Shareholder concentration and control in Australia

ABSTRACT

There is ongoing interest in understanding share ownership and control dynamics in publicly listed companies, given the governance and regulatory implications arising therefrom. This article presents a new empirical analysis of shareholder data, focusing on the largest 50 publicly listed companies in Australia, filling a striking gap in the existing literature. Specifically, the following issues are investigated within each company: 1. The level of institutional ownership within the largest 20 registered shareholders; 2. The percentage of issued capital owned by the largest three registered shareholders; 3. The control of that ownership, to determine the extent to which ownership and control diverge; and 4. Substantial shareholding information is collected and analysed, in order to reduce the information gap which exists between ownership and control, and to provide a more complete picture of shareholding patterns. Several explanatory factors behind the identified landscape and the implications arising from the findings are then discussed.

KEYWORDS:

• Corporate law
• share ownership and control
• institutional investors
• corporate governance

Acknowledgements

I am grateful for feedback received at presentations at the Cambridge University Law Faculty and the London School of Economics Law Faculty. I thank in particular Geof Stapledon, Simon Deakin, Mathias Siems, David Kershaw, Chris Riley, Daniel Attenborough, Richard Williams, Paul Davies, and Sam Comino (Nasdaq Australia) for helpful comments and discussions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 25.

2 ibid; Brian R Cheffins, ‘Corporate Governance Convergence: Lessons from Australia’ (2002–2003) 16 Transnational Law 13, 15.

3 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 25, 46; Jenifer Varzaly, ‘The Enforcement of Directors’ Duties in Australia: An Empirical Analysis’ (2015) 16 European Business Organization Law Review 281.

4 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 24–25.

5 See e.g., Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 86; Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029; Lucian A Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’ (2017) 31 Journal of Economic Perspectives 89; Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153.

6 Vivien Chen, Ian Ramsay and Michelle Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18, 18–20, 23–32.

7 ibid, 18–20. That is, corporate law may respond to the structure of share ownership in order to enhance overall welfare- termed an ‘efficiency effect’: Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 24, 25.

8 ibid.

9 Vivien Chen, Ian Ramsay and Michelle Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18, 31, 33–34.

10 ibid; Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 27.

11 Stuart L Gillan and Laura T Starks, ‘Corporate Governance, Corporate Ownership, and the Role of Institutional Investors: A Global Perspective’ (2003) 13 Journal of Applied Finance 4; Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029, 2042, 2043.

12 Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029; Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 86; Stephen M Bainbridge, ‘Director Primacy and Shareholder Disempowerment’ (2006) 119 Harvard Law Review 1735.

13 Brian Cheffins, ‘The Rise and Fall (?) of the Berle–Means Corporation’ (2019) 42 Seattle University Law Review 445, 447; Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029, 2042; Stephen Mark Bainbridge, ‘Shareholder Activism and Institutional Investors’ (2005) UCLA School of Law, Law-Econ Research Paper No. 05-20, <https://ssrn.com/abstract=796227> accessed; OECD, Corporate Governance Factbook (2019), 17: However, it should be noted that ‘institutional investors vary considerably with respect to their ability and economic incentives to actually exercise their shareholder rights’.

14 Theoretically, institutional activism can respond to the agency problem between directors and shareholders, see e.g., Marcel Kahan and Edward B Rock, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 University of Pennsylvania Law Review 1021, 1042; Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 86; Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029; Stuart L Gillan and Laura T Starks, ‘Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors’ (2000) 57 Journal of Financial Economics 275.

15 Brian R Cheffins, ‘Corporate Governance Convergence: Lessons from Australia’ (2002–2003) 16 Transnational Law 13, 19.

16 ibid, 19, 20–21; Olivia Dixon and Jennifer Hill, ‘The Protection of Investors and the Compensation for their Losses: Australia’ (2018) European Corporate Governance Institute (ECGI) - Law Working Paper No. 421/2018, 6–7; Richard Mitchell and others, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38(1) Melbourne University Law Review 68; Vivien Chen, Ian Ramsay and Michelle Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18, 22–23.

17 ibid. The House of Representatives Standing Committee on Economics inquiry into the implications of common ownership and capital concentration in Australia was commenced on Thursday, 29 July 2021, with the final Report tabled in March 2022. The report called attention to the information asymmetries associated with the paucity of detailed, publicly available share ownership information in Australia, making such research all the more timely. Further, see Carole Comerton-Forde, ‘An Analysis of S&P/ASX 300 and NZX 50 Share Ownership’ (February 2021) Australasian Investor Relations Association, noting the poor level of share ownership disclosure required in Australia, with Morningstar rating Australia below average on fund disclosures, 5.

18 Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 189; Jenifer Varzaly, ‘The Effectiveness of Disclosure Law Enforcement in Australia’ (2021) 21 Journal of Corporate Law Studies 135; Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 25; Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863, 868.

19 Tim Bowley, Activist Shareholders in Corporate Governance: The Australian Experience (Hart 2023); Tim Bowley and Jennifer Hill, ‘Shareholder Inspection Rights: Lessons from Australia’ (2022) 22 Journal of Corporate Law Studies 335; Jennifer Hill, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497; Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 189; Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863, 868; Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029, 2043.

20 Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 189, 190.

21 See e.g., Michael Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305; Tim Bowley and Jennifer Hill, ‘Stewardship and Collective Action: The Australian Experience’ (2020) European Corporate Governance Institute - Law Working Paper No. 491/2020, 4; Olivia Dixon and Jennifer Hill, ‘The Protection of Investors and the Compensation for their Losses: Australia’ (2018) European Corporate Governance Institute (ECGI) - Law Working Paper No. 421/2018, 6; Richard Mitchell and others, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38(1) Melbourne University Law Review 68; Vivien Chen, Ian Ramsay and Michelle Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18, 22–23; Alan Dignam, (2008) ‘The Globalisation of General Principle 7: Transforming the Market for Corporate Control in Australia and Europe?’ (2008) 28 Legal Studies 96, 106.

22 Where say 15% of the shares are held by a single nominee, on behalf of several thousand beneficial owners, this has substantial implications compared to where those several thousand beneficial owners own their shares directly (and not through a nominee). Nominee information is additionally important to understand and analyse, given that it reveals a significant information gap between registered ownership and control, and serves as an indirect indicator of the degree of institutional share ownership which exists. This has a direct bearing on disclosure law policy and reform in the Australian context, given the comparatively low level of ownership disclosure required: Carole Comerton-Forde, ‘An Analysis of S&P/ASX 300 and NZX 50 Share Ownership’ (February 2021) Australasian Investor Relations Association, with Morningstar Rating Australia Below Average on Fund Disclosures When Compared with Other Jurisdictions, 5.

23 Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029.

24 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 25.

25 Einer R Elhauge, ‘How Horizontal Shareholding Harms Our Economy - And Why Antitrust Law Can Fix It’ (2020) 10 Harvard Business Law Review 207.

26 In the UK context see: Jonathan Hardman and Guillem Ramírez Santos, ‘Empirical Evidence for the Continuing Need to ‘Think Small First’ in UK Company Law’ (2023) 24 European Business Organization Law Review 117.

27 This figure was calculated as at September 2020 using ASX historical market statistics regarding total Australian equity by market capitalisation: https://www2.asx.com.au/about/market-statistics/historical-market-statistics#end and ASX 50 market capitalisation data accessed from S&P Global: https://www.spglobal.com/spdji/en/indices/equity/sp-asx-50/#data.

28 This has not been done since the seminal La Porta et al 1999 study: Rafael La Porta and others, ‘Corporate Ownership Around the World’ (1999) 54 Journal of Finance 471; although, Lamba and Stapledon examine non-institutional blockholders and control, using data up to and including 2004 in their 2014 article: Asjeet S Lamba and Geof Stapledon, ‘What Motivates Block Share Ownership?’ (2014) 11 Corporate Ownership & Control 349.

29 This timeframe captures dynamic changes to shareholding structures post 2004 (the time of the last major empirical study of ownership and control in Australia), and post the sizable growth of the Australian pension market, the significant increase in managed funds, and the expanding influence of index funds both within Australia and globally. Future work plans to track the evolution of ownership data over time, which will include effects post 2016 as relevant data becomes available.

30 Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (Macmillan 1933) (1932).

31 Brian Cheffins, ‘The Rise and Fall (?) of the Berle–Means Corporation’ (2019) 42 Seattle University Law Review 445.

32 Adolf A Berle and Gardiner C Means, The Modern Corporation and Private Property (Macmillan 1933) (1932); George J Stigler and Claire Friedland, ‘The Literature of Economics: The Case of Berle and Means’ (1983) 26 The Journal of Law and Economics 237; Olivier Weinstein, ‘Firm, Property and Governance: From Berle and Means to the Agency Theory, and Beyond’ (2012) 2 Accounting, Economics, and Law 1; Michael Jensen and William Meckling, 1976, ‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’ (1976) 3 Journal of Financial Economics 305.

33 Murray Weidenbaum and Mark Jensen, Introduction to The Modern Corporation and Private Property (2nd edn, Transaction Publishers 1991), ix.

34 Rafael La Porta and others, ‘Corporate Ownership around the World’ (1999) 54 Journal of Finance 471, 472.

35 Rafael La Porta and others, ‘Law and Finance’ (1998) 106 Journal of Political Economy 1113.

36 ibid, 1146.

37 La Porta et al classified countries based on the legal origin of their commercial laws, due to the fact that they considered legal origin to be correlated with the level of shareholder protection found. Common law origin was defined as originating from the English common law: Rafael La Porta and others, ‘Corporate Ownership around the World’ (1999) 54 Journal of Finance 471, 479.

38 Rafael La Porta and others, ‘Law and Finance’ (1998) 106 Journal of Political Economy 1113, 1147.

39 Rafael La Porta and others, ‘Corporate Ownership around the World’ (1999) 54 Journal of Finance 471.

40 ibid, 472.

41 ibid, 477.

42 ibid, 472.

43 ibid, 492; John Armour and Jeffrey N Gordon, The Berle-Means Corporation in the 21st Century, Working Paper (2008), 8 <http://www.law.upenn.edu>accessed.

44 Rafael La Porta and others, ‘Corporate Ownership around the World’ (1999) 54 Journal of Finance 471, 493; John Armour and Jeffrey N Gordon, The Berle-Means Corporation in the 21st Century, Working Paper (2008), at http://www.law.upenn.edu, 8. Australia was closely followed by Switzerland, Canada and Japan, with each of these countries having 10 out of the 20 largest publicly listed companies without a 10% (or greater) shareholder.

45 ibid, 492–93.

46 ibid.

47 OECD, Corporate Governance Factbook (2017), 11; OECD, Corporate Governance Factbook (2019), 17.

48 OECD, Corporate Governance Factbook (2017), 12. That is, the holdings are typically dispersed.

49 G P Stapledon, ‘Share Ownership and Control in Listed Australian Companies’ (1999) 2 Corporate Governance International 17. Based on publicly available data.

50 ibid.

51 ibid.

52 ibid. The identity of the non-institutional shareholders were predominantly families, entrepreneurs, overseas companies, and other Australian listed companies.

53 Asjeet S Lamba and Geof Stapledon, ‘What Motivates Block Share Ownership?’ (2014) 11 Corporate Ownership & Control 349.

54 ibid. Moreover, 8–9% of the sample firms had a 50% or greater shareholder. Further, while the authors collect data on 5% or larger blockholdings, they use a dummy variable in the analysis as opposed to measuring the precise shareholding of the largest shareholders in each of the companies studied. This is a deliberate choice by the authors because of the theory they test, namely, that a company is more likely to have a controlling blockholder when private benefits of control are large, as opposed to looking into the precise shareholding stake actually held (at 353).

55 Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153. The company data included was reported between June 1990 and November 1991, with the authors analysing the percentage of ordinary shares held by the largest five, ten, and twenty shareholders within each of the sample companies.

56 ibid.

57 Shelley Marshall, Kirsten Anderson and Ian Ramsay, ‘Are Superannuation Funds and Other Institutional Investors in Australia Acting Like ‘Universal Investors’?’ (2009) University of Melbourne Legal Studies Research Paper 463, 5 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1570879> accessed 3 December 2019. Australian fund managers were found to be responsible for a sizable volume of the overall amount of money being managed in the market for equities. Such fund managers were overseeing around $343 billion as of 2006, equating to 27.9% of the total assets being managed in the equities market. In relation to the proportion of the equity of publicly listed companies which is held by institutional investors, the relevant evidence indicates that the average shareholdings of institutional investors remained relatively constant over the 1990s, standing at around 37% (ibid, 6). Although, this is not as significant as, e.g. the UK equivalent holdings, which were measured at over 60% of the equities market in 1991: G Stapledon, Institutional Shareholders and Corporate Governance (Clarendon Press, Oxford 1996), 25.

58 Carole Comerton-Forde and Ian Matheson, ‘Analysis of Share Ownership in Australia from 2001–2011’ (February 2013) Australasian Investor Relations Association. The research utilised annual report data sourced from Morningstar regarding shareholders, to document the composition of share ownership in Australia during the period 2001–2011. The sample included companies in the S&P/ASX 300 Index during the period which reported details of their shareholders (around 60% of these companies). Individual holdings of more than 10,000 shares were categorised as institutional shareholders.

59 ibid. Over this period, small shareholders reduced their direct ownership of shares from 15.1% to 9.9%. Additionally, institutional investors increased their shareholdings across the ASX 300. For example, within the 20 largest companies by market capitalisation in Australia, institutional shareholders owned 74.8% of the issued capital, although they only comprised 2.9% of the number of company shareholders. Correspondingly, retail investors owned 25.2% of issued capital and represented 97.1% of company shareholders.

60 ibid. That is, in the ASX 51–100 companies studied, institutional investors owned 87.9% of issued shares and comprised 17.4% of shareholders. Similarly, in the average ASX 201–300 company index, institutional ownership was reported at 92.2% of share capital and these institutions represented 29.7% of shareholders.

61 ibid, 3. The authors state, ‘For the purposes of this analysis, individual parcels of 10,000 or fewer shares were categorised as being small shareholders and more than 10,000 were categorised as being institutional shareholders’.

62 Carole Comerton-Forde, ‘An Analysis of S&P/ASX 300 and NZX 50 Share Ownership’ (February 2021) Australasian Investor Relations Association. This was observed across all indices. The largest 20 registered shareholders were used as a proxy for institutional investor holdings (irrespective of actual identity), and shareholders holding less than 1000 shares in any given company were used as a proxy for retail investors.

63 Brian R Cheffins, ‘Corporate Governance Convergence: Lessons from Australia’ (2002–2003) 16 Transnational Law 13, 19, 22.

64 Stuart L Gillan and Laura T Starks, ‘Corporate Governance, Corporate Ownership, and the Role of Institutional Investors: A Global Perspective’ (2003) 13 Journal of Applied Finance 4.

65 OECD, Corporate Governance Factbook (2019), 17, 72, indicating that institutional investors are now the largest category of shareholders in publicly listed companies, holding 41% of global market capitalisation as at the end of 2017. These were found to primarily be profit-maximising intermediaries who invest on behalf of their ultimate beneficiaries, with the most important institutions being mutual funds, pension funds, and insurance companies. See also Shelley Marshall, Kristen Anderson and Ian Ramsay, ‘Are Superannuation Funds and Other Institutional Investors in Australia Acting Like ‘Universal Investors’?’ (2009) 51 Journal of Industrial Relations 439; Richard Mitchell and others, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38 Melbourne University Law Review 68; Vivien Chen, Ian Ramsay and Michelle Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18 in the Australian context.

66 Stuart L Gillan and Laura T Starks, ‘Corporate Governance, Corporate Ownership, and the Role of Institutional Investors: A Global Perspective’ (2003) 13 Journal of Applied Finance 4; OECD, Corporate Governance Factbook (2019), 17. As Cheffins pertinently discusses, the original Berle-Means analysis of public companies should take into account the increasing prominence of institutional investors in order to maintain a contemporary relevance: Brian Cheffins, ‘The Rise and Fall (?) of the Berle–Means Corporation’ (2019) 42 Seattle University Law Review 445, 447.

67 Richard Mitchell and others, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38(1) Melbourne University Law Review 68; Vivien Chen, Ian Ramsay and Michelle Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18, 22–23.

68 Brian Cheffins, ‘The Rise and Fall (?) of the Berle–Means Corporation’ (2019) 42 Seattle University Law Review 445, 447.

69 ibid; Richard Mitchell and others, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38 Melbourne University Law Review 68; Vivien Chen, Ian Ramsay and Michelle Welsh, ‘Corporate Law Reform in Australia: An Analysis of the Influence of Ownership Structures and Corporate Failure’ (2016) 44 Australian Business Law Review 18.

70 The House of Representatives Standing Committee on Economics inquiry into the implications of common ownership and capital concentration in Australia was commenced on Thursday, 29 July 2021, with the final Report tabled in March 2022. See also the Australian Federal Government Consultation Paper, ‘Increasing Transparency of the Beneficial Ownership of Companies’ (2017), raising questions around the adequacy of the substantial holding provisions and the tracing notice obligations, at 19.

71 Data was taken from the ASX website in relation to the ASX 20 and ASX 50 indices: http://www.asx.com.au/products/capitalisation-indices.htm, and the ASX 20 and ASX 50 individual company annual reports for the 2016 financial year were accessed in order to obtain specific data regarding the largest shareholders from each company. Historical data was accessed through: https://www.asx20list.com/ and https://www.asx50list.com/. Comparing the data on the largest companies (ranked by market capitalisation) on the ASX website (not indexed) with the S&P ASX 50 indexed data shows that the ASX 50 index captured Australia’s largest companies by market capitalisation: https://www2.asx.com.au/ and https://www.spglobal.com/spdji/en/indices/equity/sp-asx-50/#overview. Over the study period, News Corporation and Meridian Energy were the only two companies with different index and ASX market capitalisation rankings, due to the foreign-domiciled index rules and the calculation of secondary listing market capitalisation.

72 Float adjusting an index means that market capitalisation is calculated by multiplying the share price by the number of shares readily available to the public.

73 From 1 July 2015 to 30 June 2016.

74 This figure was calculated as at September 2020 using ASX historical market statistics regarding total Australian equity by market capitalisation: https://www2.asx.com.au/about/market-statistics/historical-market-statistics#end and ASX 20 market capitalisation data accessed from S&P Global: https://www.spglobal.com/spdji/en/indices/equity/sp-asx-20/#data.

75 Over the 2016 financial year, the total number of ASX listed companies ranged between 2203 and 2238; and the domestic equity market capitalisation at the end of the 2016 financial year was $1.62 trillion: ASX historical market statistics. As a ratio to GDP, stock market capitalisation was around 135% for the 2016 financial year, of which the ASX 50 significantly contributed 64.53%. The stock market capitalisation (as a ratio to GDP) is comparable to both the UK and Japan: Reserve Bank of Australia, ‘Background on the Australian Listed Equity Market’, Submission to the House of Representatives Standing Committee on Economics Inquiry into Common Ownership and Capital Concentration in Australia (September 2021). Regarding the total number of companies registered in Australia, there were 2,372,444 at the end of the 2016 financial year: ASIC historical market statistics. While publicly listed companies account for less than 1% of the total number of registered companies, they are the most economically significant companies. By comparison, the largest 500 private companies contributed 5.6% (or $264 billion) of the $4.7 trillion revenue in Australia over the study period, with publicly listed companies providing the largest share of overall revenue: IBISWorld (September 2016) Special Report: The Top 500 Private Companies in Perspective, 5; The Australian Financial Review (August 2016) ‘Top 500 Private Companies 2016’. The current research project does not comment on companies beyond the ASX 50. The extent to which the findings of the current research may apply to the shareholder composition and control of the smaller listed companies is uncertain, being outside of the scope of this study.

76 In some instances, it was possible to look beyond corporate holdings, e.g. where a corporation was set-up to act as a trustee company for a discretionary trust, which was created on behalf of a family or prominent individual investor. If the investigation uncovered a family or individual standing behind the corporate investment vehicle, the shareholder was categorised as an individual investor.

77 Corporate Governance Factbook (2019), 17, 72, holding 41% of global market capitalisation as at the end of 2017.

78 The concentration ratio (N-firm or N-shareholder) measures the degree of concentration within a market (or a company), and shows the extent to which there is dominance or control by a limited number of firms. The two most common ways of measuring concentration are the N-firm concentration ratio and the Herfindahl index (HI): See e.g., John Black, Nigar Hashimzade and Gareth Myles, A Dictionary of Economics (5th edn, Oxford University Press 2017); Harold Demsetz and Belen Villalonga, ‘Ownership Structure and Corporate Performance’ (2001) 7 Journal of Corporate Finance 209; Boya Wang, ‘Ownership, Institutions, and Firm Value: Cross-Provincial Evidence from China’ (2016) Centre for Business Research, University of Cambridge, Working Paper No. 484 (on the HI). The Herfindahl index was also calculated to cross-check the findings regarding concentration. The major difference between the HI and the concentration ratio is that the HI assigns more weight to very large shareholdings, because the shareholdings are squared prior to being summed (it is thus sensitive to the distribution of market share between firms). This method is best applied where the entire population of shareholders and associated holdings is known. Here, the results are correlated with each other across both methods.

79 This increase can be compared with Ramsay and Blair’s previous findings: Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153.

80 Geof P Stapledon, ‘Institutional Investors: What are Their Responsibilities as Shareholders?’ in J Parkinson, A Gamble and G Kelly (eds), The Political Economy of the Company, (Hart Publishing 2000); M F Blue, ‘Nominee Shareholding in Australia’ (1975) 5 Adelaide Law Review 188, 188–189; Thomson Reuters Practical Law: (glossary): A beneficial owner of shares may decide to appoint a nominee because it does not want to have the shares registered in its own name, or it may be required to appoint a nominee under some circumstances. Nominee shareholders can be either individuals or corporations.

81 ibid. Thus, the use of nominee/custodian shareholders signifies a structure under which shares are held on a bare trust for the client beneficial owners. Under a typical bare trust arrangement, the trustee (custodian/nominee) holds shares on behalf of the beneficial owner, without discretion over the property and with no active duties other than to transfer the property to the beneficiary as and when required.

82 In the absence of an express term dealing with voting: ‘It is doubtful whether, in general, the contract would be interpreted as authorizing or permitting such a power. This is supported by the fact that, in distinction to other trust relationships, it is the beneficiary who exercises the control over shares held by his nominee.’ M F Blue, ‘Nominee Shareholding in Australia’ (1975) 5 Adelaide Law Review 188, 189.

83 ibid.

84 Thomson Reuters Practical Law: (glossary).

85 Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 169.

86 ibid.

87 ibid, 169, 185. One previous study which sought to identify the beneficial owners of financial nominee company holdings within the BHP Group Ltd found that superannuation funds were the major beneficial holders: P H Davies, ‘Equity Finance and the Ownership of Shares’ (1982) Australian Financial System Inquiry, Commissioned Studies and Selected Papers, Part 3. While superannuation funds were registered as the holders of 3.7% of BHP shares, their beneficial ownership was actually 12.9%. This is not publicly available information, Davies was able to ascertain this by contacting bank nominee companies and requesting further written information as part of the inquiry.

88 See s671B of the Corporations Act 2001 and ASX Listing Rule 4.10.4.

89 ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), RG 5.11. Persons who, together with their associates, have relevant interests in voting shares representing 5% or more of the votes in a listed company, body or listed registered managed investment scheme, must disclose details of their relevant interest: Part 6C.1 Corporations Act 2001.

90 ibid, 65.

91 s671B(1), Corporations Act 2001; ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), 29.

92 Board of Trade (UK), Report of the Committee on Company Law Amendment (Cohen Committee), Cmd 6659 (1945), par 77–82; ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), RG 5.288; Second interim report of the Company Law Advisory Committee to the Standing Committee of Attorneys-General (Eggleston Committee Report), Parliamentary Paper No. 43 (1969), par 3–4.

93 Board of Trade (UK), Report of the Committee on Company Law Amendment (Cohen Committee), Cmd 6659 (1945), par 77.

94 Second interim report of the Company Law Advisory Committee to the Standing Committee of Attorneys-General (Eggleston Committee Report), Parliamentary Paper No. 43 (1969), par 3–4, referring to overseas legislation (US and UK requirements at that time), stating that ‘provision should be made substantially along the lines of the United Kingdom legislation’; ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), RG 5.291, 5.289: ‘[S]hareholders are entitled to know whether there are in existence, substantial holdings of shares which might enable a single individual or corporation, or a small group, to control the destinies of the company, and if such a situation does exist, to know who are the persons on whose exercise of voting power the future of the company may depend’.

95 ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), 70. Including, for example, substantial holdings acquired through securities lending or prime brokerage agreements.

96 ibid, 69–70.

97 An expanded notion of power or control is set out in s608(2) of the Corporations Act 2001. Here, it is still necessary to analyse whether any power exists ‘to exercise some true or actual measure of control’ over voting or disposal: Re Kornblums Furnishings Ltd (1981) 6 ACLR 25 at 36; Edensor Nominees Pty Ltd v ASIC (2002) 41 ACSR 325 at [33]: ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), RG 5.29.

98 ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), 74–75, 80. Notice must be given to a listed company, or the responsible entity for a listed managed investment scheme, and a copy provided to the securities exchange. The prescribed documents for substantial holding notices are Form 603, 604, and 605. Relevantly, under s671C(1) of the Corporations Act 2001, civil liability may ensue where s671B is contravened: A person who contravenes section 671B is liable to compensate a person for any loss or damage the person suffers because of the contravention.

99 ibid.

100 This is denoted as institutional (I) and non-institutional (N-I) in table 3 above.

101 Disclosed in full as the Paul Ramsay Foundation Pty Limited as trustee for the Paul Ramsay Foundation. Paul Ramsay was the Chairman and founder of Ramsay Health Care. The Paul Ramsay Foundation is the largest charity in Australia by assets. Its grants are funded form the dividends of its Ramsay Health Care shareholding.

102 John Gandel and the Gandel family reportedly own 50% of Vicinity Centres’ largest asset (Chadstone shopping mall), with Vicinity Centres holding the remaining 50% (of which the Gandel Group Pty Ltd owns 17.25%). Over the study period, there are additionally two non-independent directors on the board of directors of Vicinity Centres, who are closely associated with the Gandel Group (David Thurin and Peter Kahan).

103 The ASX utilises the Global Industry Classification Standard (GICS), as developed by S&P Dow Jones Indices and MSCI, in order to categorise companies into sectors and industries.

104 See Rafael La Porta and others, ‘Corporate Ownership Around the World’ (1999) 54 Journal of Finance 471.

105 ibid, 472.

106 That is, in the case of Coca-Cola Holdings (Overseas) Limited (holding 29.21%), in its capacity as a holding company in relation to the Australian subsidiary, and the Paul Ramsay Foundation (holding 32.16%) in relation to Ramsay Health Care Limited. If these related holdings are reclassified, then the figures regarding the number of widely held publicly listed companies are 50 out of 50 at the 20% level of control, and 37 out of 50 at the 10% threshold of control.

107 That is, a high level of shareholder dispersion exists across the largest 50 companies which comprise 64.53% of the total Australian equities market.

108 Or the responsible entity for a listed registered scheme, or the operator of a listed notified foreign passport fund, or a shareholder of the company may also request that ASIC exercise its tracing powers (s672A, Corporations Act 2001).

109 See Brunswick NL v Blossomtree Pty Ltd (1992) 10 ACLC 658, 667; ASIC Regulatory Guide 86, Tracing beneficial ownership (RG 86) (June 2007), 5.

110 s672B(1A), Corporations Act 2001.

111 s672DA(7) and s672DA(8), Corporations Act 2001.

112 s672DA(8), Corporations Act 2001.

113 In Australia, these services are provided by Nasdaq Corporate Solutions (Australia) & Orient Capital Pty Ltd. Typically, listed companies utilise these professional services firms to analyse their own registers in order to uncover and understand beneficial ownership information. These reports are not made public, only the bare register. See also, ASIC Regulatory Guide 86, Tracing beneficial ownership (June 2007), RG 86.41: ‘A company or responsible entity is not required to include any analysis of information provided to it under Pt 6C.2 in the register. Nor is the company or responsible entity required to reformat the information within a register entry … ’

114 Parliament of the Commonwealth of Australia, ‘Report on the implications of common ownership and capital concentration in Australia’, House of Representatives Standing Committee on Economics (March 2022) p41, par 1.12: ‘The committee was provided evidence that large Australian listed entities regularly pay financial investigators to identify their biggest beneficial owners. This can involve making multiple inquiries through nominee and holding companies – sometimes held offshore – in order to identify the true shareholders. (Although these investigatory exercises are paid for by shareholders, their results are rarely disclosed.)’

115 Adolf A Berle and Gardiner C Means, The Modern Corporation and Private Property (Macmillan 1933) (1932).

116 Adolf A Berle and Gardiner C Means, The Modern Corporation and Private Property (Macmillan 1933) (1932); Brian Cheffins, ‘The Rise and Fall (?) of the Berle–Means Corporation’ (2019) 42 Seattle University Law Review 445, 447.

117 Comprising the largest three shareholders in each company within the dataset.

118 See table 2, above. For example, HSBC Custody Nominees Australia Ltd (the second most prominent ASX 50 registered shareholder in the present study) operates in financial services, engaging in commercial, private, and retail banking, and wealth management, investment, and advisory services: Bloomberg company profiles. In the US context, see Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863, 865.

119 See e.g. Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863; Brian Cheffins, ‘The Rise and Fall (?) of the Berle–Means Corporation’ (2019) 42 Seattle University Law Review 445; A De La Cruz, A Medina and Y Tang ‘Owners of the World’s Listed Companies’ (2019) OECD Capital Market Series, Paris, 18.

120 Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153.

121 ibid, 184–85, 193.

122 ibid.

123 Geof P Stapledon, ‘Institutional Investors: What are Their Responsibilities as Shareholders?’ in J Parkinson, A Gamble and G Kelly (eds), The Political Economy of the Company, (Hart Publishing 2000). The securities are held on trust by the nominee shareholder for the beneficial owner’s benefit, and the existence of control must be conferred (if at all) by contract. The usual structure involves the use of a bare trust, under which the custodian/nominee holds shares on behalf of the beneficial owner, without discretion over the shares and without active duties, except to transfer the shares to the beneficiary when requested.

124 GP Stapledon, ‘The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism’ (1995) 18 UNSW Law Journal 250, 253. Combined with a decrease in the percentage of shares held by individuals.

125 The full definition of a ‘substantial holding’ is found in s9 of the Corporations Act 2001, as a relevant interest in voting shares or interests carrying 5% or more of the total votes attached to all voting shares or interests. This is to be read in conjunction with s608(1) of the Corporations Act 2001, which sets out the basic definition of a relevant interest in securities.

126 Institutions comprise 97.8% of the identified substantial shareholders across the ASX 50, and 97.8% of the largest 20 groups of shareholders across the ASX 50.

127 As acknowledged in The House of Representatives Standing Committee on Economics Inquiry and Report on the implications of common ownership and capital concentration in Australia (March 2022); subject to a successful tracing notice (section 4.3 above).

128 PH Davies, ‘Equity Finance and the Ownership of Shares’ (1982) Australian Financial System Inquiry, Commissioned Studies and Selected Papers, Part 3, 343; Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 169, 185. Davies sought to identify the beneficial owners of financial nominee company holdings within the BHP Group Ltd and found that superannuation funds were the major beneficial holders. While superannuation funds were registered shareholders of 3.7% of BHP shares, their beneficial ownership amounted to 12.9%.

129 The House of Representatives Standing Committee on Economics Inquiry and Report on the implications of common ownership and capital concentration in Australia (March 2022). See also, the Australian Federal Government Consultation Paper, ‘Increasing transparency of the beneficial ownership of companies’ (2017), and Andrew Leigh and Adam Triggs, ‘Common Ownership of Competing Firms: Evidence from Australia’ (2021) 97 Economic Record 333.

130 In the absence of a successful tracing notice. This can be contrasted with the UK situation, in which survey information can aid our understanding of beneficial share ownership, combined with a lower disclosure threshold which is able to shed light on interests as low as 3%. For example, in the UK context, the Office for National Statistics releases a biennial statistical ownership bulletin detailing the value of ordinary shares held in UK publicly listed companies by sector of beneficial ownership, with a geographical breakdown of shares owned outside the UK. The report methodology involves measuring beneficial share ownership using data from Euroclear (CREST), the electronic settlement system for equity share trading, and additional analysis of share registers.

131 s671B of the Corporations Act 2001 sets out the applicable disclosure obligations in relation to substantial holdings.

132 s608(1)(b) and (c), Corporations Act 2001.

133 Although, over the past few years, the largest superannuation funds have been retaining their voting power, as opposed to delegating it to the investment fund manager. Nonetheless, the investment manager will still have a relevant interest in the shares through having the power to dispose of the shares: s608(1)(c) Corporations Act 2001.

134 Rafael La Porta and others, ‘Corporate Ownership around the World’ (1999) 54 Journal of Finance 471, 472.

135 Rafael La Porta and others, ‘Corporate Ownership around the World’ (1999) 54 Journal of Finance 471, 492–3.

136 Cf. Brian Cheffins, Corporate Ownership and Control: British Business Transformed (2008) Oxford University Press, for a detailed exploration of the ‘sell side’ and ‘buy side’ drivers in the UK context.

137 Carole Comerton-Forde and Ian Matheson, ‘Analysis of Share Ownership in Australia from 2001–2011’ (February 2013) Australasian Investor Relations Association; Carole Comerton-Forde, ‘An Analysis of S&P/ASX 300 and NZX 50 Share Ownership’ (February 2021) Australasian Investor Relations Association.

138 Reserve Bank of Australia, ‘Background on the Australian Listed Equity Market’, Submission to the House of Representatives Standing Committee on Economics Inquiry into Common Ownership and Capital Concentration in Australia (September 2021); Reserve Bank of Australia, ‘Privatisation in Australia’ (1997) December Bulletin. Proceeds from privatisations were approximately $61 billion across the 1990s, occurring in three main sectors in Australia: financial services, electricity and gas, and transport and communication. State and Commonwealth Governments sold assets by offering equity to the public, and concluding trade sales.

139 Reserve Bank of Australia, ‘Background on the Australian Listed Equity Market’, Submission to the House of Representatives Standing Committee on Economics Inquiry into Common Ownership and Capital Concentration in Australia (September 2021); Reserve Bank of Australia, ‘Demutualisation in Australia’ (1999) January Bulletin.

140 See e.g., the Australian Share Ownership Study/Australian Investor Study published annually by the ASX, which indicates an ongoing trend in the reduction of direct retail share ownership and participation in the share market, with each year reporting a decrease in directly held retail share ownership; Carole Comerton-Forde and Ian Matheson, ‘Analysis of Share Ownership in Australia from 2001–2011’ (February 2013) Australasian Investor Relations Association, reporting that small shareholder ownership declined from 15.1% in 2002 to 9.9% in 2011.

141 Robert Clark, ‘The Four Stages of Capitalism: Reflections on Investment Management Treatises’ (1981) 94 Harvard Law Review 561, 565.

142 ibid, 568; GP Stapledon, ‘Share Ownership and Control in Listed Australian Companies’ (1999) 2 Corporate Governance International 17.

143 Robert Clark, ‘The Four Stages of Capitalism: Reflections on Investment Management Treatises’ (1981) 94 Harvard Law Review 561, 571.

144 As at December 1997. This does not capture all significant privatisation proceeds, for example, the Telstra privatisation process began in 1997 and was not finalised until 2011. Further, in 1997 it was noted that government privatisations over the period 1997–2000 would be worth US$150 billion, with telecommunications privatisations alone likely to be worth US$38.9 billion in 1997: Parliament of Australia, ‘Telstra: Privatisation Issues’ (1996–97) 8 Current Issues Brief.

145 Reserve Bank of Australia, ‘Privatisation in Australia’ (1997) December Bulletin. Trade sales were also used in addition equity offerings. Overall, the RBA reported that Australia had one of the largest privatisation programs among OECD nations, with the value of privatisations in Australia during the 1990s ranking second after the UK.

146 Reserve Bank of Australia, ‘Background on the Australian Listed Equities Market’ (2021) Submission to the House of Representatives Standing Committee on Economics Inquiry into Capital Concentration and Common Ownership in Australia, 1; P Lowe and M Gizycki, ‘The Australian Financial System in the 1990s’ (2000), in S Shrestha and D Gruen (eds), The Australian Economy in the 1990s, Proceedings of a Conference, Reserve Bank of Australia, Sydney, pp 180–215; Reserve Bank of Australia, ‘Demutualisation in Australia’ (1999) January Bulletin.

147 Reserve Bank of Australia, ‘Demutualisation in Australia’ (1999) January Bulletin. For example, AMP Ltd was formed as the Australian Mutual Provident Society in 1849 as a non-profit life insurance company and mutual society, prior to demutualising in 1998, resulting in policyholders receiving shares in the new company. AMP Ltd is now a widely held ASX 20 company, with no substantial shareholders, and with 2,957,737,964 shares held among 788,692 shareholders over the present study period. Similarly, Medibank had only one substantial shareholder (Blackrock Inc. (5.01%)).

148 As at January 1999: Reserve Bank of Australia, ‘Demutualisation in Australia’ (1999) January Bulletin.

149 Reserve Bank of Australia, ‘Demutualisation in Australia’ (1999) January Bulletin. At the time of publication the RBA had recorded 1,948 public floats.

150 Carole Comerton-Forde and Ian Matheson, ‘Analysis of Share Ownership in Australia from 2001–2011’ (February 2013) Australasian Investor Relations Association.

151 Reserve Bank of Australia, ‘Background on the Australian Listed Equity Market’, Submission to the House of Representatives Standing Committee on Economics Inquiry into Common Ownership and Capital Concentration in Australia (September 2021): Further, considering stock market capitalisation as a ratio to GDP, Australia has a similar level (140%) to the UK and Japan; GP Stapledon, ‘The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism’ (1995) 18 UNSW Law Journal 250, 254. It should, however, be noted that the near total dominance of institutional and corporate shareholders in ‘the largest 20 owners’ category, does not prove that total institutional ownership in each company, or in the ASX indices as a whole, is greater than individual ownership.

152 ibid, 254.

153 Willis Towers Watson, Global Pension Assets Study (2019), 8, 11, 14 (reporting that 47% of assets are allocated to equity).

154 Michael Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305; Jennifer Hill, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497, 499.

155 Additionally, the Australian system allows flexibility in choice, with individuals able to choose between various investment options with different risk profiles and investment strategies employed.

156 Willis Towers Watson, Global Pension Assets Study (2019), 18. Over the last thirty years, the total value of assets managed by Australian pension funds has grown from $73 billion in 1989 to $2.89 trillion, as reported by the Australian Bureau of Statistics in June 2019, achieving a compound annual growth rate of 13%.

157 Reserve Bank of Australia, ‘Background on the Australian Listed Equity Market’, Submission to the House of Representatives Standing Committee on Economics Inquiry into Common Ownership and Capital Concentration in Australia (September 2021); Deloitte Analysis Report, ‘Dynamics of the Australian Superannuation System’ (2019). The investment of current superannuation funds in Australian shares comprises approximately 35% of the ASX total market capitalisation. If funds continue to hold the same proportions through asset allocations to equity, this is expected to increase to over 60% by 2038 and therefore dominate ASX holdings.

158 Michael Legg, ‘Shareholder Class Actions in Australia – the Perfect Storm?’ (2008) 31 UNSW Law Journal 669, 674. Additionally, nominee companies are widely utilised by domestic superannuation funds and unit trusts, which is consistent with the dataset findings regarding the dominance of institutions and the prevalence of nominees within corporate share registers: GP Stapledon, ‘The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism’ (1995) 18 UNSW Law Journal 250, 253–54; Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 169, 185.

159 For example, foreign investors reportedly account for approximately one third of the holdings of Australian publicly listed shares, from a share value perspective: Reserve Bank of Australia, ‘Background on the Australian Listed Equities Market’ (2021) Submission to the House of Representatives Standing Committee on Economics Inquiry into Capital Concentration and Common Ownership in Australia, 4; Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 170. See also, GP Stapledon, ‘The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism’ (1995) 18 UNSW Law Journal 250, 254.

160 Ian Ramsay and Mark Blair, ‘Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies’ (1993) 19 Melbourne University Law Review 153, 170.

161 A detailed examination of the data beyond the ASX 50 is a point for a future inquiry. Looking to the ASX 300, recent research indicates similar patterns, such as a downward trend in the number of retail shareholders across all indices; the top 20 registered shareholders holding a larger proportion of issued capital across all indices; and the largest institutional investors increasing their share ownership across all indices and sectors: Carole Comerton-Forde, ‘An Analysis of S&P/ASX 300 and NZX 50 Share Ownership’ (February 2021) Australasian Investor Relations Association.

162 Whereas the Berle and Means analysis identified the separation between diversified shareholders and managers: Adolf A Berle and Gardiner C Means, The Modern Corporation and Private Property (Macmillan 1933) (1932).

163 Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863.

164 ibid, 876–78. As such, agency relationships exist along two margins: between the registered owner and the beneficial owner; and between the registered owner and the managers of the investee company. These agency relationships are present whether there is a chain of institutions between beneficial and registered ownership, or just one institution which is interposed between the beneficial owners and managers. These are known as the agency problems of institutional investors, termed ‘the agency costs of agency capitalism’ by Gilson and Gordon.

165 Other examples include directors’ duties and shareholder litigation. Regarding the existence and enforcement of these rights in the Australian context see e.g., Jenifer Varzaly, ‘The Effectiveness of Disclosure Law Enforcement in Australia’ (2021) 21 Journal of Corporate Law Studies 135; Jenifer Varzaly, ‘The Enforcement of Directors’ Duties in Australia: An Empirical Analysis’ (2015) 16 European Business Organization Law Review 281.

166 Richard Mitchell and others, ‘Shareholder Protection in Australia: Institutional Configurations and Regulatory Evolution’ (2014) 38(1) Melbourne University Law Review 68; Gilbert and Tobin Shareholder Activism Report (2018), 4.

167 s249D, Corporations Act 2001. Alternatively, shareholders with at least 5% of the votes may convene one themselves: s249F.

168 s249N, Corporations Act 2001.

169 s249P, Corporations Act 2001, or in respect of any other matter which may be properly considered at the general meeting.

170 s203D, Corporations Act 2001, in relation to public companies. Regarding the appointment of directors, see s201G and s201E, Corporations Act 2001. These sections require ordinary resolutions which need only a simple majority (more than 50% of votes cast in favour of the resolution) to pass.

171 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 32, 37. From a practical perspective, there were a total of 44 activist board seats gained in Australia in 2018, with 22 of these seats won through voting, and the remaining 22 won by settlement: Activist Insight and Schulte Roth & Zabel, ‘The Activist Investing Annual Review 2019’, 35. Additional examples of shareholder activism utilising appointment and removal rights include the appointment of directors in order to implement a share buy-back (the targeting of Intrepid Mines by Quantum Pacific Capital), and an (unsuccessful) attempt to remove and replace an entire board (Lone Star Value Investors unsuccessfully attempting to replace the board of Antares Energy with a proxy and media campaign), both occurred in 2014: See e.g., Michael Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305.

172 Michael Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305. See s250V Corporations Act 2001.

173 Gilbert and Tobin Shareholder Activism Report (2018), 10; Michael Jefferies, ‘The Third Wave of Shareholder Influence and the Emergence of Informational Activism in Australia’ (2019) 34 Australian Journal of Corporate Law 305; Martin Bugeja and others, ‘Life after a Shareholder Pay ‘Strike’: Consequences for ASX-Listed Firms’ (2016) CIFR Paper No. 130/2016: <https://ssrn.com/abstract=2876925>.

174 See, Division 9, s250U Corporations Act 2001.

175 s250V Corporations Act 2001.

176 s250V, s250W Corporations Act 2001.

177 Martin Bugeja and others, ‘Life after a Shareholder Pay ‘Strike’: Consequences for ASX-Listed Firms’ (2016) CIFR Paper No. 130/2016 <https://ssrn.com/abstract=2876925> accessed August 2016, the research findings included 306 first strikes, 51 s strikes, and 12 board spills, resulting in 8 director dismissals or resignations thereafter. Moreover, a recent example of an attempt to utilise the board spill provisions was in relation to Harvey Norman Holdings Ltd in November, 2019. The company received two consecutive strikes against its remuneration report, but avoided a board spill after institutional shareholders declined to support the spill resolution. See e.g. https://www.afr.com/companies/retail/harvey-norman-s-australian-sales-return-to-growth-20191126-p53ed8. While 50.6% and 47.5% of shareholders voted against the remuneration report, in two consecutive AGMs, only 11.1% of shareholders supported the spill resolution. Institutional shareholders reportedly followed the advice of proxy advisers Ownership Matters and CGI Glass Lewis in voting against the remuneration report, however, they did not support spilling the entire Harvey Norman board.

178 Lucian A Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’ (2017) 31 Journal of Economic Perspectives 89, 90.

179 Geof P Stapledon, ‘Institutional Investors: What are Their Responsibilities as Shareholders?’ in J Parkinson, A Gamble and G Kelly (eds), The Political Economy of the Company, (Hart Publishing 2000). In Australia, there may be a number of institutions interposed between the beneficial owners and registered shareholder, depending on the institution type. For example, in the case of AustralianSuper (the largest Australian superannuation and pension fund), in-house fund managers are used to manage equity investments in a variety of companies, which are registered in the name of their custodian, JP Morgan Nominees Australia Ltd (the registered shareholder). However, in the case of smaller superannuation funds, external fund managers are generally used to manage their equity investments, resulting in a chain of intermediary institutions. In this instance, the fund managers play a key role where the fund management agreement provides them with the power to exercise the voting rights attached to the shares (as is commonly the case).

180 Lucian A Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’ (2017) 31 Journal of Economic Perspectives 89, 93, 107; Lucian A Bebchuk and Scott Hirst, ‘Big Three Power, and Why it Matters’ (2022) 102 Boston University Law Review 1547.

181 The ACSI and the FSC are the two leading industry bodies in relation to asset owners and asset managers.

182 With reporting requirements beginning 1 July 2018.

183 Effective 1 January 2018.

184 For example, in the UK the Financial Reporting Council (FRC) published the first version of the UK Stewardship Code in July 2010. It has been suggested that this may in part be due to the fact that Australia did not experience significant adverse results post the global financial crisis, which precipitated heightened investor scrutiny in other jurisdictions: Tim Bowley and Jennifer Hill, ‘Stewardship and Collective Action: The Australian Experience’ (2020) European Corporate Governance Institute - Law Working Paper No. 491/2020, 5. On the prevalence of international stewardship codes see e.g., Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029, 2045; Dionysia Katelouzou and Mathias Siems, ‘The Global Diffusion of Stewardship Codes’ (2020) European Corporate Governance Institute- Law Working Paper No. 526/2020 <https://ssrn.com/abstract=3616798> accessed.

185 The Australian Council of Superannuation Investors (ACSI) Australian Asset Owner Stewardship Code (May 2018), 5, 6.

186 Or undertakes asset management activities.

187 That is, asset managers are required to either describe the policy underlying their practices or explain why they are not relevant to them. The comply or explain approach has been criticised on the basis that it generally results in a failure to take compliance seriously, and in the event of non-compliance a superficial justification is typically provided: Brian Cheffins, ‘The Stewardship Code’s Achilles’ Heel’ (2010) 73 Modern Law Review 985, 1013.

188 This may be compared with recommendation 42 of the Independent Review of the Financial Reporting Council (FRC) in the UK, led by Sir John Kingman (the Kingman Review), the report of which was published in December 2018. The findings relevantly include that the UK Stewardship Code, ‘whilst a major and well-intentioned intervention, is not effective in practice’ and that a ‘fundamental shift in approach’ is required to ensure that the revised Code more clearly focuses on ‘outcomes and effectiveness, not on policy statements’, concluding that ‘If the Code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition’, 46.

189 ACSI policy, Towards Stronger Investment Stewardship (May 2019), <https://acsi.org.au/policies/towards-stronger-investment-stewardship/> accessed 15 November 2020. The policy proposals form part of ACSI’s broader response to the 2019 report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia.

190 The ACSI submitted that the ‘benefits of a stewardship code that applies to a more comprehensive array of stakeholders are tangible’. In their view, a stewardship code within an appropriate regulatory framework, applicable to all institutional investors should be introduced. The ACSI suggests that this could be undertaken in consultation with key stakeholders such as, for example, the Australian Prudential Regulation Authority (APRA), an independent statutory authority that supervises banking, insurance and superannuation institutions, and promotes financial system stability in Australia; and the Financial Services Council (FSC), a leading industry body which sets standards and develops policy in Australia’s financial services sector, in relation to the regulatory aspects of stewardship.

191 While the existence of regulatory or code-based measures may be expected to improve aspects of this governance relationship, it is unlikely that they alone can modify institutional reticence, to the extent that this is problematic. See e.g., Lucian A Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’ (2017) 31 Journal of Economic Perspectives 89, 108: To the extent that there is a problem with the incentives of institutional investors to spend on stewardship, a change in investment manager incentives will likely be more successful than aspirational principles or well-intentioned guidelines.

192 Where they meet the relevant interest definition in s608(1) of the Corporations Act 2001.

193 See further, Parliament of the Commonwealth of Australia, ‘Report on the implications of common ownership and capital concentration in Australia’, House of Representatives Standing Committee on Economics (March 2022) p41, par 1.11.

194 Board of Trade (UK), Report of the Committee on Company Law Amendment (Cohen Committee), Cmd 6659 (1945), par 77–82; ASIC Regulatory Guide 5, Relevant interests and substantial holding notices (August 2020), RG 5.287, p69.

195 See further, Parliament of the Commonwealth of Australia, ‘Report on the implications of common ownership and capital concentration in Australia’, House of Representatives Standing Committee on Economics (March 2022) p41, par 1.12.

196 FCA Disclosure and Transparency Rules, DTR 5.1.2R, DTR 5.3.1R(1), Disclosure Guidance and Transparency Rules sourcebook August 2022 (in relation to UK incorporated issuers).

197 Parliament of the Commonwealth of Australia, ‘Report on the implications of common ownership and capital concentration in Australia’, House of Representatives Standing Committee on Economics (March 2022) p42, par 1.13–1.15.

198 The House of Representatives Standing Committee on Economics Inquiry and Report on the implications of common ownership and capital concentration in Australia (March 2022). While the Australian Federal Government Consultation Paper, ‘Increasing transparency of the beneficial ownership of companies’ (2017) raised questions about the adequacy of the substantial holding disclosure provisions as well as the tracing notice obligations, at 19, no reform followed the consultation.

199 Bobby Reddy, ‘The Emperor’s New Code? Time to Re-Evaluate the Nature of Stewardship Engagement under the UK’s Stewardship Code’ (2021) 84 Modern Law Review 842.

200 See e.g. Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029; Lucian A Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’ (2017) 31 Journal of Economic Perspectives 89; Lucian A Bebchuk and Scott Hirst, ‘Big Three Power, and Why it Matters’ (2022) 102 Boston University Law Review 1547; Bobby Reddy, ‘The Emperor’s New Code? Time to Re-Evaluate the Nature of Stewardship Engagement under the UK’s Stewardship Code’ (2021) 84 Modern Law Review 842.

201 Based on the three largest shareholders within each company.

202 It has similarly been observed that ownership concentration has been increasing in both the US and UK contexts due to institutional holdings: OECD, Corporate Governance Factbook (2019), 17; Brian Cheffins, ‘Corporate Governance and Countervailing Power’ (2019) 74 The Business Lawyer 1.

203 See e.g. OECD, Corporate Governance Factbook (2019), 17; A De La Cruz, A Medina and Y Tang ‘Owners of the World’s Listed Companies’ (2019) OECD Capital Market Series, Paris.

204 Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863; Adrienne Buller and Benjamin Braun, ‘Under New Management: Share Ownership and the Growth of UK Asset Manager Capitalism’ (2021) Common Wealth Report.

205 ibid.

206 Overall, comparing the two indices examined, it is evident that within the ASX 20 there is a greater preponderance of institutional investors, an overall greater degree of shareholder dispersion at both levels of control, there are fewer substantial shareholders, and the ownership of these substantial shareholders is less concentrated, when compared with the ASX 50.

207 While the research results show that investment management institutions such as BlackRock, Vanguard and State Street are substantial shareholders in numerous ASX 50 companies, their ownership does not yet match the pervasiveness which has been observed in the US context: See e.g., Lucian A Bebchuk and Scott Hirst, ‘The Specter of the Giant Three’ (2019) 99 Boston University Law Review 721, 735.

208 As discussed in section 4 of the article, s9 of the Corporations Act 2001 defines a substantial holding as a relevant interest carrying 5% or more of the total votes attached to all voting shares or interests. This is to be read in accordance with s608(1) of the Corporations Act 2001, which defines a relevant interest by reference to control rights (voting, disposition).

209 Rafael La Porta and others, ‘Corporate Ownership around the World’ (1999) 54 Journal of Finance 471.

210 Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863, 868.

211 ibid; Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029, 2043.

Additional information

Notes on contributors

Jenifer Varzaly

Dr Jenifer Varzaly is an Assistant Professor of Commercial and Corporate Law at the Durham University Law School. She completed her PhD at Cambridge University and her Masters at Oxford University. Her principal research and teaching interests are in the fields of corporate law and governance and law and economics. Jenifer has been a visiting academic at Columbia University and at Stanford University, and has consulted in the areas of corporate law and finance in the US, Australia, and the UK. She has been invited to present at a range of international forums, including the Oxford University Commercial Law Centre, UNCITRAL, UNIDROIT, and the Securities and Futures Commission of Hong Kong.