Voting in your interests

5 September 2014

Voting in your interests

Why the needs of retirees can be different from other investors

When an investor buys a share in a company this entitles them to vote on company issues at shareholder meetings.  Generally, the issues put to the vote at these meetings are non-controversial; however, recently there was a situation where State Super Financial Services decided to instruct its appointed fund managers to vote against a particular management proposal.  This article describes what happened and why we decided to stand up for the interests of our clients even if this meant voting against a management proposal.

What happened with Woodside?

Woodside Petroleum, an Australian energy company, asked their shareholders to approve a proposal to allow Shell, a multi-national energy company, to sell Woodside shares they owned back to Woodside.  What made this situation different was that the proposal was called a selective buy-back meaning only Shell would be permitted to participate; normally share buy-backs are offered to all shareholders.  The proposal needed to obtain 75% approval for it to occur, but only obtained 72%; therefore, it was not carried.  This article explains why we voted against this particular management proposal.

Why did Woodside propose the selective buy-back?

Shell has held a large number of shares in Woodside since the 1980’s, and further increased their holdings when they were interested in buying out Woodside in 2001.  That buy-out attempt failed when it was prevented by Peter Costello, the Treasurer at the time, who decided that it was not in the national interest.  Shell and Woodside have since become competitors and Shell has said it is keen to sell its share holdings in Woodside.  Shell had a holding of 13.6% in Woodside and after the selective buy-back of 73.5 million shares, this was expected to fall to 4.5%. The issue for Woodside was that because investors knew that Shell was a keen seller of shares this created a share ‘overhang’, potentially weighing on the price of Woodside shares.  Woodside believed that the buy-back would benefit all shareholders through the potential removal of any share price ‘overhang’ and also by improving earnings per share (and also dividends per share) for the remaining investors given the reduction in the number of shares available in Woodside.

The importance of franking credits to retirees

Had the proposed selective buy-back proceeded then Shell would have received franking credits.  These franking credits were not being made available to other shareholders at the same time because the buy-back was selective and only available to Shell.  Franking credits are very important for investors in Australia.  They pass the tax that the company has already paid, in the form of the 30% corporate tax rate, back to shareholders to ensure they are not taxed on the same income that the company has already paid tax on.  This is especially valuable to our clients who are investing in a low-tax environment as the benefit of the franking credits flows into our super and retirement pension products.

Why did State Super Financial Services vote against the buy-back?

The selective buy-back suited Shell and Woodside, but in our view, it was not fair to all shareholders and in particular, it was not in the interests of our clients because many of them are retirees who benefit from franking credits.  Good corporate governance standards demand that all shareholders of a given class of share should be treated equally.  This was the main reason State Super Financial Services asked their appointed investment managers to vote against the selective buy-back proposal.  We are a long term investor and the share overhang is more a short term supply-demand issue for the share price and is of less importance compared to how Woodside performs over coming years.

Acting in the best interests of retirees

Many superannuation investment managers cater for a wide variety of different types of investors but we are focused on the needs of retirees.  In certain situations, such as the one described, it becomes necessary for us to instruct investment managers to vote in accordance with its directive, to ensure voting is aligned with our clients’ best interests.  Generally, we allow appointed investment managers to vote the way they wish, based on their own research and analysis whilst being mindful of our Proxy Voting Policy.  You can see further information relating to how our appointed investment managers have voted on company proposals at ssfs.com.au/esg - in the section relating to proxy voting.  We will continue to monitor and review the proxy voting policy to ensure it provides both relevance and flexibility