With shares in Medibank Private dipping below their $2.15 float price in recent times, some of the health insurance giant’s 400,000 shareholders will no doubt be thinking about taking out their frustration at the inaugural AGM in Melbourne on October 21.
Unlike with American public companies, one normally easy option for disgruntled investors with ASX-listed companies is to nominate for the board. The Medibank constitution requires candidates to lodge at least 45 business days before the AGM, so the deadline was yesterday, and I was seriously considering a tilt.
Alas, the Abbott government and the eight-person Medibank Private board have created two unusual barriers to entry for external candidates.
The first was to declare that the maximum number of directors is eight, so if an outsider did nominate, the board would be able to declare “no vacancy” and require that the outsider defeat one of the incumbents, who will presumably get the average 96% vote received by Australian public company directors.
When Arrium (then trading as OneSteel) tried a similar tactic in 2011, the move to cap the board at just eight directors was smashed, with only 167 million votes supporting the proposal compared with 473 million votes against. Shareholders like the option of being able to add new directors to a board if things go wrong.
The second entrenchment tactic by Medibank Private was to insert a clause in the constitution that required external candidates to satisfy the requirements for calling an extraordinary general meeting — namely, signed support from 100 shareholders.
This was the same tactic attempted by Toll Holdings in 2011, which was rejected by shareholders, as was explained in this Crikey piece last month.
The Gillard government changed the law in 2011 so that boards could no longer have the flexibility to nominate any maximum number of directors they like, thereby declaring “no vacancy” when an outsider stood, effectively disposing of the requirement that a candidate only needed 50% of the vote plus 1 to get elected.
After the 2011 amendment, a number of companies such as Suncorp, Orica, Newcrest and Toll attempted to insert entrenchment clauses in their constitutions, but most of these were rejected by shareholders.
The most notable exception was Graeme Wood’s Wotif Group, which pushed through a constitutional change to reduce the maximum board size from 10 to just six. You can see the unconvincing rationale on page 11 of the notice of meeting. It was approved on a show of hands with 125 million proxies in favour and 30 million against.
Institutional investors and proxy advisers have been slack on issues such as approving dilutive placements, but generally speaking they have held the line well opposing proposals, which reduce the ability of external candidates to nominate.
This means that barriers to entry such as low board caps and onerous nomination requirements can only be inserted when there is a new float or a demerger.
David Crawford, the so-called doyen of the directors’ club in Melbourne, has been the chief proponent of such tactics in recent years.
As a BHP Billiton director, he inserted the 100-signature rule into the South32 constitution and therefore will not face a board challenge as chairman at the company’s inaugural AGM in Perth later this year.
Similarly, unreported until now, Crawford used his power as the then-chairman of Foster’s Group in 2011 to ensure that the demerged Treasury Wine Estates also requires 100 signatures from shareholders for anyone to stand against the incumbent directors.
This means there are three ASX 100 companies with a different set of rules to the rest, which generally allow individuals to self-nominate or with the support of a single shareholder.
Medibank Private, South32 and Treasury Wine Estates will each be formally asked to amend their constitutions ahead of this year’s AGMs, and it will be interesting to hear the arguments as to why it should be so easy for the directors to appoint someone they know, yet an outsider is being asked to spend several days gathering signatures just to create a contest.
I wrote to Medibank Private yesterday asking for a formal response as to whether it was the Abbott government or the board who was responsible for its use of the 100-signature barrier.
As controlling shareholder, it was presumably the government, as this would accord with the philosophy behind this week’s “lawfare” move. Conservatives don’t generally like to do anything that makes it easier for activists to be effective or visible.
If it was the government, the majority-female Medibank Private board should have no problem in seeing reason and bringing themselves into line with market practice through a constitutional amendment at its first AGM.
After all, Medibank directors such as chair Elizabeth Alexander and Linda Nicholls have, between them, sat on illustrious boards like CSL, Amcor, Boral, Perpetual, Fairfax Media, Healthscope, Pacific Brands and St. George Bank. None of them ever tried to entrench their positions and create large barriers for competitor directors through such clauses in their constitutions.
Former Queensland premier Anna Bligh is also on the Medibank board and would presumably be sympathetic to arguments for fair elections.
If the board refuses to voluntarily fix this problem, it would be most interesting to see what would happen if 100 Medibank Private shareholders gathered together and proposed a constitutional amendment at next year’s AGM to remove the barriers to board entry.
Would they really oppose such a move when they know it would be endorsed by all three proxy advisers and the majority of institutional investors? Then again, the required 75% support for a constitutional amendment would not be easy to achieve if the board were urging a vote against, especially given the large bloc of retail investors on the Medibank share register.