Last month, the board of Westfield Retail Trust (WRT) finally succeeded in securing the 75 per cent unitholder vote needed to push ahead with its controversial proposed merger with Westfield Group’s Australian and NZ operations.
The Lowy family rightly described the victory as ‘bitter sweet’.
The WRT case is a warning for what can happen when listed entities fail to engage well with their institutional investors.
To recap events, WRT investors had been urged by their board to back a $70 billion restructure proposed by Westfield Group.
Westfield Group, which jointly owns the Australian and NZ shopping centre portfolio with WRT, proposed to sell its share to WRT along with its management and development rights to create a new company, called Scentre.
Scentre would have had an entirely different business and risk profile to WRT. Many WRT investors were concerned about the higher debt levels and new operations of the new company which they felt made it a riskier investment.
The WRT meeting to vote on the restructure was held on 29 May.
However, just prior to the meeting, it had become apparent from a count of the proxies that the proposal faced certain defeat, having garnered only 74 per cent voter support.
Opposition from the institutional investor camp quickly reached a stand-off when a number of influential investors, notably UniSuper and Colonial First State, came out swinging against the deal.
The WRT board clearly did not anticipate that the proposal might be torpedoed.
It prompted Westfield Group chair Frank Lowy to issue a threat at the meeting, that Westfield Group would ‘go it alone’ if WRT did not fall into line.
And it prompted WRT chair Dick Warburton to make the decision to adjourn the WRT vote by almost three weeks – buying much needed time to muster the slim majority of 76.09 per cent to get the deal over the line at the most recent meeting.
Why shareholder engagement is important
The public stoush between WRT and some of its most influential institutional investors suggests that the WRT board did not have a robust shareholder engagement program in place.
Good engagement occurs when the institutional investor and corporate have a process of regular communication that allows the investor to ask questions about the entity’s governance, strategy and operations.
Equally, it gives the corporate an opportunity to seek input and test ideas with some of its most knowledgeable investors.
Good engagement is not about both parties agreeing on everything all the time.
It’s about building relationships of trust over time so that investors are more likely to keep faith with the board even in difficult times because they understand the decision-making.
It’s also about eliminating ‘nasty surprises’. Boards should not be hearing on the eve of an EGM that a major restructure will be gunned down.
And investors should not be finding out at the meeting that there’s been a ‘material change’ to a proposal they’ve been asked to vote upon.
Engagement requires commitment
There are obligations on both sides for engagement to be successful.
For institutional investors it means being transparent about who in the organisation is responsible for voting and engagement, and disclosing their voting and governance guidelines so corporates understand who they’re dealing with and what matters to them.
For corporates, it means ensuring they are appropriately resourced for engagement and have shared, agreed responsibilities as between the board and management on who has carriage for which issues.
It also entails gaining an understanding of proxy advisors as well as their significant institutional investors at both the asset owner and asset manager level and their role in voting decisions.
Then it’s up to both parties to commit to regular, informed, constructive and targeted discussions, which if done well, are aimed at enhancing the entity’s long-term value and performance.
Good engagement is built around regular, ongoing dialogue that’s mutually beneficial for both parties. What it’s not is a knee-jerk outreach when a crisis occurs.
You can’t help but think that WRT could have passed its merger proposal far more smoothly and discreetly, and saved itself a great deal of anguish, if only it had understood this from the outset.
The Governance Institute has developed a set of practical strategies to help institutional investors and listed entities to establish a sound engagement program.
Judith Fox is the national director, policy, of the Governance Institute of Australia.
