

International Congress of Comparative Law, at 577 (1986).

4

The failure of the aged pension to provide a comprehensive retirement income scheme 17

has, as in the US,18

resulted in the increasing significance of the second pillar of retirement funding, namely, employment-based

"private pension" income and the third pillar, privately and voluntarily initiated and purchased retirement

income.

Public sector employment-based superannuation was introduced in NSW in the late 19th century and

Commonwealth encouragement to private sector schemes was given through the introduction in 1915 of tax

concessions to employers setting up occupational superannuation schemes. Although only 32% of the

Australian workforce was covered by occupational superannuation in 1974, this figure has increased

significantly,19

aided by important changes in the 1980's in the industrial relations sphere, which resulted in

almost all awards of the Australian Industrial Relations Commission comprising a 3% superannuation

component.

Approximately 20% of the Australian workforce, or just under 2 million employees, are entitled to benefits

under public sector superannuation schemes of the Commonwealth and State governments, investments

estimated to total around $32 billion. 20

Public sector superannuation has traditionally had a reputation for

being far more generous than most private sector schemes. 21

Public sector schemes, which have until now tended to be defined benefit schemes, have been much in the

news of late. There has been criticism of the high level of unfunded liabilities of public sector schemes in

Australia - that is, where no fund has been established but the employer meets the cost of the benefits defined

as they arise. It has been estimated that accumulated unfunded liabilities in the public sector are over $80

billion and possibly as high as $90 billion, Queensland being the only state to have a fully funded scheme. 22

Problems faced by public sector schemes have been highlighted by recent events concerning the NSW State

Superannuation Investment and Management Corporation (SSIMC), which manages the largest occupational

17 In spite of its inadequacies, the Australian Government, in its 1989 statement on Better Incomes: Retirement into the Next Century,

endorsed the view that the aged pension should remain "the cornerstone of equity and adequacy in the retirement income system"

(see SHERRY COMMITTEE, Safeguarding Super: The Regulation of Superannuation, June 1992, para 2.5).

18 See BUXBAUM, "Institutional Owners and Corporate Managers: A Comparative Perspective," 57 Brooklyn L.Rev. 1, 9-10 (1991),

where the US experience is contrasted with that of Germany, in which a far higher level of state pension payments prevails.

19 See SHERRY COMMITTEE, Safeguarding Super: The Regulation of Superannuation, para 2.22 and 2.24, citing ABS statistics

for 1991 showing that occupational superannuation stands at 80% for full-time workers and 42.3% for parttime workers.

20 Who's Who of Public Sector Funds, Superfunds, at 36 (November 1991).

21 Id. at 32.

22 Australia's $80 billion shortfall, Superfunds, at 18 (November 1991).

5

fund in Australia. This covers around three quarters of a million public servants, all but 179,000 of which

were in defined benefit schemes, guaranteed by the State Government.23

In the annual report for the SSIMC,

it was announced that the fund had achieved "an unsatisfactory 0.1 per cent return” 24

on its $10.6 billion

portfolio for 1991/92. This was mainly due to a write down of almost a billion dollars on the fund's $3.5

billion property portfolio.25

The government's unfunded superannuation liabilities reached $14.1 billion.

A few days after the reports of the fund's performance, it was announced that entry into the superannuation

scheme had been frozen and that new employees could join only a new and considerably less generous

scheme. The new scheme will be an accumulation, rather than defined benefit, scheme. There has been

debate about whether the action of freezing entry into the superannuation scheme was due to the fact that the

old scheme was too generous, or to the high level of unfunded liability, or was a direct result of the concern

aroused by the announcement of the magnitude of the property writedowns.26

Personal superannuation schemes are the main source of retirement saving by the self-employed and by those

wishing to supplement employer sponsored superannuation.27

Tax concessions, if certain conditions are

met,28

provide an incentive for this form of investment. The major types of institutions marketing personal

superannuation in its various guises to the public are companies regulated under the Corporations Law, life

insurance companies, State government insurance offices and friendly societies. Banks have in recent times

entered the life insurance field, with some of the major trading banks establishing life office subsidiaries29

23 Australian Financial Review, 14 August 1992, p 1.

24 Managing Director's Report, 1992 Annual Reports for State Authorities Superannuation Board and State Superannuation

Investment and Management Corporation, p 13.

25 "Property Falls in on State Super," Sydney Morning Herald, 14 August 1992 p l. The "property crisis" in Australia has had a direct

effect on the asset mix of the fund in recent times, with an increased holding of Australian shares. As at 31 March 1990 and 31

March 1992, property has fallen from constituting 32.8% of the fund to 23.4%. There has been a corresponding rise in the percentage

of Australian shares from 25.1 % to 34.3% (Review of Business Operations, 1992 Annual Reports for State Authorities

Superannuation Board and State Superannuation Investment and Management Corporation, p 21.)

26 Under the new scheme, First State Superannuation, the government contribution would be an escalating 4% in accordance with the

superannuation guarantee levy, in contrast with average government contribution under the previous scheme equal to 14.5 per cent of

income - Sydney Morning Herald, 17 August 1992, p 6.

27 See, generally, ALRC and CSAC, Report No 59, Collective Investments. Superannuation, March 1992, chapters 2 and 3.

28 Id, para 5.4. The Opposition's election platform, Fightback!, (p 50) argues however that current taxation arrangements

for superannuation systematically favour the wealthy, who receive a far larger "tax break" than lower income earners.

29 See RICE, "An Overview of the Current Life and General Insurance Market," The InterDate Financial Handbook, at 31-33,

(InterData Pty Ltd, Sydney 1991).

6

and "superannuation savings accounts". Nonetheless, life offices dominate the personal superannuation

market and in September 1991 there were $62 billion in the statutory funds of life insurance companies.30

The picture of superannuation in Australia has recently undergone a radical shift, with the introduction of

Superannuation Guarantee Levy (SGL) legislation from 1 July 1992. The SGL effects a fundamental change

to retirement funding by making occupational employer funded superannuation compulsory, with a gradual

increase in compulsory employer contributions from 3% to a targeted 9% by the year 2000-2001.31

Major

objectives of the SGL include increasing both the scope of coverage and the average level of superannuation

savings under employment based schemes32

and, on a macro-economic level, bolstering national savings to

reduce reliance on foreign debt.33

Since an Australian Federal election is on the horizon, it is worth

mentioning that the Opposition's policy on superannuation differs fundamentally from that of the current

Labor government. Although also directed at increasing national savings, the Opposition's policy provides

for a non-compulsory system of superannuation with greater institutional neutrality, especially aimed at

encouraging lower income earners to make their own provision for retirement. Although the Opposition has

stated that it will retain the current level of employer contribution under the SGL if it wins office at the next

election, there would be no further compulsory increases.34

It has been said that, through the SGL, the government will, "transform superannuation from a voluntary

collective investment used by a minority of the workforce to an almost universal, compulsory retirement

savings policy". 35

The SGL has also been described as "perhaps unique by world standards. It will be a

curious combination of compulsory but private sector located funding’.36

It would appear that the

30 The life insurance market is itself dominated by the large players. According to a report in The Age (7 June 1991, p 7) the largest

life insurance company, the AMP Society, holds one third of the nation's total life insurance and the holding of AMP with the other

largest life office, National Mutual, amounts to approximately one half of all life insurance.

31 It is anticipated that contributions will rise from $328 million in 1992-3 to $4795 million in 2000-1 (present value dollars) -

Second Report of the Senate Select Committee on Superannuation, Super Guarantee Bills, June 1992, para 3.13.

32 Targeted interim retirement income under the SGL is 40% of pre-retirement income.

33 Support for the SGL has not however been universal. In their minority report for the Senate Select Committee Report on Super

Guarantee Bills, Senators Alston and Watson complained that "[w]ith Australia still suffering from the deepest economic recession in

60 years, and with unemployment over ten per cent, the last thing which business needs is policies which undermine the capacity of

employers to expand their enterprises and increase employment"(p 87). They also disputed the claim that the SGL will result in any

specific increase in national savings and stated that "the structural shift of savings from retail financial institutions to superannuation

funds will have profound and largely unforeseen consequences for the composition of investment flows" (see at 88-91).

34 See Fightback! programme of the Liberal and National Parties, November 1991, chapters 5 and 7; Allerdice, "Fightback! The

Opposition's proposed superannuation reforms" (1992) 3 Australian Superannuation Law Bulletin, p 41, and FITZGERALD &

HARPER, Super Preferred or Level Playing Field? Implications for Saving and the Financial System, at 3-4, February 1992.

35 ALRC & CSAC, Report No 59, Collective Investments: Superannuation, 31 March 1992, lix.

36 Evidence of Association of Superannuation Funds of Australia representative, Senate Select Committee on Supernannuation, p 643.

7

Superannuation Guarantee Levy has placed Australia in the realm of Clark's fourth stage of capitalism, with

the government appropriating the savings-decision function.37

These developments in Australia have resulted in predictions of major growth in superannuation fund assets.

Superannuation fund assets, which in 1983, stood at $32.6 billion dollars, have reached a current level of

approximately $140 billion. This figure is however expected to rise to somewhere between $300 and $600

billion by the year 2000 and $1400 billion in current dollars by 2010.38

Recognition of the accelerating growth rate of superannuation funds has led to interest in their current and

prospective investment patterns.39

Superannuation funds invest the great majority of their funds in Australia,

only around 13% being invested overseas. Of the $114.3 billion invested in Australia as at 31 March 1991,

27% or $31.4 billion was invested in shares in Australian companies.40

As at 30 June 1992, the total market capitalisation of all entities listed on the Australian Stock Exchange

(ASX) was A$276.8 billion41

and the total market capitalisation of all domestic entities was $193.8 billion.42

According to the Australian Shareownership Survey 1991, only about 10.2% of Australian adults are direct

shareholders in the sharemarket and the ASX has described the level of individual share ownership as "well

below that in comparable economies.” 43

The percentage of listed shares held by individuals is also relatively

low.

Australian superannuation funds' equity holdings constitute a little over 20% of total market capitalisation,

however the figure is said to be "more meaningfully near 30%".44

Although the major superannuation funds

37 CLARK, "The Four Stages of Capitalism: Reflections on Investment Management Treatises," 94 Harv.L.Rev. 561, 565-6 (1981).

38 SHERRY COMMITTEE, Safeguarding Super: The Regulation of Superannuation, paras 2.51-2.52 and FITZGERALD,

Australians' Superannuation Savings: Nestegg or Honey Pot?, at 44, October 1991, citing data of the Australian Bureau of Statistics

(ABS).

39 See, for example, LEIGH HALL, Where Will the Superbillions Be Invested in the 1990's?, 20th Conference of Economists,

Hobart, 3 October 1991.

40 FITZGERALD, Australians' Superannuation Savings: Nest Egg or Honey Pot?, at 44-47, (October 1991), using ABS statistics.

The figure for investment in shares in Australian companies by superannuation funds rises to 38% or $43 billion if investments

through unit trusts are included.

41 The figure as at 30 June 1991 was $228.1 billion. See ASX Annual Report for year ended 30 June 1992.

42 The figure as at 30 June 1991 was $163.4 billion.

43 1992 ASX Annual Report, p 7 and ASX Shareownership Survey 1991, p 7.

44 FITZGERALD, Australians' Superannuation Savings: Nest Egg or Honey Pot?, at 51-52, (October 1991). The 30% figure was

reached through the exclusion of the approximately ten largest overseas companies listed on the ASX, but not having major

operations in Australia.

8

do hold investments in small to medium sized companies, unlisted companies and venture capital etc,

investment in equities has in recent times tended to be heavily concentrated in "blue chip" stocks or the top

50 or 100 ASX listed companies. This is not surprising given the caution engendered among many fund

trustees following the 1987 stockmarket crash, biases in the tax system towards investment in these blue chip

stocks, and the relative illiquidity of many stocks listed on the Australian Stock Exchange.45

In view of the

fact that a typical large fund may have a portfolio of only around 50 stocks, the high concentration within

investment in equities is apparent. As fund managers compete to outperform the index, there may be a

developing counter trend to greater interest in up-and-coming green chip companies.

The exodus of individuals from direct investment on the ASX has been subject to one notable reversion in

recent times, with the privatisation and public float of the New South Wales Government Insurance Office.

The $1.2 billion float, in which institutional investors had been invited to bid for 35% of the stock, was

massively oversubscribed by small investors. A slide in the price of GIO shares since the privatisation may

however have dampened the enthusiasm of small investors for future issues.46

The growth of superannuation funds and the widely voiced complaint that their investment has been too

conservative has led to debate on the desirability of restricting and channelling their investment through

investment controls. It has been argued, for example, that Australia needs capital and that there should thus

be a prohibition on overseas investment by superannuation funds. The Senate Select Committee on

Superannuation ("the Sherry Committee"), in its recent report on the regulation of superannuation

recommended against any such restriction, noting the hardly excessive 13% level of overseas investment by

superannuation funds and the advantages offered by overseas investment in terms of portfolio diversification

and reduction of volatility of investment returns.47

More concerted have been the calls for channelling, through mandatory investment rules, of a percentage of

superannuation funds into areas of public interest, such as venture capital, infrastructure or low-cost housing.

Justifications for introducing investment controls have been said to exist in the tax advantages of

superannuation funds and conservative investment policies of fund managers.

45 Id. at 54-55.

46 Many small investors missed out when the share issue closed oversubscribed by about $1 billion only 32 hours after opening. See

Walker and Howard, "Implementing Privatisation: The Case of the GIO Float", Public Sector Research Centre Working Paper,

September 1992. Since the failure of the Westpac share issue (see below), however, at least one large float has been delayed and

doubt expressed about the timetable of future scheduled privatisations.

47 SHERRY COMMITTEE, Safeguarding Super: The Regulation of Superannuation, June 1992, p 110.

9

The imposition of investment controls on funds would not be new to Australia. The so-called "30/20 rule",

introduced in 1961, provided for higher taxation of life offices and superannuation funds, unless they

invested a minimum of 30% of their assets in public securities, with at least 20% invested in Commonwealth

securities. The arrangement was strongly criticised and its abolition recommended in the early 1980's by two

influential reports on the Australian financial system, the Campbell Report 48

and the Martin Report.49

The

Campbell Committee rejected the argument that the rule performed a prudential function, suggesting that the

converse could sometimes be true. Since the rule prevented "captive institutions from adopting the optimum

composition of their portfolios", the Committee concluded that the institutions might sometimes be prompted

to invest the balance of assets in compensatory high risk investments. Other distortions and anomalies

created by the rule were identified.

Recent committees, considering the issue of investment controls anew, have tended to remain negative. The

report on superannuation by the Law Reform Commission (ALRC) and the Companies and Securities

Advisory Committee (CSAC) 50

recommended against any form of prescriptive asset allocation, on the basis

that such approach may result in lower investment returns. The same conclusion was reached by the Sherry

Committee, which noted arguments that prescriptive asset allocation would conflict with the fiduciary

obligations of trustees to act in the best interests of their members, and that some funds were now in fact

broadening their investment range to include areas of public interest.51

Nonetheless, the Sherry Committee

recommended that the issue be re-examined within three years.

In spite of the apparent antipathy to politically decided bases for investment, it has been noted that there is

one sector of superannuation which is wholly politically dictated.52

This is in the area of unfunded public

sector schemes. In these unfunded schemes, which are substantial, no fund is explicitly set aside for

investment, and budget resources representing accruing liabilities may be directed to areas deemed

politically desirable. As has been noted, there is increasing criticism of the level of Australia's unfunded

public sector schemes.

48 Australian Financial System, Final Report of the Committee of Inquiry, September 1981, chapter 10.

49 Australian Financial System, Report of the Review Group, December 1983, chapter 9, part 5.

50 ALRC and CSAC, Report No 59, Collective Investments: Superannuation, ch 11. See also Discussion Paper 50, para 7.4.

51 See paras 9.13 and 9.15-9.17. Specific reference was made to the Development Australia Fund (DAF), a joint venture of the

Australian Chamber of Manufacturers, the Australian Council of Trade Unions and the Australian Mutual Provident Society (AMP,

which, subject to normal investment criteria, specialises in providing capital in areas such as housing and development projects.

52 FITZGERALD, Australians' Superannuation Savings: Nest Egg or Honeypot?, at 52 (October 1991).

10

III. Regulation of Collective Investment

Regulation of collective investment, particularly superannuation, is high on the law reform agenda in

Australia at present. The reports of the Law Reform Commission and the Companies and Securities

Advisory Committee and of the Sherry Committee stress the need for greater cohesion in regulation of

superannuation and for increased prudential controls. Superannuation regulation in Australia tends to be a

haphazard affair due to the fact that superannuation schemes are currently regulated by a number of

Commonwealth and State laws and an array of different authorities. The Sherry Committee has

recommended that the Commonwealth assume sole control of the area through a combination of its powers

over taxation, corporations and pensions under the Constitution and that the Insurance and Superannuation

Commission (ISC) become the sole regulator of the industry.53

Additional controls which have been

recommended by the Committees include - preconditions to the ability to act as trustee, clarification of the

duties of trustees and directors of corporate trustees, certain prudential controls, including a recommendation

that the limit on in-house investment be reduced from 10% to 5%, more stringent auditing requirements and

greater powers for the ISC. The Sherry Committee also favours the establishment of a fidelity fund to

safeguard against fraud in superannuation schemes. Heightened levels of prudential control are now seen as

particularly important in view of the increasing element of compulsion in superannuation.

Recent reform proposals have also focused on legitimation of instititutional investors through accountability

to members and through adequate participation in fund governance structures by the beneficiaries. It seems

that many of the collective action problems which have traditionally beset shareholders are now being seen

in this new arena, behind the institutional veil. For example, while the Sherry Committee recommends that

rights of members be clearly defined by legislation and "supports in principle" members being empowered to

remove trustees and directors of corporate trustees through meetings, it nonetheless considers that where

fund members are widely dispersed, it may be more appropriate that grievances against trustees be pursued

by the main regulatory authority or through industrial relations tribunals.54

Similar considerations led the

Committee to recommend against the holding of annual general meetings for funds.

Current regulations require that only private and public funds established after specified dates and with more

than 200 members are required to have equal employer/employee representation on trustee structures. Less

53 SHERRY COMMITTEE, Safeguarding Super: The Regulation of Superannuation, June 1992, Recommendations 3.1 and 4.1. See

generally Security in Retirement: Planning for Tomorrow Today, Statement by The Honourable John Dawkins MP, Treasurer of the

Commonwealth of Australia, 30 June 1992.

54 Id., para 4.45.

11

than one per cent of all superannuation funds are affected by this requirement. 55

This threshold level for

equal employee participation was viewed as inadequate in the reports on superannuation, on both prudential

and legitimation grounds. The Sherry Committee accepted an active member interest as "a potent form of

prudential supervision" and considered that, since superannuation moneys belong to the fund's members,

"there is a need for an arms' length relationship between the employer and the superannuation fund and that

members have a right to participate in the decision making process of the fund".56

The ALRC report

recommended that equal representation requirements be extended to all schemes with 50 or more members,57

but the Sherry Committee went even further, recommending that all funds with five or more members be

subject to the requirements. The ALRC report discussed, but made no recommendation on another matter

concerning representation, namely whether representation of employers on the boards of accumulation funds

should be phased out. The argument behind such an approach was that, while employer representation on the

board of a defined benefit scheme is appropriate given the fact that the employer bears the investment risk,

there is no compelling reason for representation in the case of an accumulation scheme.58

One area, where the potential for tension between the interests of employer and employee has been clearly

demonstrated, concerns the respective rights of the parties to any surplus in defined benefit schemes - a

matter which many deeds do not properly address. Both the Sherry Committee and the ALRC report

commented on the level of uncertainty regarding treatment of surpluses in defined benefit schemes. The

question is of particular significance in view of the fact that current tax concessions have often led employers

to overfund superannuation schemes, surpluses thereby being created59

Neither committee was fully

persuaded by the arguments of industry groups that, where the trust deed is silent, the employer should be

entitled to any surplus since the employer bears the investment risk in a defined benefit scheme and that a

contrary result would lead to underfunding of schemes. Focusing on the often ephemeral nature of an

actuarial surplus, the ALRC report recommended the introduction of strict preconditions to any return of

surplus to the employer.60

The Sherry Committee, which was particularly concerned about appropriation of

surplus by employers following changes to the trust deed, called for a review into the purposes for which

surpluses in funds are currently used.61

55 Id., para 5.2.

56 Id., paras 5.5 and 5.9.

57 ALRC and CSAC, Report No 59, Collective Investments: Superannuation, 31 March 1991 at 177-178.

58 Id., para 12.15. See also Discussion Paper 50, Collective Investment Schemes: Superannuation, January 1992, para 9.8.

59 From 1995, this form of tax minimisation will no longer be available. See ALRC and CSAC, Report No 59, Collective

Investments: Superannuation", at 245, 31 March 1992.

60 Id. at 248.

61 SHERRY COMMITTEE, Safeguarding Super: The Regulation of Superannuation, June 1992, at 75.

12

This particular issue was at the centre of a recent decision, Lock v Westpac Banking Corporation 62

concerning the superannuation fund of one of Australia's largest banks, a case showing that equal employee

participation on the trustee structure is no guarantee against disputes of this kind. The plaintiff, a member of

the Bank's defined benefit staff superannuation scheme, which had produced a surplus of up to $1.2 billion,

challenged certain resolutions of the Bank's board. First, the board purported to exercise a power to amend

the trust deed to insert a provision enabling the board in certain circumstances to apply the surplus in the

fund in various ways, including repayment to the Bank. It was also resolved, with the consent of the trustees

as required under the amended provision, that $300 million of surplus assets in the fund should be returned to

the Bank, and an equivalent amount applied to increase benefits of members. Prior to the amendment, the

trust deed made no provision for return of surplus to the Bank. The plaintiff alleged that the amendment and

subsequent resolution returning $300 million to the Bank were invalid and that the sum should be refunded

to the trustees.

Employing a meticulous construction of the scheme deed, to reach the conclusion that the Bank through its

board had indeed been entitled to amend the deed and appropriate the impugned sum to itself, the judge

rejected arguments that the amendment was beyond power, that the amendment had been made for an

improper purpose and that the Bank had breached fiduciary duties or duties of good faith owed to scheme

members. The judge made some interesting comments about the overlap of traditional legal categories in this

area, stating that "pension plans are different in nature from traditional trusts. They are based upon a contract

between the employer, the Trustee and employees". Yet at the heart of the ALRC report is the proposition

that "the trust structure is the most appropriate for superannuation ".63

Also unsuccessful in the Westpac case was the claim that the trustees, in consenting to the arrangement, had

been in breach of their fiduciary duty. According to the judge, the trustees had been entitled to take into

account the interests of the Bank in relation to the surplus, in finding a resolution "which was fair" to both

the Bank and employees. One commentator, however, has questioned why the trustees should have

considered the Bank's interests at all.64

62 Unreported, 26 August 1991, SC (NSW), Waddell CJ in Eq.

63 ALRC & CSAC, Report No 59, Collective Investments: Superannuation", para 2.18.

64 GLOVER, "Lock v Westpac Banking Corporation and the Problem of Superannuation Fund Surpluses," (1992) 9 Aust.Bar.Rev.

172, 177.

13

Intimately connected with the issues of legitimacy and members' rights, is the question of enforcement of

rights and determination of superannuation disputes. A recent High Court decision, Re The Amalgamated

Metal Workers Union of Australia; ex parte The Shell Company of Australia Ltd,65

will have important

ramifications in this regard. It, like the Westpac decision, demonstrates the tension between an analysis of

employment superannuation schemes as based on contract as opposed to trust law. The case involved yet

another dispute concerning the surplus in certain superannuation funds. In 1949, Shell Australia Ltd

established a contributory pension fund and over time most employees in the Shell group of companies were

required to join and make contributions to this fund. It was a defined benefit fund, the trust deed for which

provided only for payments of benefits and specifically prohibited any amendment which could enable

moneys from the fund to be returned to the employers.

By 1990, there was a substantial surplus in the fund. Shell established a new fund, which was also a defined

benefit scheme. The deed of the original fund was varied to enable its members to transfer to the new fund

and most did so. Under the trust deed for the new fund, however, the trustees were required, upon request

from Shell Australia, to repay any part of the surplus to the employers. Some of the employees objected to

intended payment of the surplus to the employers and issued a log of claims in the Australian Industrial

Relations Commission, on the basis that this was an "industrial dispute", including a claim that if an actuarial

surplus were found to exist in the funds, the employers should "use their best endeavours" to procure certain

amendments to the trust deed requiring that 50% of the surplus be directed to the employees.

The majority of the High Court held that the principal claim was an industrial dispute within the meaning of

the Industrial Relations Act 1988 (Cth), being "about matters pertaining to the relationship between

employers and employees". The majority66

stated that "[i]t must now be accepted that the general question of

superannuation entitlements is a matter which may form the subject of an industrial dispute... It follows that

a dispute between an employer and its employees as to the form that a scheme should take is a matter

pertaining to the relations of employers and employees". The minority,67

however, distinguished between the

obligation of an employer to contribute to a superannuation scheme and disputes concerning payment from

the fund. While the minority considered that the employer's obligation to contribute to the fund could be

characterised as involving the terms and conditions of employment, the relationship arising from the fund

itself was treated as a relationship of trustee/beneficiary, not employer/employee.

65 (1992) 66 ALIR 645 (27 August 1992), Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ.

66 Mason CJ, Deane, Toohey and Gaudron JJ.

67 Brennan, Dawson and McHugh JJ.

14

The majority's holding that the principal claim was an "industrial dispute" meant that the substance of the

dispute could be referred back to the Industrial Relations Commission for arbitration. The decision of the

High Court is notable for several reasons. The broad approach taken by the majority means that a wide range

of potential disagreements concerning superannuation funds will now fall within the aegis of "industrial

dispute". This is beneficial to employees since referral to the Industrial Relations Commission by an

employee or union is a more convenient and less costly process than pursuance of a claim through the court

system and it has been suggested that financial considerations may in the past have deterred employees from

bringing superannuation complaints to court. Also of great importance is the fact that the decision-making

process of the Industrial Relations Commission in making an award is more flexible and less constrained by

legal precedent than that of a court. The president of the Australian Council of Trade Unions applauded the

decision as "further confirmation of the right of unions to be involved in issues such as the negotiation of

superannuation, the form of schemes, the need for employee trustees, full information about funds and the

ability of unions to act as watchdogs for fund members".68

IV. The Position of the Institutional Investor within the Corporation

There is a substantial and growing literature on the desirability and feasibility of greater activism by

institutional investors in matters of corporate governance.69

Yet there is a level of ambiguity regarding the

precise role envisaged for institutional investors in such a new order. Under some proposals, the institutional

investor remains clearly distanced from management.70

Other commentators view the rise of institutional

investors as having the potential to obviate the traditional problems of dispersion of shareholders and co-

ordination difficulties. In the most optimistic versions of this scenario, the institutional investor is

transformed into the idealised responsible shareholder, which the separation of ownership and control has

previously made unattainable. This suggests a return to a 19th century version of the corporation with

shareholder/owners viewed as supreme.

68 "IRC's control of super expands," Australian Financial Review, 28 August 1992, at 1.

69 See, for example, BLACK, "Shareholder Passivity Reexamined," 89 Mich.L.Rev. 520 (1990); ROE, "A Political Theory of

American Corporate Finance," 91 Colum.L.Rev. 10 (1991); ROCK, "The Logic and (Uncertain) Significance of Institutional

Shareholder Activism," 79 Geo.L.J. 445 (1991).

70 See, for example, GILSON & KRAAKMAN, "Reinventing the Outside Director: An Agenda for Institutional Investors," 43

Stan.L.Rev. 863, 865 (1991), where the central question is framed as "How should a passive investor relate to its portfolio

companies?"

15

The traditional image of institutional investors in Australia has been akin to their image in the US, where

they have been depicted as passive and supportive of management, with exit from the company as the

primary expression of dissatisfaction. This image is now however being reassessed.

Several factors have led to this reassessment of the role of institutional investors in corporate governance in

Australia. The severe corporate collapses from the 1980's tainted such a passive stance as insufficiently

responsive or responsible. And the trend in the 1990's towards simplification of corporate structure through

deconglomeration has arguably led to a greater confidence by institutional investors in assessing

performance of businesses through comparison. Also, exit by selling out 71

has become increasingly difficult

for larger institutional investors as a result of the concentration of the Australian market. The level of

concentration is demonstrated by the fact that in the six months to June 1992, the top 50 of the 1,116 entities

with listed equities accounted for approximately 80% of equity turnover and market capitalisation. A mere

20 companies constituted 60% of turnover and capitalisation.72

A company's share price may be pushed

down as a result of the sale of a large holding by a major institutional investor and, even if the investor is

able to exit before the share price drop, this course of conduct may be unwise from a public relations

perspective.

The enervation of the market for corporate control has also played a part. The number of takeovers has

declined sharply in recent years73

and the limitations of the market for corporate control as an efficient

mechanism for disciplining errant management - the fact that it operates as a loose, often ill-timed and

misdirected, cannon - have been recognised.74

Takeover law amendments in 1986, which outlawed pro-rata

partial bid takeovers, have also been instrumental in quelling the number of takeovers.75

Furthermore,

defensive tactics and strategies have been employed by many target companies76

and takeovers are sometimes

blocked by the Trade Practices Commission on the basis that they may lead to market dominance.77

71 Note, however, that there has been growth in trading in derivatives. See SCHOLES, Risk Management: A Historical Perspective,

Australasian Finance and Banking Conference, 28 November 1991.

72 1992 ASX Annual Report, p 41.

73 The number of takeovers in Australia dropped from 289 (24% of which were opposed) in 1988 to 86 (26% of which were opposed)

in 1991. RAMSAY, "Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action," (1992) 15

UNSWLI 149, 154.

74 Id. at 154-155.

75 See FORD & AUSTIN, Ford's Principles of Corporations Law (6th ed, 1992) paras [2008] and [2025], and RAMSAY, "Balancing

Law and Economics: The Case of Partial Takeovers," (1992) J.Bus.L 369.

76 Id., paras [2054-2055]. See also CASEY & EDDEY "Defence Strategies of Listed Companies Under the Takeover Code," (1986)

11 Australian Journal of Management 153.

77 A recent example was the TPC's veto of the $560 million takeover by Santos Ltd of another gas company, Sagasco Holdings Ltd

(Australian Financial Review, 1 October 1992, p 1.)

16

At first sight, the legal background, in which shareholder rights have over time been steadily attenuated,

appears less than auspicious for the re-emergence of active and powerful shareholders. Although a level of

control has always been available to shareholders through, for example, their right in certain circumstances

to convene general meetings, their right in a public company to remove a director by ordinary resolution and

the power to alter the company's articles by special resolution,78

the strategic superiority of the board

generally and, in the case of election of directors, specifically, has in the past rendered such power

theoretical only.79

Also, the Australian courts have consistently held80

that, where a company's articles vest managerial power

in the board, the shareholders have no power to override or interfere with a decision of the directors. This

principle was taken to its logical extreme in NRMA v Parker,81

where a requisition by shareholders for the

convening of a general meeting, otherwise in accordance with the companies legislation, was invalidated on

the basis that the object of the meeting was not one which could be effected by a general meeting resolution.

In reponse to a further argument that the proposed resolutions would inform management of the NRMA of

the general meeting's opinion on certain matters, the judge stated his view that "it is no part of the function of

the members of a company in general meeting by resolution... to express an opinion as to how a power

vested by the consititution of the company in some other body or person ought to be exercised by that other

body or person…The members of the plaintiff no doubt have a legitimate interest in how these powers are

exercised, but in their organic capacity in general meeting they have no part to play in the actual exercise of

the powers".82

There has even been diminution of shareholder powers in areas traditionally assigned to them, such as the

power to cure breaches of directors' duties. Although the shareholders in general meeting have traditionally

been treated as the appropriate organ to cure any breaches of fiduciary duty by the directors, in Kinsela v

78 On shareholder rights generally, see the Report of the House of Representatives Standing Committee on Legal and Constitutional

Affairs, Corporate Practices and the Rights of Shareholders, November 1991, chapter 5.

79 One decision which to some extent curbed the level of the board's advantages was Advance Bank Australia Ltd v FAI Insurances

Ltd (1987) 5 ACLC 725. FAI Insurances Ltd, which owned just under 10% of shares in the Bank, nominated four persons for

election as directors at the Bank's annual general meeting. The board of the Bank opposed FAI's involvement at board level and

conducted a campaign using corporate funds to ensure re-election of the board's candidates. The court held that while there is no

absolute prohibition on expenditure of corporate funds in an election for company directors, here the level of expenditure and the

form of the campaign amounted to an abuse of authority by the directors.

80 Following the early English decision in Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame (1906) 2 Ch 34.

81 (1986) 4 ACLC 609 (SC (NSW), McLelland J).

82 Id. at 614.

17

Russell Kinsela Pry Ltd,83

it was said that a shareholder decision, even by unanimous consent, was

ineffective to cure a breach of duty to take into account the interests of creditors.

In spite of these developments suggesting a diminished role in corporate governance for shareholders,

countervailing trends are also apparent. The introduction in 198584

of a provision permitting shareholder

access to corporate documents and information has been the source of many incursions by shareholders into

the managerial realm. Nonetheless, the ambivalence concerning the role and rights of shareholders is still

apparent in the courts' relatively narrow conception of what is a "proper purpose" for shareholder inspection

under the relevant provision. There is also increased reliance on shareholder approval as a legitimating

precondition in recent legislative reform proposals.85

V. Investor Activism in Australia

The clearest manifestation of a new approach to the role of institutional investors in corporate goverance was

the creation in late 1990 of the Australian Investment Managers' Group (AIMG). The group comprises

around 40 of the largest institutional fund managers in Australia, each with more than $500 million in funds

and collectively holding more than $200 billion. Members agree to be bound by a code of conduct,

establishing a minimum set of principles for fund managers.86

The purposes of the AIMG were defined at its

inception as - to advance the integrity of the Australian capital markets; to protect the rights of investors; to

promote the interests of investors; to facilitate investors taking action when warranted by circumstances; to

provide assistance to the Australian Securities Commission, the Stock Exchange and other government

agencies in matters relating to investors' interests and to assist companies in understanding the requirements

of investors.87

At the time of the creation of the AIMG, its chairman, Leigh Hall, described the group as "a

reflection of the growing maturity of the securities markets that investors can no longer rely on the Wall

Street Walk; that is, if you don't like you sell. You can only sell to another institution so the problems are

only inherited by someone else”.88

83 (1986) 4 ACLC 215.

84 The relevant provision is now found in Corporations Law s 319.

85 See, for example, Part RP, Corporate Law Reform Bill 1992, "Financial Benefits to Related Parties of Public Companies".

86 Information obtained from discussions with the Chairman of the AIMG.

87 Australian Investment Managers' Group Statement of Purposes.

88 Quoted in Australian Super Review, December 1990/January 1991, p1.

18

There is a broad spectrum over which activism and influence by institutional investors may range. At one

end of this spectrum, institutional investors might seek to improve corporate governance generally through,

for example, discussions with regulatory agencies over law reform proposals; at the other of the spectrum,

institutional investors might, in response to particular managerial conduct, act directly to remove

management from office. Between these poles lies conduct including informal negotiations with

management, proxy contests, agenda setting and appointment of directors.

It seems that the AIMG is prepared to engage in a wide variety of such activities. For example, the AIMG

put general pressure on companies to adhere to certain standards of corporate governance when it endorsed a

Corporate Practices and Conduct code prepared by the Business Council of Australia in conjunction with a

number of other business and legal associations.89

A significant percentage of Australian listed public

companies have now explicitly adopted the principles in the Corporate Practices and Conduct code as a

result of a statement by the AIMG that, in making investment decisions, its members would give preference

to corporations following the principles. One of the issues in the code is corporate governance and, like the

Cadbury Committee in the UK,90

attention is focused upon creating a series of checks and balances over

management through, for example, guidelines to the effect that generally the roles of chairman and chief

executive should be separate, that public companies should have boards and audit committees comprising a

majority of non-executive directors,91

and that boards should perform a monitoring function, ensuring that

adequate systems of internal control exist. The Corporate Practices and Conduct paper also encourages

public companies to develop and enforce codes of ethics, setting out their relationship and responsibilities to

groups such as shareholders, customers and suppliers, employees and the community.

There have been several high profile examples of more aggressive forms of activism by institutional

investors in Australia in the last few years. For instance, shareholder pressure has been applied to obstruct

increased managerial compensation.92

There have also been a number of attempts led by institutional

investors to remove incumbent managers. In August 1991, there was "an institutional shareholder revolt"93

in

89 Business Council of Australia, Corporate Practices and Conduct, 1991 (chairman, Henry Bosch AO).

90 Committee on the Financial Aspects of Corporate Governance, Draft Report, 27 May 1992.

91 The Corporate Practices and Conduct code recommends that at least two of the non-executive directors be truly independent in the

sense that they have no other contractual relationship with the company or any other relationship "which could affect the exercise of

independent judgement".

92 In 1990, shareholders of Goodman Fielder Wattle Ltd voted against an executive option plan as originally formulated, while

approving a scheme to issue options to employees other than executive directors ("Shareholders set aside executive option plan," The

Australian, 27 November 1990, at 15. In 1991, fund managers of institutional investors used their voting rower against an increase in

remuneration for directors proposed by the board of Westpac Banking Corporation.

93 Shareholder revolt rocks Darrell James, Australian Financial Review, 9 August 1991, at 16.

19

the company, Darrell James Ltd. Five institutions, led by the NSW State Authorities Superannuation

Board,94

requisitioned a meeting to remove three directors of the company. Initially unsuccessful in unseating

the incumbent management, the fracas nonetheless resulted in the appointment of five independent directors.

Even more recently, institutional investors, representing over 50% of shares in Bennett & Fisher Ltd, one of

the oldest listed companies in Australia, combined to force out more than half the board members in

December 1991.95

Having reconstituted the board in this way, the rout was then completed when the

managing director was sacked as managing director by the new board and resigned from his position as

director two days before a shareholders' general meeting to remove him.96

One of the ironies in the saga was

said to be the fact that the market's response to the removal of the managing director led to an appreciation of

the value of his shareholding in the company by around 30% following his removal from office.97

There is by no means consensus amongst commentators on the desirability of institutional investors

exercising a greater level of power over corporate managers. Optimal results are often thought to be general

improvements in corporate governance and removal of inefficient managers. Professor Conard, however,

refers to one of the potential negative consequences as the possible "entrenchment of enterprise managers

through alliances between them and institutional managers".98

Concerns of this kind emerged as a result of a

strategic alliance which was announced in mid-1991 between Australia's largest life office, the AMP Society,

which has been at the forefront of investor activism, and the Westpac Banking Corporation. The terms of the

alliance involved AMP lifting its shareholding in Westpac and provided for four interlocking directorships.

The potential for a situation of conflict to arise where an institution aligns itself in this way with incumbent

management became clear in a recent attempt by Westpac to raise $1.2 billion through a rights issue.

Dramatic falls in the Westpac share price raised concerns that there would be a significant shortfall in the

fundraising. The AMP Society, which, with a 14% holding was the largest shareholder in Westpac, had,

according to one press report, "little choice but to make a contribution to the rights issue resuscitation

efforts” 99

and publicly restated its commitment to the bank and the share issue. This was in spite of an

94 Other institutions involved included a subsidiary of the National Australia Bank and the State Electricity Commission of Victoria's

superannuation fund.

95 "Holders oust directors in reshuffle at Bennett," The Australian, 16 December 1991, at 21.

96 "MD gets the boot in big Bennett clean-out," The Age, 9 May 1992, at 25. This was an extreme instance, with massive company

losses, a highly controversial transaction involving the company and the managing director's wife and failure to make proper

disclosure on certain matters to the corporate regulator, all contributing to the removal.

97 "Bennett & Fisher's shares gain as Summers leaves," Australian Financial Review, 12 May 1992, at 16.

98 CONARD, "Beyond Managerialism: Investor Capitalism?," 22 JL Ref 117, 119 (1988).

99 KERRY, "AMP strange bedfellows," Sydney Morning Herald, 11 September 1992, at 22.

20

announcement in May of a $1.6 billion interim loss and the fact that the fall in the market price of Westpac

shares had already wiped $300 million from AMP's investment.100

All this was still not enough to sway other

shareholders, including other institutional investors, dissatisfied with the board's performance. The rights

issue was a debacle, with an $883 million shortfall, and following intense pressure from shareholders and the

press, the chairman and four other directors resigned from one of Australia's most prestigious boards.101

The

divergence of AMP's response to the Westpac issue from that of several other institutional investors is

noteworthy, suggesting that in this situation AMP's role had shifted from one of institutional investor to one

of "partner".102

Soon after the failure of the Westpac rights issue, it was announced that another major float,

by Woolworths, would be deferred, amidst reports in the financial press of another "revolt" by major

institutions over the pricing for the subunderwriting of the float.103

VI. Legal Obstacles to Institutional Investor Activism in Australia

Several commentators in the US have criticised the network of legal rules inhibiting greater activism by

institutional shareholders. Assuming that Australian institutional investors have sufficient motivation to take

a more active role, to what extent are they obstructed by existing legal rules?

At first blush at least, there seems to be considerable leeway under Australian corporate law for institutional

investors to engage in many different forms of shareholder activism. For example, proxy solicitation is not

subject to restrictions like those which have been criticised in the US,104

and occurs not infrequently in

Australia. It may in fact be used as an inexpensive and straightforward way to obtain control of a company

through a minority shareholding position, bypassing the restrictive and highly technical takeover rules. One

possible glitch in proxy solicitation - breach of the takeover provisions through the person authorised to vote

obtaining a "relevant interest" in the shares voted - is obviated by a provision expressly stating that a relevant

100 "AMP and Packer shore up Westpac," Sydney Morning Herald, 11 September 1992.

101 "Directors go in Westpac Bloodletting," Sydney Morning Herald, 2 October 1992. The new appointment to deputy chairman of

Westpac was Sir James Balderstone, chairman of AMP.

102 Indeed, one financial commentator asked whether the saga was actually a backdoor takeover of Westpac by AMP. See Walsh,

"How it all went horribly wrong," Sydney Morning Herald, 25 September 1992, at 25.

103 "Woolies float a doubtful starter," Sydney Morning Herald, 24 September 1992, at 33.

104 On the SEC's proxy reform proposals brought about by such criticisms, see BLACK, "Agents Watching Agents: The Promise of

Institutional Investor Voice," 39 UCLA L.Rev. 811, 829 (1992). For a discussion of other obstacles to greater activism by

institutional investors in the U.S., see BLACK, "Shareholder Passivity Reexamined," 89 Mich.L.Rev. 520 (1990) and ROE, "A

Political Theory of American Corporate Finance," 91 Colum.L.Rev.10 (1991).

21

interest in shares arising in this way, otherwise than for valuable consideration, is to be disregarded.105

So far,

however, institutional investors, whilst vital to the success or failure of any proxy solicitation attempt, have

not tended to be the motivating shareholders.

Another suggested method by which institutional investors might exert greater control at board level and

more effectively monitor board decisions is by means of the appointment of nominee directors. Although

there is one Australian decision106

adopting, as a strict and uncompromising principle the view that a

nominee director has an overriding duty to the company and not to an appointor, other decisions have taken a

far more pragmatic and commercial approach. It is clear that there are a range of circumstances in which the

court will not intervene even though a director has given overriding consideration to, or acted solely in the

interests of an appointor.107

Express legislative authorisation for this liberal approach to nominee directors

has also been recommended by the Australian Companies and Securities Law Review Committee.108

In spite of the apparent flexibility of the law relating to nominee directors, interest by institutions in such

arrangements will, it seems, vary depending upon the type of company involved. Although institutional

investors may desire a greater level of control, which can be achieved through the appointment of nominee

directors, in the case of investment in smaller green chip companies, there seems little enthusiasm, the

Westpac-AMP alliance aside, for the appointment of nominee directors to the boards of blue chip companies.

In blue chip investments, institutional investors still appear to prefer a role more detached from management.

There are several possible reasons for this, both commercial and legal. There are, for example, concerns

about insider trading constraints. Another deterrent to more hands-on involvement in managerial matters

may be the fear that the institutional investor might be treated as a shadow director, the definition of

"director" under the Corporations Law extending to any "person in accordance with whose directions or

instructions the directors of the body are accustomed to act".109

Were institutional investors to be so

classified, numerous duties would be imposed upon them, to which shareholders are not currently subject.

105 Corporations Law s 41.

106 Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307. As well as the possibility of

breach of fiduciary duty, overriding regard for the interests of an appointor might also be attacked under s 260 Corporations Law, a

minority shareholder protection provision, as "oppressive, or unfairly prejudicial to, or unfairly discriminatory against, a member or

members".

107 See, for example, Levin v Clark [1962] NSWR 686; Re Broadcasting Station 2GB Pty Ltd [1964-65] NSWR 1648, and in New

Zealand, Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150.

108 Report No 8, Nominee Directors and Alternate Directors, (1989).

109 Corporations Law s 60(1). Cf, however, Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] BCC 567.

22

What of institutional shareholder involvement of a more subtle kind? To what extent are institutional

investors able to request and obtain information which may be denied by management to other shareholders?

There is no doubt that, in the past, information has been imparted routinely in this way to institutional

investors through selected briefings and roadshows. New insider trading laws were introduced in Australia in

August 1991, which broadened the scope of insider trading provisions. One commentator has argued that

technically, the most prolific insider traders in Australia are probably stockbrokers and the major institutional

investors.110

Under the previous insider trading legislation, the basic prohibition applied to a person who was "connected"

with a body corporate. For the institutional investor, probably the most relevant way in which a connection

could arise was through a person being a substantial shareholder, holding not less than 5% of voting shares in

the company. Institutional investors holding less than this percentage would fall outside the scope of the

basic prohibition; however, even when the shareholding level exceeded 5%, it was arguable that any

information possessed by the investor was not possessed "because of” the connection of substantial

shareholding, as required by the provision.111

Under the amended provisions, there is no longer any

requirement that a defined connection exist between insider and the relevant company. Rather, a person may

be an insider purely through the possession of material information which is not generally available.112

Arguably, this marks a shift in the underlying policy of insider trading legislation in Australia from one

based on fiduciary relationships to one based on informational advantage.113

It seems that the broadening of the scope of the insider trading laws in Australia makes institutional investors

more susceptible to claims of insider trading. The crucial issue will now be whether the information is to be

regarded as material and information will be treated as material "if the information would, or would be likely

to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or

sell" the relevant securities. Under this broad notion of materiality, it is arguable that possession of

information by institutional investors, which gives them greater certainty about generally available

information, might nonetheless in some circumstance be material. Insider trading laws in Australia have in

the past been anodyne and ineffective.114

Whether the amendments to the law will result in more prosecutions

110 BEERWORTH, "New Insider Trading Legislation," (1991) 19 Butterworths Corporation Law Bulletin, para [373].

111 Corporations Law s 1002(1). Although s 1002(3) dealt with tippees, institutional investors would have been unlikely to fall within

that section since the section required that the tippee must be an "associate" of the person giving the information or have had an

"arrangement" for the communication of the information.

112 Corporations Law s 1002G(1).

113 See generally BLACK, "The Reform of Insider Trading Laws in Australia," 15 UNSWL.J. 214 (1992).

114 From the time that criminal sanctions against insider traders were introduced by legislation in 1961, there were no successful

prosecutions for insider trading in Australia. See TOMASIC, Casino Capitalism? Insider Trading in Australia (1991), chapter 3.

23

and greater enforcement is yet to be seen. However the presence of the new laws will almost certainly be

taken seriously by institutional investors.

Finally, what of groups such as the AIMG? Are there any legal barriers to institutional investors coming

together in this way? One possible constraint arises under the takeover provisions of the Corporations Law.

Australia's takeover laws are highly technical and labyrinthine and are more than capable of catching conduct

not strictly associated with a takeover bid at all. Furthermore, the remedies for breach of the basic prohibition

can be draconian. Remedial orders which the court may make include orders restraining the exercise of

voting power attached to shares, orders restraining their disposal, even orders vesting shares in the Australian

Securities Commission. Technical breach of the takeover provisions would be anathema to institutional

investors.

The basic prohibition under the takeover provisions prevents a person from "acquiring" shares in a company

if this would result in any person's "entitlement" to voting shares in the company exceeding a 20% threshold,

unless certain lawful pathways are taken.115

In computing a person's entitlement to shares, the shares in

which that person has a relevant interest are aggregated with shares in which an "associate" of that person

has a relevant interest.

Might institutional investors be classified as "associates" of each other by virtue of their activities within a

group such as the AIMG? The concept of "associate" is very broad. One shareholder may become the

"associate" of another by virtue of an agreement, arrangement or understanding for the purpose of controlling

or influencing the composition of the corporation's board or the conduct of its affairs or through acting in

concert with the other shareholder.116

The agreement, arrangement or understanding may be formal or

informal, written or oral and the courts have given the terms a broad scope.117

It is thus arguable that in

certain circumstances coordinated institutional investor activity might result in the parties becoming

associated. There will however be no breach of the takeover provisions unless somebody has "acquired"

shares as a result of a "transaction".118

The transactional requirement will generally be lacking in the type of

conduct undertaken by the AIMG.

115 Corporations Law s 615.

116 Corporations Law s 12(l)(e), s 9 and s 15.

117 See, for example, dicta in Adsteam Building Industries Pty Ltd v Queensland Cement and Lime Co Ltd (No 4) (1984) 2 ACLC

829 and Industrial Equity Ltd v CCA (1989) 1 ACSR 153.

118 See Corporations Law ss 51 and 64.

24

Overall, the legal obstacles to greater activism by institutional investors are far from daunting. Institutional

investors have shown on several occasions that they are prepared to break with their traditional patterns of

behaviour and managers are increasingly aware of the need to keep institutional investors satisfied. Against

this background, the future of corporate governance in Australia will be intriguing indeed.