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Shareholder Democracy or a Banana Republic: The CASAC Proposals for Reform

Author: Ralph Simmonds LL.B. Hons (UWA), LL.M. (U Toronto)
Professor of Law, School of Law, Murdoch University
Issue: Volume 7, Number 4 (December 2000)

Contents

Shareholder Democracy or a Banana Republic: The CASAC Proposals for Reform

    Introduction

    [A banana republic is a] small country with an unstable government, typically a military dictatorship, and an economy dependent on the export of a single product or on outside financial help.[1]

    That's all very well in practice, but it will never work in theory.[2]

  1. The recently released Final Report by the Companies & Securities Advisory Committee on "Shareholder Participation in the Modern Listed Public Company"[3] [Final Report], following its Discussion Paper nine months earlier,[4] raises the particularly important and fundamental question of why shareholder participation is important. Final Report offers an implicit, but unexamined, answer, one that (like all good theories) raises most useful issues about what we need to know about corporate governance in this country to reform the law in the area of shareholder participation. Finals Report does this in a document that rather belies its title. The title promises a substantial analysis of the important question I have identified. In fact, Final Report is, at least on its face, simply a useful review of aspects of the law of shareholder meetings in this country, and of pragmatic issues of law reform. It looks like a stocktake of issues of practical concern arising out of Part 2G.2 of the Corporations Law[5] and the related common law of corporations. It is in fact rather more than that.

  2. This paper tries to tease out the Final Report's answer to what I have styled the important and fundamental question of why shareholder participation is important. I then go on to consider, in light of that answer, what we need to know about corporate governance today to reform the law of shareholder participation, at least in the modern listed public company. I do this in the context of my review of what I consider the major practical issues Final Report addresses, which I undertake in order to evaluate the associated Recommendations. I go on to consider briefly one important matter of shareholder participation that I see to have been largely untouched by the Final Report, before concluding on where it would leave us in terms of my title: shareholder democracy or "banana republic" - or neither?

    Why Shareholder Participation Might be Important - the Importance of Theory

  3. There are in fact two quite distinct arguments that are possible of why we should be concerned to have such participation. They proceed from the two principal theories of corporate governance identified in the burgeoning literature, especially the literature that compares corporate governance systems across civil law and common law jurisdictions.[6]

  4. One theory is contractarian, and is probably the dominant theory in corporate law scholarship in this country. It is also the body of theory that appears to have most influenced the Corporate Law Economic Reform Program.[7] This theory, as is well known, identifies issues in corporations law, including governance ones, in terms of efficient voluntary relationships with economic purposes.[8] Management's objective is to maximise the total value of the business; shareholders, as the stakeholders with the residual claim, should have control because "[o]nly residual claimants have the incentive to maximise the total value [of the business]"[9] It would follow from this theoretical perspective that shareholder control enhances firm value. That is why shareholder participation matters.

  5. It is important to note that this does not tell you what form shareholder participation should take. At least two contrasting accounts are possible.

  6. One account might say that the contractarian perspective requires, at least for modern listed public corporations, the possibility for discipline of management through the operation of the market for corporate capital and the market for corporate control. This in turn appears to require "thick, liquid trading markets [for equity]" that depend on relatively dispersed shareholdings; such shareholdings, as opposed to holdings more characterised by control blocks associated with thinner markets, are fostered by legal regimes that promote one share, one vote equity structures, and that prohibit self-dealing and insider trading[10]

  7. Countries with such markets, so fostered, include the US and the UK. These two countries with their "[equity] market systems"[11] could be contrasted with continental European countries (Germany is the usual archetype) whose equity markets are characterised by "majority or near-majority holdings of stock held in the hands of one, two or a small group of large investors", resulting in much thinner equity markets. Countries with such "blockholder systems"[12] are seen to have corporations and securities regulation law much more tolerant of listed non-voting or inferior voting equity, and less inhibiting of self-dealing and insider trading[13]

  8. Australia viewed from this perspective occupies an intermediate position, although one more aligned with market than it is with blockholder systems. Australia, compared with the US and the UK, has equity markets for listed public companies characterised by more family or non-financial corporate holdings, so that proportionately more of its listed public companies are not exposed to the market for control through the hostile takeover bid[14] Compared with the US and the UK, it also has less institutional holders, and (for the time being, at least) proportionately more individual shareholders[15] And (perhaps most significantly for present purposes) its system of corporations and securities regulation law has the characteristics just described that are associated with the US and the UK[16]

  9. Another account might say that the contractarian perspective is not so prescriptive. It allows for the possibility that blockholder arrangements might equally maximise firm value, through the enhanced incentive to monitor that flows from thinner, less liquid equity markets, and that offsets the adverse effect on the value of the business of the higher cost of capital associated with such markets. Such arrangements are also said to be associated with a lesser emphasis on short-term value horizons, creating a "more secure environment for firm-specific investments of human capital"[17] It may be possible to arrive at hybrid arrangements combining the markets and blockholder arrangements; but it seems unlikely. Countries have to choose[18]

  10. A contrasting theory that can tell you why shareholder participation matters is the communitarian one. This theory identifies issues in corporations law in terms of the array of stakeholders with legitimate interests in the activities of the business. Not all of these can be expected to have voluntary economic relationships with it, and even for those with such relationships there are pervasive problems with working out the appropriate terms of such relationships[19] While economic values matter, they are not the only ones that corporations law must work to accommodate. Put another way, the relationships between the stakeholders and their corporation that corporations law must account for are not just economic: they include matters of a wider politics. Such politics are not only those associated with government, such as (to take common examples) environmental issues and ones of remote and regional development, but also the politics more closely associated with the individual and with "social justice", such as the recognition of the dignity of work and of basic human rights.

  11. Management from this communitarian perspective must be "accountable for fulfilling the firm's responsibility to its primary stakeholder groups"[20] shareholders are one such group, and accountability to them implicates more than maximising residual value, because their connection with the firm is not fully captured by their residual claimant status[21] Shareholder participation matters not so much because it helps to enhance firm value, but because it is necessary to legitimate the corporation.

  12. This last point is capable of accommodating a vision of shareholder participation in the modern listed public corporation that allows for a different form of shareholder participation than contractarianism contemplates. Where contractarianism sees the shareholder as the residual value motivated monitor of corporate performance, or at least one who is a freerider on the monitoring of others and who is so motivated, communitarianism is able to accommodate the shareholder as one potentially concerned with a wider array of issues relevant to the business not as readily reducible to their impact on residual value. Communitarianism does not seem to require that these be accommodated without limit, at increasing cost to the need to attend to the pressing concerns of the business. But it is undoubtedly less hostile to matters of "political" concern being raised by shareholders than is contractarianism; and it seems to require that corporations law allow for such matters to be raised where they are sufficiently relevant to the business. This would seem to push towards models of shareholder participation that are closer to (political) democratic politics than those associated with contractarianism.

  13. At the same time, the contrast here should not be overstated. Contractarianism would seem to see "residual value" as determined by the aggregated preferences of market participants; if an issue otherwise "political" is considered to go to such "value" so determined, it should have a place. To put it another way, "investor confidence" that is considered to be so important to thick and liquid trading markets may require such allowance - although the further the matter is from recognisable economic value, the less this argument should be acceded to[22]

  14. At this point, it is possible to characterise the Final Report. As will become apparent from detailed discussion below, it proceeds from a contractarian, not a communitarian perspective. It is concerned with shareholders as an economic value accountability mechanism, not as a political stakeholder. It accepts shareholders in a market, not a blockholder system[23] It tends away from a political democratic model of shareholder participation[24] It is relatively inhospitable to accommodating shareholder concerns to have non-economic issues accommodated in corporate governance[25]

  15. The contractarianism is, as I have indicated, in line with the outlook of CLERP. Contractarianism there aligns with CLERP's concern for enhancing the international competitiveness of Australian business through corporate governance[26] It has been suggested in the literature that market system based contractarianism is better suited than the blockholding alternative, let alone communitarianism, to flexible responses to rapidly changing markets for products (including services) and labour that are increasingly globalised[27] At least as to the blockholding contractarian alternative, however, this is a contestable claim - the data viewed in historical perspective do not sufficiently support it as other than a plausible or possible view[28]

  16. But one must not understate the subtlety of the Final Report's view of the shareholder. It does not, as current law does not, preclude shareholder activism that is not straightforwardly economic in motivation. Shareholders can in suitable ways raise matters going beyond economic value maximisation. It is just that the Final Report has resisted widening those ways, and in fact in some respects recommends narrowing them[SoL1].

  17. Having identified the Final Report's outlook, it is now appropriate to confront the major issues it discusses, and its method of dealing with them. Here I want to suggest the strengths and limitations of the sort of corporate law reform enterprise this CASAC project represents.

    The Major Issues in the Final Report - and How It Deals with Them

    The Background

  18. The Final Report identifies the changing character of the conditions for shareholder participation in corporate governance in terms of three major changes in the conditions for such participation. These conditions are the backdrop against which it discusses the role of shareholders in corporate governance, calling meetings, settling the agenda for meetings and conducting them.

  19. The most familiar such change is the dramatic growth in the levels of popular participation in shareholding in listed public companies, at least since the major privatisations[29] which puts particular strain on the possibility of direct participation in meetings[30] It also raises questions of effective communication with such a dispersed, diverse and relatively inexperienced shareholder cohort[31]

  20. Another such change is the growth in institutional share ownership[32] which, given the systems for holding their shares through intermediaries[33] raises issues of effective communication between institution and company[34] It also raises questions of whether or not it is appropriate to take other steps to foster institutional shareholder participation in corporate governance, at least in the interests of those who hold shares indirectly through the institutional holders[35]

  21. The third principal change is technological in forms that promise to relieve against at least some of the difficulties these other changes have produced, by their promise to enhance the flow of information from the company to its shareholders and communication between them[36]

  22. Viewed against this background of change, the Final Report comprises, after a Summary, separate Chapters on each of "Corporate decision-making", "Calling a meeting", "Settling the agenda" and "Conducting the meeting"[37] By far the longest account is of the last topic[38] There is, however, important matter in each of them, and they deserve separate treatment.

    The Role of Shareholders in Corporate Governance

  23. Given the theoretical perspective of the Final Report, it is not surprising that the document discusses this matter in the customary terms of efficient and accountable business management, rather than democratic involvement. In this it aligns itself with the OECD Principles of Corporate Governance[39] and goes on to account for the pattern in the Corporations Law of the default rule for companies of management by or under the direction of the board of directors. This is understood as excluding the possibility of override by shareholder direction, but it is also subject to the assured role of the shareholders, of public companies at least, as stakeholders having the power at any time to remove directors, as well as to appoint and remove auditors, and to approve certain transactions with particular risks to corporate capital and certain fundamental changes in the company, all as supplemented by ASX Listing Rules[40]

  24. The default rule of management by the board, so understood, is of course subject at least formally to the possibility of contrary provision in the company's constitution, where in some other market systems it is a matter (for widely held companies) of mandatory provision[41] It would have been interesting for the Final Report to have noted whether or not there is any significant incidence of such contrary provision among Australian listed public companies: for the business efficiency reasons it gives, one would have expected a low such incidence, while the ASX's one vote per share approach would presumably further constrain variation[42] But any variance would have been of interest - if only to test whether or not for certain sorts of listed public company business efficiency might point to the possibility of greater formal shareholder involvement, let alone whether or not some listed public companies might be run in ways more congenial to a communitarian approach than a contractarian one.

  25. With this starting point, Final Report considers, particularly against the backdrop of significantly increased popular shareholding, whether or not the Corporations Law needs to be changed to promote further "equal and simultaneous access to material information given by a listed company about its affairs"[43] It notes its respondents' general support for such access, but also their varying views on whether or not the Corporations Law, with its continuous disclosure and insider trading provisions, and with the "consumer protection powers" of ASIC, needs changing. It concludes, in light of the recent ASX facility for announcements by listed entities to be made available at its Web site (introduced after the responses were made), and the growing incidence of provision of information at those entities' own Web sites, that no change is needed[44]

  26. However, the Final Report does not identify which of its respondents aligned with which view on the need for change, nor does it consider whether the quality (in timeliness and intelligibility terms) of the information so provided was seen to be satisfactory. Presumably no particular point was made of this by respondents, who covered a wide spectrum of interests, including bodies that have taken a particular interest in issues such as these[45] Still, in view of the relative inexperience of many of the new individual shareholders, it would have been useful for the Final Report to have addressed these further issues.

    Calling Meetings

  27. Here the Final Report considers the matters of the shareholders' power to requisition meetings[46] the law with respect to the information to be provided in the notice of meeting[47] and the procedure for companies to communicate with the beneficial owners of shares held by nominees[48]

  28. Only with respect to the first of these three - which is identified as the "principal issue" at stake, and a "significant matter of corporate governance"[49] - does the Final Report propose any change in the law. There, in line with the theoretical approach I have identified with the document, as well as law in other jurisdictions, and the majority of the submissions made for it, it recommends that only shareholders holding a minimum of 5% of the votes that might be cast at a general meeting should be able to requisition a meeting[50] This would drop from the Corporations Law the current alternative possibility for a minimum of 100 shareholders to do this, regardless of their proportionate holding, the size of their investment or the time they had held it[51]

  29. This recommendation and its supporting discussion were evidently prepared before the disallowance by the Senate[52] of the regulation that had replaced the 100 shareholder test with one of a minimum of 5% of shareholders by number, a regulation which the Final Report notes was made "as a temporary response" (pending the Final Report) to the "concerns" that numerical test had raised[53] Those concerns it identifies with the possibility that test opened up, in light of the pattern of shareholding in the top 150 listed public companies, of holders of shares representing a "miniscule" proportion of the issued equity of the company putting it to the possibly "considerable" costs of calling and conducting the meeting[54] The Final Report clearly contemplated such meetings being called for reasons that did not go to maximising the economic value of the company, but rather pursuing a "particular social agenda"[55]

  30. The argument against the position the Final Report supports centres on the value of a numerical test, if not the current one[56] to "encouraging widespread share ownership among the Australian community", as well as "greater participation" by small shareholders[57] Against that would run the argument that all shareholders economically motivated would have a concern about the considerable costs to which a meeting requisitioned by a miniscule portion of the shareholders could put "their" company.

  31. At this point an interesting empirical issue is joined: to what extent does the current requisition authority make a significant contribution to investor confidence? Determining this would be extremely difficult; and it is reasonably clear that in any event the Final Report's 5% test would leave Australia with one of the most liberal regimes in the world[58] This of course does not tell us whether there might be an advantage for Australia to be gained in this area. What the position that the Final Report adopts, in the absence of further evidence, does tell us is something about the importance of theory.

  32. In a similar vein, the recommendation with respect to communication with beneficial holders, that no change should be made in the law, is worthy of note. Here, the Final Report proceeded in line with the views of most of its respondents, which were premised on the freedom of beneficial owners to make their own arrangements with the holders of the shares in which they held a beneficial interest, the significant administrative costs it would create without matching benefits to shareholders, and the development of new forms of dissemination of corporate information as through company Web sites[59] But this was in the face of suggestions of problems with current law, which appears to contemplate company communication directly only with holders, of possible failure of the arrangements being invoked[60]

  33. Here, however, it is not clear that the issue was properly joined. The Final Report's reasoning appears to be directed at the issue of requiring companies to communicate with beneficial holders, where the issue is also raised of legislative facilitation of companies adopting a process of recognising "designated owners" for communication purposes. There may be no need for such facilitation; but putting the matter at its lowest, this is not clear[61] To the extent that institutional involvement in corporate governance in a market system like Australia's adds value[62] and is significantly at stake here[63] the failure to grapple further with this issue is problematic.

    Settling Meeting Agendas

  34. Here the Final Report considers the matters of the power of shareholders to propose resolutions[64] the timing requirements for annual general meetings so far as they impact on shareholders having their resolutions considered[65] whether companies should be able to exclude proposals by previous proposers who had failed to present their previous proposals[66] and whether the Corporations Law should permit shareholders to pass non-binding (or "advisory") resolutions on matters of corporate management.[67] It proposes some modification of the relevant proposing power, greater notice of AGMs, no exclusion power, and no provision for non-binding shareholder resolutions. It characterises as the "principal issue" at stake here "the right of shareholders to have particular matters considered at a company meeting", which implicates particularly the first (proposal power) and the last (what can be proposed) matters.

  35. In relation to the power of the shareholders to propose resolutions, the Final Report notes a spread in the responses to this issue, with most supporting some change, either to support a higher threshold, as by aligning the proposal power with a modified meeting requisitions power (or at least modifying the shareholder numerical test under the current alignment of the two),[68] or by introducing a test for proposals, borrowed from US and Canadian legislation, that would limit more than current law does the possibility for social agenda items.[69]

  36. The Final Report concludes that the proposal power can be distinguished from the requisitioning one, in view of the lesser expense to the company implicated by proposals, so as to leave a shareholder numerical test[70] But that test should be augmented, to ensure that proposers have some "minimum material financial commitment to the company", of "say" $1,000 measured in terms of the highest market value of the holding in the 12 months preceding the proposal (to allow for failing companies)[71] Here, however, unlike the requisitioning context, the Final Report confronts significant overseas examples of lower thresholds, down to proposals by single shareholders, albeit usually with enhanced relevance riders[72] This makes the empirical question of the contribution to investor confidence of the current form of this "very significant right" of shareholders (as the Final Report characterises it) of particular interest. Again, as with the requisitioning context, this highlights the importance of theory.

  37. The related matter of non-binding shareholder resolutions goes to a matter where it may not be quite as clear as the Final Report suggests[73] that current law is against shareholders in companies with the default management provision in their constitutions[74] It concludes against making other provision in the law, in line with most of the submissions made to it[75] on the basis that it would tend to interfere with responsible board management of the company, and that shareholders otherwise able to pass such resolutions could instead remove directors, while individual shareholders at meetings are free to make comments or ask questions so as to make their views of management known in that forum[76] Again, the Final Report confronts overseas examples of shareholder power to pass non-binding resolutions on matters of management[77] It concedes that this sort of opportunity to express collective opinions formally would tend to "reinforce the notion of managerial responsibility to shareholders"[78] Again, one is left with an empirical question, of how important such a possible reinforcement is to investors.

    Conducting the meeting

    Introduction

  38. Here there are no less than twenty two issues canvassed, under four broad headings: proxy voting, voting at the meeting (including the possibility of absentee voting, and voting after the meeting), the role of the chair of the meeting, and election of directors. This section of the paper identifies each of these issues briefly, along with how the Final Report resolves them, before singling out under the relevant heading what I perceive to be the major ones. Those major ones as I see them are the regulation of proxy solicitation, the matter of whether or not institutional shareholders should be required to vote and voting by absentees, and the principles for the election of directors and the matter of a single simultaneous ballot for such elections[79] I conclude with a consideration of a matter not addressed in the Final Report, but which the new technologies raise, of provision for the possibility of "virtual" shareholder meetings.

    Proxy Voting

  39. Under proxy voting, the Final Report considers

  40. With respect to proxy solicitation, the Final Report sets out as the backdrop the "key" significance of proxies, given relatively low shareholder attendances at meetings of listed public companies, and the incidence of vicarious participation through a proxy (for institutional shareholders, rather than by representatives)[88] and the possibility that proxy solicitations, by directors and by others, may become more common in line with the position in the US and with the falling costs of communication with shareholders resulting from the new technologies[89] The US and Canada point to a model of regulation of general proxy solicitation in the form of mandatory disclosure in a proxy information circular filed with a regulator and distributed as part of the solicitation[90]

  41. In the face of a division of opinion about whether or not to regulate more closely in Australia, the Final Report's position in favour of no change rested on pragmatic concerns of defining when a general solicitation occurred, possible delay in solicitation to permit review of filed disclosure, the possibility that filing (and review) would give "unwarranted" credibility to the solicitation and the lack of evidence of abuse - to date[91] However, that last qualifier counselled that further consideration might need to be given to the matter "if proxy solicitation conflicts become commonplace"[92]

  42. Here is a classic question of the relevance of regulation to investor confidence. It may be significant to this that there was apparently support for regulation of the North American sort from one respondent associated with the interests of individual shareholders[93] There is of course the counter to any reflexive association of such regulation with investor confidence that is represented by the literature cautioning scepticism in relation to claims of the value of mandatory disclosure in corporations and securities law[94] In the present context it might be argued that enhanced regulation might chill the provision of useful information, and tend against trying to enlist shareholders generally in contested issues of corporate governance. Interestingly, the Final Report does not raise issues of that sort.

    Voting at the meeting

  43. Under voting at the meeting, the Final Report considers:

  44. The matter of whether or not "the interests of those who buy shares in institutional shareholders ... or invest in managed investment schemes" require for their protection that the shareholders or scheme manager exercise the voting rights, either by attending meetings or voting or both, is, as the Final Report notes, a matter that has attracted attention in best practice guidelines[103] and the secondary literature[104] In the US there is a much-noted federal government requirement for certain retirement fund managers to exercise voting rights on matters affecting the value of fund investments[105] And voting levels of institutional shareholders in Australia are apparently fairly low in international terms[106]

  45. Most respondents opposed imposing a requirement to exercise voting rights in any of these ways, noting the existing duties to consider whether or not to exercise them, and best practice guidelines that directed attention to the relevance of a clearly articulated policy on voting to the relevant entity's competitive position[107] Further, any requirement would be "difficult to apply" (as in distinguishing between institutional and non-institutional shareholders), and "could be largely ineffective" (in having voting taken more seriously than commercial considerations would indicate)[108] Rather, existing law and the development of best practice guidelines, together with market pressures, should be relied upon[109] Although no mention is made of the matter, the development of direct absentee voting by electronic means might have a significant role to play here[110] so too might facilitating communication between companies and beneficial owners, where the Final Report's position has already been questioned[111]

  46. This then leads on to voting by absentees, and not only for the benefit of institutional shareholders and managed investment fund scheme managers. As the Final Report notes, it is not clear whether or not companies can provide in their constitutions for postal or electronic voting by absentees from the meeting, although there is strong support for the possibility for such provision in both cases[112] The Final Report notes the support of most of its respondents for at least the possibility of such voting, in view of the directness and simplicity of such arrangements that would tend to "encourage or assist shareholder voting participation"[113] In view of the practical concerns about verifying votes, the document recommends that the introduction of such voting be left to the directors of the company concerned, subject to the provisions of its constitution, while the practical matter of dealing with changes of absentee votes, which might otherwise discourage their use, should be met by the reverse of the rule for proxy votes, namely, having the earlier vote the valid one[114]

  47. Here, as the Final Report notes, there is in opposition to this position the concern expressed by some respondents at its perceived detraction from the meeting as a "forum for discussion and debate by shareholders". But it is hard to resist the document's apparent conclusion, in line with the OECD Principles of Corporate Governance[115] that the gain in shareholder participation offsets any loss of this sort. This point leads naturally, however, into a consideration of what counts as a "meeting", given the new technologies, a matter returned to at the end of this section.

    Chair of the meeting

  48. Under this head, the Final Report considers:

    Election of directors

  49. Under this head, the Final Report considers:

  50. Given the position of the Final Report on the role of shareholders in corporate governance, it is not surprising that the document sees "the integrity of the election process is essential for good corporate governance"[122] At the same time the "wide discretion" present law allows companies in crafting their election processes might, as through provision for sequential election of directors where there are more candidates than vacancies, mean that candidates at the end of the sequence are never reached - although it is not clear that the current common law of corporations in fact allows this[123] Nor is there any provision for standards for the election process in "current codes of best practice"[124]

  51. The Final Report notes that most respondents supported its equal opportunity and majority vote principles, although there was a division of opinion on whether to include them in the Corporations Law, or in the Listing Rules (for greater flexibility)[125] The responses to the single simultaneous ballot proposal, which it was generally recognised is a way of achieving both principles, is seen to establish the virtue of flexibility, as some respondents had contended that other systems might also be appropriate for this purpose[126]

  52. All of this appears to be a sensible way of giving effect to the importance attached to the shareholder's franchise. At the same time, given the paucity of other discussion of the design of better election processes, it is a matter of some regret that an account of some alternative ways of achieving conformity with the Final Report's principles is not included.

    Virtual company meetings?

  53. The Final Report does not explore this issue, except to indicate, in the context of its discussion of whether or not to allow direct absentee voting to substitute for a meeting, the importance of meetings as opportunities for shareholders or their substitutes to interact with management and one another, even if proxies have determined the particular issue's outcome[127] Here there is at least the potential, with future increases in Internet band width, of meetings online involving two-way audio visual interactions; and present technology at least allows for "virtual meetings" using bulletin board postings of communications among the participants[128] The rapidly increasing use of the Internet by a growing proportion of the Australian population that is starting to approach levels corresponding to individual shareholdings ones[129] holds out the prospect of this technology enhancing the possibilities for direct participation by smaller shareholders, and conceivably by other shareholders, all of whom are presently represented, if at all, by proxies.

  54. Here we have come full circle in shareholder participation terms. Much of the ideology of the new Internet technologies is democratic in character, in its broadening of the individual's ability to communicate. At the same time there are difficult issues for the governance of listed public listed companies posed here, of meetings in fact affording sufficient opportunities for informed interactions between the participants of the sort mutual physical presence undoubtedly affords[130] and of meetings being unduly prolonged by the sorts of conversations some at least of these technologies open up[131]

  55. Consistently with the approach in the Final Report, and given the encouragement to participation these technologies appear to allow, I suggest one should look for encouragement of their use, to build up useful experience, on which codes of best practice could be drawn up. Following further reflection, legislative provision - at least of some further facilitative kind - might turn out to be appropriate.

  56. But one would also be looking for careful, rigorous evaluation of the experience so built up. Theory not so informed is potentially bad theory[132]

    Conclusion

  57. There is much to admire in the Final Report, with its useful trawling of some of the major practical issues in shareholder participation in modern listed public companies in this country. While a more elaborate account of its theoretical orientation would have been useful, and while there is a more limited empirical base for its discussion than one would have wished, overall the impression it leaves, with some qualifications, is of the working out of consistent and practical reform ideas.

  58. What is clear is that the Final Report is neither about shareholder democracy in any political sense, nor is it a set of specifications for a "banana republic". It is rather about important aspects of the governance of institutions of considerable importance to Australians who are concerned with an internationally competitive, flexible corporate sector. Such a sector would be left by the Final Report no more insider dominated or prone to instability that it is now, although it might be less open to the prosecution of wider, non-economic social agendas. Whether that might ultimately compromise the popular legitimacy of the sector is unclear. However, in line with what I suspect is the position the Final Report would have taken had it considered the matter, I would very much doubt it.

Notes

[1] Encarta( World English Dictionary [North American edition](. Other definitions do not refer to the instability. The term came to prominence in this country of course with then Treasurer Paul Keating's famous interview with John Laws in 1986 in which Mr Keating envisaged this country becoming such a republic if it did not address its fundamental economic problems: see Oxford Dictrionary of Australian Colloquialisms, 4th ed, GA Wilkes (Melbourne: OUP, 1996).

[2] I have not been able to find the source of this inversion of the better known barb at academic theory. I have always found this version a superior way of making the point.

[3] Companies & Securities Advisory Committee, Shareholder Participation in the Modern Listed Company [:]Final Report (Sydney?: the Committee, June 2000).

[4] Companies & Securities Advisory Committee, Shareholder participation in the modern listed company [:] Discussion Paper (Sydney?: the Committee, September 1999).

[5] Final Report, supra note 3, para 0.1, says it is about examining "issues arising from current law and practice regarding shareholder general meetings, as set out in [Part 2G.2]", being the Part inserted by Company Law Review Act 1998 (Cth).

[6] Two particularly useful and rich recent accounts are Bradley, Michael, Schipani, Cindy A, Sundaram, Anant K and Walsh, James P, "The Purposes and Accountability of the Corporationin Comtemporary Society: Corporate Governance at a Crossroads" (1999) 62 Law & Contemporary Problems 9; and Bratton, William and McCahery, Joseph A, "Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference" (1999) 38 Columbia Journal of Transnational Law 213.

[7] See the account in Black, A, Bostock, T, Golding, G and Healey, D, CLERP and the New Corporations Law, 2nd ed (Sydney: Butterworths, 2000), Ch 1. It is a different matter whether or not CLERP has used it well: Whincop, Michael, "Rules, standards and intransitive statutes : what the economic reform of corporate law might have looked like." (1999) 1

[7] Companies and Securities Law Journal 11.

[8] Which may or may not correspond with contracts as common lawyers would understand them: some contractarians would include all voluntary economic relationships, while others have conceptions that correspond with lawyers': see Bratton & McCahery, supra note 6, at 273 - 274 nn 186, 187 (contrasting transaction costs theory, which conceives of corporate governance arrangements as the product of efficient ex ante contractual arrangements or a default equivalent, and incomplete contracts theory, which puts greater emphasis on the difficulty of contracting for governance problems, given difficulties in computing future phenomena or observing or verifying governance matters).

[9] Bradley et al, supra note 6, at 37.

[10] Bratton & McCahery, supra note 6, at 218.

[11] Bratton & McCahery, supra note 6, at 222 (mapping out the detail of such systems).

[12] Bratton & McCahery, supra note 6, at 224 - 225 (mapping out the characteristics of such systems).

[13] This is notwithstanding trends to enhance investor protection and market transparency in Europe: see Bratton & McCahery, supra note 6, at 236.

[14] For the major account of this, see Stapledon, GP, Institutional Shareholders and Corporate Governance (Oxford: Clarendon, 1996), Ch 1.

[15] See the data and sources reviewed in Redmond, Paul, Companies and Securities Law [:] Commentary and Materials, 3d ed (Sydney: LBC Information Services, 2000), at 74 - 77.

[16] On one share, one vote, see Final Report, supra note 3, para 0.2n 3; on self-dealing, see eg Corporations Law, Ch 2E; and on insider trading, see Corporations Law, Pt 7.11, Div 2A.

[17] Bratton & McCahery, supra note 6, at 226.

[18] This is the conclusion on the data so far, in Bratton & McCahery, supra note 6.

[19] This aspect connects with the branch of contractarianism that emphasises an incomplete contracts perspective: see supra note 8. The difference appears to lie in the significance attached to non-economic values in the life of the business that is associated with communitarian perspectives.

[20] Bradley et al, supra note 6, at 44 (quote from Clarkson, Max BE, "A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance" (1995)

[20] Academic Management Review 92, at 112).

[21] See Bradley et al, supra note 6, at 42 (communitarians view the firm as an "entity, connected in some organic fashion with our social, historical and political world").

[22] Investor confidence is, of course, an important element in corporations law: see Australian Securities Commission Act 1989 (Cth), s 1 (2) (b). It is also important in the CLERP outlook on corporate governance: Corporate Law Economic Reform Program, Directors' Duties and Corporate Governance [:] Proposals for Reform : Paper No 3 (Canberra?: AGPS, 1997), at 10. For the difficulties in determining investor confidence's influences and their relativities, let alone what the results may tell one about whether and how to make law, see Lawrence, Jeffrey, "The Economics of Market Confidence: (Ac)Costing Securities Market Regulations" (2000) 18 Companies and Securities Law Journal 171, esp. at 179 - 180.

[23] Thus, it does not enter into the one-share, one vote debate, accepting the position as followed by the ASX: see Final Report, supra note 3, para 0.2n 3.

[24] This will become particularly apparent from its Recommendation with respect to the power of shareholders to requisition a meeting of shareholders

[25] This will become apparent from its Recommendations with respect to shareholders powers to put resolutions. For an illustration of the tension between the theory underlying CLERP and other, political, conceptions of corporate governance, see Media Release, Minister for Financial Services and Regulation, 30 June 2000 (on disallowance by Senate of regulation under Corporations Law s 249D (1A) to substitute a new threshold, of shareholders representing at least 5% of the members of the company, for minimum 100 shareholders threshold for shareholders to requisition a meeting in s 249D). This disallowance is returned to below, text following note 51.

[26] CLERP Paper No 3, supra note 22, at 10.

[27] This is the burden of Bradley et al, supra note 6.

[28] This is the burden of Bratton & McCahery, supra note 6.

[29] REDMOND, 3d, supra note 15, at 74

[30] Final Report, supra note 3, para 1.9.

[31] See Final Report, supra note 3, paras 1.10 ff.

[32] STAPLEDON, supra note 14, Ch 2; Ramsay, Ian, Stapledon, GP and Fong, Kenneth, "Corporate Governance: the Perspective of Australian Institutional Shareholders" (2000) 18 Companies & Securities Law Journal 110, at 111 - 112.

[33] These are nicely mapped out in Stapledon, Geof and Bates, Johnathan, "Reconceptualising the Nature of Modern Shareholding (and Making Voting Easier)" (2000) 18 Companies and Securities Law Journal 155.

[34] See Final Report, supra note 3, paras 4.33 ff.

[35] See eg Stapledon, G, "Should Institutional Shareholders be Required to Exercise their Voting Rights?" (1999) 17 Companies & Securities Law Journal 332; and Final Report, supra note 3, paras 4.89 ff.

[36] The principal account of the change and the possibilities is in Boros, Elizabeth, The Online Corporation: Electronic Corporate Communications [:] discussion paper (Melbourne: Centre for Corporate Law and Securities Regulation, December 1999); see Final Report, supra note 3, para 1.18.

[37] Final Report, supra note 3, Ch 1 to 4, respectively.

[38] Ch 4 has 207 paras and 22 Recommendations, compared with Ch 3's 58 paras and 4 Recommendations, Ch 2's 43 paras and 3 Recommendations and Ch 1's 18 paras and 1 Recommendation.

[39] (1999), available from the OECD's Web site, http://www.oecd.org/daf/governance/principles.htm

[40] See the useful basic discussion in Final Report, supra note 3, paras 1.5 and 1.6 and accompanying notes.

[41] See Klein, William A and Coffee, John C, Jr, Business Organization and Finance, 7th ed (Westbury, NY: Foundation, 2000), Ch 3 C.

[42] The strength of this approach is often identified in the rarity of waivers of it: see Final Report, supra note 3, para 4.204n 332 (submission of AMP). This approach would presumably be inimical to special shareholder intervention powers to provide for the position of controlling shareholders, being the sort of shareholders characteristic of the Australian market among the market systems (on that characteristic, see text at n 14, supra.

[43] Final Report, supra note 3, paras 1.10 ff: "Issue 1".

[44] Final Report, supra note 3, paras 1.12 to 1.15 and Recommendation 1.

[45] See Final Report, supra note 3, Appendix 1 for the list of respondents, which included the Australian Accounting Research Foundation and the Australian Shareholders' Association.

[46] Final Report, supra note 3, paras 2.1 ff: "Issue 2".

[47] Final Report, supra note 3, paras 2.25 ff: "Issue 3".

[48] Final Report, supra note 3, paras 2.33 ff: "Issue 4".

[49] Final Report, supra note 3, Ch 2, heading and para 2.19, respectively.

[50] Final Report, supra note 3, Recommendation 2.

[51] Corporations Law s 249D.

[52] On 28 June 2000: see Corporate Law Email Bulletin No 34 (June 2000), accessible from http://cclsr.law.unimelb.edu.au/bulletins/index.html.

[53] Final Report, supra note 3, para 2.4.

[54] Final Report, supra note 3, para 2.6.

[55] See Final Report, supra note 3, para 2.7 and accompanying notes. As is pointed out there, such an agenda could not necessarily be met by the directors' argument that the purpose for holding the meeting was to "harass" the company or its directors or, under Corporations Law s 249Q, was not for a "proper purpose". An example of an agenda that would not easily be met in those terms would be a meeting to be held to remove directors or to amend the corporate constitution (on the possibility of such an intervention in management, see text at n 41, supra), on the basis of a serious concern with a social dimension (such as an environmental one) of the company's activities. Keeping open the possibility for pursuing such an agenda figured prominently in the Senate debate that led to disallowance of the regulation referred to in the previous text.

[56] The Australian Shareholders Association proposed an additional requirement to ensure a minimum financial stake in the company, adjusted for companies in financial trouble: see Final Report, supra note 3, para 2.12n 40.

[57] Final Report, supra note 3, para 2.13.

[58] See Final Report, supra note 3, para 2.23.

[59] See Final Report, supra note 3, paras 2.41, 2.42. For a simplified picture of the pattern of separation of ownership, control rights and shareholding that is the backdrop to the issue here, see Stapeldon and Bates, supra note 33, at 1

[59] (noting that there may be several levels of ownership, as well as other complications).

[60] The Final Report in fact refers to this evidence: see Final Report, supra note 3, para 2.40.

[61] See discussion in Stapledon and Bates, supra note note 33, at 156.

[62] This is a matter on which empirical evidence is currently being gathered, to supplement a previous study that seemed to show it did not: see Ramsay et al, supra note 32, at 112 - 113.

[63] The pattern in the responses to this Issue in the Final Report, which included a number of institutional investors and representative bodies, is suggestive that it is not: see Final Report, supra note 3, para 2.41n 69.

[64] Final Report, supra note 3, paras 3.4 ff: "Issue 5".

[65] Final Report, supra note 3, paras 3.28 ff: "Issue 6".

[66] Final Report, supra note 3, paras 3.42 ff: "Issue 7".

[67] Final Report, supra note 3, paras 3.50 ff: "Issue 8".

[68] See Corporations Law provisions in ss 249N, 249O and 249P (subject to word length and controls for defamatory matter).

[69] On these extra limitations, see Final Report, supra note 3, paras 3.10, 3.11.

[70] Final Report, supra note 3, paras 3.23, 3.24.

[71] Final Report, supra note 3, para 3.24 and Recommendation 5.

[72] See references in note 69, supra. However, New Zealand appears to have such a position without such a rider: see Final Report, supra note 3, para 3.12.

[73] Final Report, supra note 3, para 3.51.

[74] But it is probably the " better" view: see Ford, HAJ, Austin, RP and Ramsay, IM, Ford's Principles of Corporations Law, 9th ed (Sydney: Butterworths, 1999), at [7.123].

[75] Including one by the Australian Shareholders Association: Final Report, supra note 3, para 3.55n 132.

[76] Final Report, supra note 3, paras 3.56 to 3.58.

[77] Subject, in the Canadian case, to relevance controls like those for requisitioning meetings: see Final Report, supra note 3, paras 3.52 and 3.53 (Canada Business Corporations Act s 137; NZ Companies Act 1993, s 109).

[78] Final Report, supra note 3, para 3.57.

[79] I note that these issues receive much more space in the Final Report than any of the others.

[80] Final Report, supra note 3, paras 4.4 ff: "Issue 9".

[81] Final Report, supra note 3, para 4.20 ff ("Issue 10").

[82] Final Report, supra note 3, paras 4.25 ff: "Issue 11".

[83] Final Report, supra note 3, paras 4.31 ff: "Issue 12".

[84] Final Report, supra note 3, paras 4.37 ff: "Issue 13".

[85] Final Report, supra note 3, paras 4.44 ff: "Issue 14" (the quotation is from para 4.56).

[86] Final Report, supra note 3, paras 4.58 ff ("Issue 15").

[87] Final Report, supra note 3, paras 4.70 ff: "Issue 16". See also note 88, infra.

[88] Final Report, supra note 3, para 4.4 and para 4.1n 136, para 4.81. This renders the reporting of the contribution of proxies to decisions at the meeting a significant matter of corporate governance information - whether on a show of hands or on a poll, as Corporations Law s 251AA presently provides. In light of this, I found hard to follow the Recommendation 16 in the Final Report that retains the reporting requirement for show of hands but that (with a saving) does away with it for polls.

[89] Final Report, supra note 3, paras 4.12, 4.13.

[90] See Final Report, supra note 3, paras 4.10, 4.11.

[91] Final Report, supra note 3, paras 4.17 to 4.19.

[92] Final Report, supra note 3, para 4.19.

[93] Final Report, supra note 3, para 4.12n 155 (the Australian Shareholders Association). That note lists a range of other respondents similarly inclined.

[94] See Blair, Mark, and Ramsay, Ian, "Mandatory Disclosure Rules and Securities Regulation" in Securities Regulation in Australia and New Zealand, 2nd ed, Walker, Gordon, Fisse, Brent and Ramsay, Ian, eds (Sydney: LBC Information Services, 1998), 55.

[95] Final Report, supra note 3, paras 4.89 ff: "Issue 17".

[96] Final Report, supra note 3, paras 4.101 ff: "Issue 18".

[97] Final Report, supra note 3, paras 4.110 ff: "Issue 19".

[98] Final Report, supra note 3, paras 4.118 ff: "Issue 20".

[99] Final Report, supra note 3, paras 4.137 ff: "Issue 21".

[100] Final Report, supra note 3, para 4.139 ff: "Issue 22".

[101] Final Report, supra note 3, paras 4.141 ff: "Issue 23".

[102] Final Report, supra note 3, paras 4.144 ff: "Issue 24".

[103] Final Report, supra note 3, para 4.90n 222 (Investment and Financial Services Association Guidance Note 2.00).

[104] Final Report, supra note 3, para 4.99n 233, referring to Stapledon, G, "Should Institutional Shareholders be Required to Exercise their Voting Rights?" (1999) 17 Companies and Securities Law Journal 332.

[105] Final Report, supra note 3, para 4.91.

[106] See Stapledon, Geof, Easterbrook, Sandy, Bennett, Pru and Ramsay, Ian, Research Report [:] Proxy Voting in Australia's Largest Companies (Melbourne: Centre for Corporate Law and Securities Regulation and Corporate Governance International, 2000) at 19, referred to in Final Report, supra note 3, para 4.99n 232.

[107] Final Report, supra note 3, para 4.98.

[108] Final Report, supra note 3, para 4.99.

[109] Final Report, supra note 3, para 4.100.

[110] See Stapledon et al, supra note 106, at 25 (view in the UK).

[111] See text at 60, supra.

[112] See Final Report, supra note 3, paras 4.121 and 4.122, and references there.

[113] Final Report, supra note 3, para 4.130.

[114] Final Report, supra note 3, paras 4.133, 4.135 and Recommendation 20.

[115] See Final Report, supra note 3, para 4.118.

[116] Final Report, supra note 3, paras 4.151 ff: "Issue 25".

[117] Final Report, supra note 3, paras 4.160 ff: "Issue 26".

[118] Final Report, supra note 3, paras 4.169 ff: "Issue 27".

[119] Final Report, supra note 3, paras 4.183 ff: "Issue 28".

[120] Final Report, supra note 3, paras 4.192 ff: "Issue 29".

[121] Final Report, supra note 3, paras 4.197 ff: "Issue 30".

[122] Final Report, supra note 3, para 4.183.

[123] See Final Report, supra note 3, paras 4.184 (source of quotation), 4.187.

[124] Final Report, supra note 3, para 4.186.

[125] Final Report, supra note 3, paras 4.188, 4.191.

[126] Final Report, supra note 3, para 4.196 (without describing details of such systems).

[127] Final Report, supra note 3, paras 4.142, 4.143. It sometimes appears to assume a meeting must be a meeting offering in person physical contact: see eg para 4.145 ("assumption ... of physical meeting"). This is, however, hard to square with the opportunities meant to have been opened up by Corporations Law s 249S, introduced by the Company Law Review Act 1998 (Cth): see Boros, supra note 36, paras 3.8, 3.10 to 3.14 (discussing the possibilities for video-conference and online meetings).

[128] Boros, supra note 36, paras 3.10 to 3.15 (indicating that US meetings already have some of these features).

[129] Boros, supra note 36, para 1.6 provides the household penetration and (larger) overall usage level estimates.

[130] See the research on the sources of communication through communication that shows that the words alone account for only about 7% of the information garnered, compared with 38% for "vocal influence" ("tone, stress, accent, pitch, pauses, silences") and 55% for "nonverbal influence" ("expression, touching, gestures, posture, distance"): Rose, Colin, Accelerated Learning (New York: Dell, 1987), at 146 (reporting on research).

[131] See Boros, supra note 36, para 3.15.

[132] Cf Lawrence, supra note 22.

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