Power to the People

The last 150 years of Western history has seen the emergence of an intelligent educated middle class. Until recently - the last 25 years - they behaved rationally, albeit erratically, and accumulated a large share of the world's economic cake.

Sure, the rich have continued to get richer, in terms of their own individual balance sheets, but the power of the middle class majority economically has continued to grow too, despite relatively recent mass stupidity.

But this power is held by many, and is virtually never exercised.

If the small middle class shareholders voted as a block, or for that matter just voted, the face of corporate activity would be fundamentally different to how it now operates. And because just like elections votes can sometimes be very close and decided at the margin, sometimes relatively small bundles of shares can achieve unexpected results.

For example the New Zealand Shareholders' Association proxies were instrumental in defeating a directors' fee increase at Dorchester Pacific, at the last meeting before it went into moratorium.

But even if all the investors in Contact Energy gave us their proxies, the directors' fee increase there would still have passed and a customer revolution would still have been necessary to obtain some form of justice.

Contact will never forget that the meek middle class are their customers and angry customers can punish them.

Enough now of lamenting the self protecting structures of modern capitalism and its deficiencies, the reality is all of the deficiencies of capitalism stem from ignorance and apathy on the investor side. The consequence of this lack of investor supervision is laziness at best, fraud and theft at worst on the management side.

It is time for the underlying power of the people to emerge and in force. It is time for them to work out how they can make a difference without asking the government, sharemarket operator NZX or anyone else to help them.

Economic power, and for that matter political power, is wielded by large corporations that are owned by, you guessed it, the people. Taming this power base is simple, buy equities, and vote your interests. And guess what? If you buy good equities it is rewarding as well, so you get paid to change the world.

How do the middle class own equities? Well in two basic ways, the first way is the simplest; they just buy a parcel of shares in a company. Some just buy a small list of individual companies. Others adopt my long lamented portfolio theory and buy a bit of everything and then do nothing because it is too much work.  The second way is to pass the baton over to someone else, a fund manager and let them do it for you. KiwiSaver and the PIE regime have accelerated this opting out of personal responsibility to fund managers.

Some of the things you can do.

If you have a small list of companies and you have consciously selected them for a good reason, for heavens sake manage them closely. Always vote your shares; you are the intelligent middle class decision makers who can shape change. If you have the time and energy engage with boards. Tell them what you think of what they are doing. Boards do respond to rational mail from shareholders and it gives them a feel for the issues that shareholders care about. The noisy wheel gets attention.

If you have bought a whole portfolio of shares that are beyond your capacity to manage resulting in you just doing nothing and waiting for your dividend cheques, ask yourself this question. "Why have I bought shares at all?"

Most likely it will be because someone told you that you can make more out of shares in the long run than out of bank deposits, -greed. This is true but the long run might be longer than you are prepared to wait, and if you are getting older longer than you will live.

In the interim you may well take losses. And even with a widely held share portfolio your dividend income will be considerably more erratic than a bank term deposit properly managed. Ask yourself why you are taking such a risk.

If it is because you need to take such a risk to improve your income, wake up guys. You won't get the return unless you do some work or pay someone to do the work for you.

So cash the lot up and find a good fund manger. By the way you won't find one, so just cash it up and accept relative poverty. Work, thrift, and risk taking are the way to a better life. NOTHING EVER CHANGES.

If you are taking risk because you want to then "want" usually involves desire, and the desire should be fun and the pursuit of knowledge. In the words of John Maynard Keynes: "Concentrate your risk, concentrate your mind."

So again sell the dogs and keep the ones that you consciously assess as worth keeping and work the ones you keep hard.

In reality most of the middle class can't get their head around these simple concepts. So I give up on trying to get people to work their investments and accept the majority are just lazy and/or have other things to do and don't care about investing and saving.

But what you can do for the sake of the rest of us who do care about investing and economic returns, for us all is this.

When the voting forms come though, fill in the name box of the proxy form with "NZSA" or "New Zealand Shareholders' Association", tick the box beside each resolution that says "proxy holder discretion" and drop it in the post. If you can intelligently cast your vote for or against something, do it.

The NZSA has run a proxy service for the last seven years and last year attended over 50 annual general meetings (AGMs) for which we had proxies and attended every major company AGM. The NZSA is the only independent proxy service operating in NZ, and because of its other activities and the breath of experience in investing of its members, has arguably more collective knowledge of the people and businesses operating in NZ than any other organisation in NZ, or for that matter elsewhere.

I am going to encourage the NZSA to try this year to make this even easier for you, by trying to convince Computershare and Link (the two share registries) to accept a blanket proxy from you for all of the shares on your account in the form of one letter. I.e. that you can write to them and say for all meetings from now on until further notice the NZSA shall have a full proxy over all shares in my portfolio. All listed companies have a common constitution and the voting requirements are standard and include a standard form of proxy.  

The problem will be the way the registries have their business technology configured, and the work required to change it either systemically or on individual files will be considerable. So I am not holding my breath on success with this. If we can make this work, the letter of instruction agreed with each registry will be on our website (www.nzshareholders.co.nz).

Assuming you invest though fund managers or KiwiSaver providers, KiwiSaver is the same (investing through fund managers) only more remote. Write to them and tell them that as far as you are concerned it is fundamental to you that in every single instance that they vote all shares held by them intelligently and on an informed basis, and seek from them an undertaking that they will vote all holdings and publish on their website their voting actions.

Suggest to them that if they cannot attend a meeting they should appoint a proxy and in your view that proxy should be the NZSA. Also tell them you regard it as inappropriate for them to seek advice on how to vote from foreign proxy advisors who have no knowledge of the people in NZ and how they operate.

If they are in any doubt as to who they should vote for in board elections they should seek advice from the NZSA in preference to any other advisor. A LETTER IS COPIED IN BELOW. But frankly it is better if you use your own words as then the ground swell appears to have more conscious momentum.

 Now to what I hope the NZSA can do this year.

Publish on its website a governance rating for each company and its board, a star rating, based on the governance criteria now internationally accepted. It should be based on what these companies actually do to our knowledge rather than what they say they do, and any who say one thing and do another should be marked down.

Such hypocrisy is a fundamental governance sin in my view. The NZSA board has had this idea introduced to them already and not by me. Likely the detail of this will be preserved for members only.

Publish a list of directors who we respect that will be updated as more come to hand. This list will be people who we have engaged with and who have behaved rationally, ethically and with decency. If they are not on our list they will either be rat bags or not known to us.

This should accelerate the good guys to want to be known to us. We should also remove people from this list if they offend us and explain why we have done that.

I have introduced this concept to the NZSA board and it is gaining support, but of course they have concerns about how the explanations for removal are couched. Just last week NZX chairman Andrew Harmos replied to an inquiry from me, which admittedly was colourful, and used the word defamation. He seems to forget to take off his lawyer's hat while wearing his director's hat.

The NZSA has now resolved to create a members only section. I have long been opposed to this as our power has stemmed from public not private humiliation of those who deserve it. The incentive to reply to our letters is the thought that if they don't our letters are published unrebutted.  It was resolved that the detail on each director's background and actions, if published, would only be in the members only section.

I can certainly see the merit in keeping the work we do on the analysis of governance or company economic results private to our members. But the publishing of the reasons for removal from such a list seems to be the whole point. I tell you this little insight into the workings of the NZSA board, not because I am unhappy with the outcome, and pissed off that I don't get everything I want, but because in fact I am happy.

I have a board of opinionated, strong minded, intelligent people in various shades who collectively are better than me in everything, and individually as good or better than me in some things. The sum of the whole is now in fact an extraordinary organisation.

The NZSA board is also examining the logistics of providing simple financial matrixes over time to measure the risk and economic performance of companies. While the detail will most likely be reserved for members, the summary data on both this and governance will likely be in the public domain in the form of a league table.

It will be interesting to see if good governance and good performance are correlated.

The NZSA is considering such private data bases, simply because they too have come to the point that the organisation does not want to provide a free ride any longer to free loaders. The membership sub is only $110, and in the words of Des Hunt: "People pay thousands to insure their houses and won't pay $110 to insure their investments. Where are their priorities?"

So here's an action plan for those of you who invest in equities directly or indirectly in 2010.

1) Manage the shares you own hard, always vote, if you don't want to vote appoint a proxy every time.

2) If you have adopted portfolio theory directly and own a whole lot of shares, sell the lot and put your money in the bank, or analyse them. I.e. do some work, sell the dross, keep the good ones and work them.

3) If you can't bring yourself to do this, appoint the NZSA as a proxy every single time.

4) If you invest through fund mangers or KiwiSaver, write to them and tell them...

 a. You want them to vote every time.

 b. You want them to attend AGMs and if they cannot you want them to appoint the NZSA as their proxy.

 c. If they don't know how to vote, do not seek advice from foreigners. Seek advice from the NZSA.

And finally if this works join the NZSA so you can democratically cast your one man one vote to keep our executive honest and at the same time insure your investments.

If this happens the NZSA might just get enough voting power to threaten change, and then the corporate world will be a different place. You judge if it will be a better place.

Letter to fund managers.

I am a contributor / unit holder / KiwiSaver in your fund.

I have elected to provide you with my funds, so that you can manage them as I neither have the inclination or time to do this myself.

It is obvious to me that management should involve you doing the work I am not prepared to do myself, such as voting  any shares or rights you have, and attending meetings to keep you fully in tune with the people running the businesses you and I part own.

I am aware that you do not always vote your shares, and further that you from time to time take advice on how to vote your shares from third parties.

I write to you to request that you undertake to me as a contributor to your fund the following:

1) That you will as a condition of retaining the management rights of my money vote all shares you hold in all businesses you own or ensure that similar undertakings are provided to you by any fund managers that you invest with. If they fail to provide you with this undertaking you are to change fund managers.

2) You should also publish on your website for each investment you hold how you have voted on each resolution that required your attention as should those who you invest through.

3) If you cannot attend the meetings, you should in all circumstances appoint a proxy, and if you do this in respect of any shares you hold in NZ that proxy holder should be the New Zealand Shareholders Association, directed or undirected.

4) If you need to seek advice on how to vote, particularly in respect of board elections, it is my request that you seek this advice from the NZSA in preference to foreign proxy advisors.

This letter requires a specific reply. If you are not inclined to reply, please send to me redemption forms, (for KiwiSavers these are fund transfer forms)

Yours Etc.