COMMERCIAL Shareholders' Rights Need Protection

Press, Volume CVI, Issue 31340, 10 April 1967, Page 17

COMMERCIAL Shareholders ' Rights Need Protection

Announcements of moves to further protect investors’ capital in companies have been very much in the news lately, especially with the visit to Australia and New Zealand of the chairman of the London Stock Exchange, Mr R. F. M. Wilkinson.

Behind each move is the one main theme, the need to give more solely to enrich their owners.

It is ironical that there should have to be measures, such as legislation, to protect shareholders’ interests because companies exist solely to enrichen their owners.

But as companies have expanded and become more complex they have also become more impersonal. The personal wishes of the small investor, with -his few hundred shares, tend to be overlooked as the company pursues its aim of bigger profits. Because of this, small investors have formed, as in Australia, shareholders’ associations so that their opinions can carry more weight as a collective body. However, it is the established bodies, such as the stock exchanges, accountants’ societies and Government committees, that have most protected shareholders’ interests. Investor’s Rights Said Mr Wilkinson in Svdney: “Protection of shareholders’ rights to maintain their equity in a company at all times is a fundamental requirement of the London Stock Exchange.” A great many of the stock exchange requirements were ahead of the law, he added, and many were recommendations of the Jenkins Committee of 1961 which had not yet been implemented. In New Zealand, stock exchange listing requires the company to “undertake to supply promptly to the association, as well as to its shareholders, all information relative to declaration of dividends, proposed alteration to its capital structure, changes in directorate and matters of a similar nature,” besides other factors. In effect, anything that affects the value of the shareholders’ holding. Latest Moves Just what are some of the latest moves to disclose more to shareholders? The first is a British move

. to compel share buyers, acting through nominees, to reveal their identity when their beneficial holding in a company rises above a 10 per cent equity. Owning shares through a nominee has many advantages, but it is where the real owner’s holding becomes so large that an incorrect picture of the company’s ownership is given that objections arise. Take-over Bid For buying through a nominee is often done when the owner wants to ultimately take over the whole or majority of the share capital. The more he buys before announcing his bid, the less will be the price he need offer. If his true identity were disclosed, the bid could be jeopardised. For instance, if a large woollen concern started to buy heavily into a smaller one, it would be simple to deduce that the larger firm wanted to gain control. This would push share prices up in anticipation of a take-over offer. The shareholders who have just sold their shares and the ones who still retain them would lose where an unknown owner was buying heavily. This upsets the real function of a company, to give maximum returns tn its shareholders. New Legislation Last year the newly proposed British company legislation was discussed in these columns. The new British Bill compels, inter alia, greater disclosure of information in the accounts of companies and'in the directors’ reports, including information and turn-over, the split of sales, and profits between sides of the business, and the valuation of fixed

assets and trade investments. Greater disclosure is obviously in the interest of the investing public, which will have access to much more information about the activities of companies, and should be able to form a better idea of the relative profitability of different industries. Move Profitable This might encourage the channeling of funds into the more profitable industries and thus foster greater economic efficiency. Recently a British company director went one better. In an address to the British Institute of Management, the finance director of Guest, Keen, Nettlefords (a company larger than 8.H.P.) suggested that British company law should compel United Kingdom directors to make annual forecasts of turn-over, profit and cash flow in their reports. He thinks it would improve boardroom efficiency, and that the forecasts should not only be made, but printed in the next annual report beside the actual figures achieved for that year. Where appropriate, explanations should be given of any divergences. Guarded Comment The “Economist”, of London, commented that although company law cannot enforce efficiency, it should encourage it, and seemed reservedly in favour of the idea. The weekly journal said: “The point is that making directors give forecasts—even if only of profits—would give shareholders far clearer insight on what is actually happening inside companies. "He would give them more to bite on at general meetings. ; “Above all, it would apply to directors the same technique of control as they ought to be using throughout their companies. Control Technique “In other words, the technique of getting someone to state an objective and perhaps to justify it. And then either achieve it or say why they haven’t” The “Economist” added that directors would be virtually obliged to give realistic forecasts, or else look silly. The explanations in case of failure could have an important psychological effect and with luck improve the process of internal management it said. There are, of course, many problems and questions in-

volved in making these forecasts—as company directors are quick to point out. Changes in the economic . climate, in the Government i perhaps, and other uncertainties . . . and the übiquitous . competitor, who should not be able to learn too much, although this aspect might cancel out. No doubt management already uses budgets and estimates for its own guidance, and many annual reports contain a review of the future. But it would indeed be pleasant if investors had the opportunity to have something a bit more specific “to bite on.” C.F.M. Issue Details of Canterbury Frozen Meat’s one-for-four issue at par to shareholders contains a most unusual aspect—the issue is being underwritten. Normally companies engage an underwriter if they want money from the public, rather than their shareholders. It could be a debenture issue or, as was the case with R. W. Saunders and Associated British Cables, a public flotation of shares. For a commission the underwriter undertakes to accept all debentures or shares not subscribed to. He then finds buyers for the scrip not taken up. Recent Example A recent example where the underwriter had to accept shares not subscribed for was the flotation by Auckland Intercontinental Properties, in 1965. This “insurance” guarantees that the company has a successful flotation. In C.F.M.’s issue however, there is really no need for an underwriter. The 10s shares will be issued at par—3s 3d below the market value of the old shares at the close on Friday. Since the announcement of the issue on March 8 share prices have slipped from 14s but the narrowness of this fluctuation suggests that shareholders will not find the extra payment much of a handicap. In any case the generosity of the issue price will mean that rights will fetch around 2s 6d. Because of this, why not appoint a Christchurch underwriter instead of a Wellington one? The underwriting fee of several thousand pounds could have stayed in Christchurch—where the majority of the shareholders are—instead of going to Wellington, without penalty to C.F.M.