This article first appeared in the NZ Herald on Wednesday September 21 2016.
The dumping of a Rakon director is a rare example of NZ investors taking charge, reports Christopher Adams.
If ever there was a time for the Shareholders Association to pop the champagne, it was last Friday.
Following weeks of agitating, the investor group succeeded in its push to dump Rakon executive director Darren Robinson from the board of the poorly performing technology manufacturer.
About 55 per cent of votes went against Robinson's re-election.
Association chairman John Hawkins says it was the first time, to his knowledge, that a company resolution had been defeated in such a way at a New Zealand annual meeting.
"What it really shows is that retail shareholders, if they get themselves organised, can actually wield quite a big influence over companies," he says.
Combined with other recent wins for the investor group, including a government about-turn on a tax that hits shareholders in de-merged companies, it's been a fruitful year for the 15-year-old association.
But despite claiming Robinson's scalp, it doesn't sound as though the Moet was flowing on Friday evening.
Hawkins says the group isn't gloating about its win, but is pleased that its activism had a "tangible outcome".
"It was unfortunate that [Rakon] had got itself in the situation where the shareholders had to step in and remind the directors and management who actually owned the place," he says. "As I've said to a number of people, now the real work starts."
Robinson's unseating was a rare case of successful shareholder activism in this country.
In times gone by, widespread investor discontent has often failed to overturn unpopular resolutions because votes from major institutions have helped them get over the line.
But in Rakon's case, the investor base is heavily skewed towards retail shareholders, who the association represents.
Still, Hawkins says the founding Robinson family's roughly 23 per cent stake in the firm was a major hurdle.
In late July, the association called on shareholders to vote against Darren Robinson's re-election, saying investors were "fed up" with the family's domination of the boardroom.
Darren and his brother Brent, Rakon's chief executive, and their father Warren - who founded the company in 1967 - occupied three of Rakon's six board seats.
"If you leave out the ownership of those three directors, 86 per cent of the people who voted, voted to remove Mr [Darren] Robinson," Hawkins says. "That's really the measure of what the rest of the shareholders thought."
In addition to Darren's departure as a director, the meeting was told that Warren Robinson intended to retire from the board before next year's AGM.
It was also revealed that the Robinson brothers' pay - another bone of contention - has been reduced, by lopping 12.5 per cent off their base salaries.
Chairman Bryan Mogridge was re-elected last week but won't be seeking another term. The process of finding new directors has begun.
So with big changes under way at Rakon, does the association have another target in sight?
Hawkins says the kind of action it took against the tech firm is a "last resort".
"We talk to a lot of companies all the time about a range of factors and we would not usually go down this path," he says. "This was just a circuit breaker to allow change to occur."
In his address to the association's annual meeting last month, Hawkins described the situation for investors in Mad Butcher franchisor Veritas Investments and software developer Wynyard Group as "troubling".
In both cases, "dominant shareholders, lax board oversight, very strong management personalities or a combination of all three" had resulted in poor results for shareholders, he said.
Hawkins says the association's decision about two years ago to accept corporate members - which now include Air New Zealand, Spark and Genesis Energy - has significantly increased its resources.
"That's been quite important in the association being able to build on the various things it does," he says. "We looked at the prospect of doing something at Rakon three years ago and at that time decided we simply didn't have sufficient financial resources to do the job properly."
He insists the association doesn't risk facing an awkward situation if an issue arises with one of its corporate members. "They know very clearly that if there's a problem and we have to make a stand [against them], we will, and they accept that."
Shareholder activism tends to be a low-key affair in New Zealand, with headline grabbing stoushes like the push against Rakon being relatively uncommon.
Overseas, activist hedge funds - which snap up large stakes in target firms and then push for change, often through securing board seats - are becoming increasingly powerful.
Almost 300 were launched between 2003 and 2014, and such investors now hold more than US$100 billion in assets globally, according to a report by PwC.
Matt Whineray, chief investment officer of the New Zealand Super Fund, says the tactics used by activist funds would be more difficult to employ in New Zealand because of low liquidity levels, which can make it challenging to build significant stakes in many local companies.
Nevertheless, he reckons Kiwi investors are becoming less apathetic and local institutions are doing a lot of work behind the scenes, including through the recent establishment of the Corporate Governance Forum.
Most of New Zealand's major fund managers are forum members, alongside the Super Fund and the ACC. It has established a set of corporate governance guidelines for investors and companies.
"I'm encouraged by a whole bunch of things that have gone on recently, [Rakon] is an example but there's also been the whole debate around responsible investment in KiwiSaver," Whineray says.
He says activism is just a small part of the bigger picture of overall shareholder engagement.
"[Activism] is the obvious, shiny and interesting thing as opposed to the day-to-day engagement on disclosure, board composition, succession planning and executive pay - all that kind of stuff that we think is important but doesn't necessarily make great headlines."
He says there is much room for improvement in New Zealand's corporate governance.
"Everyone loves progress - they just hate change, so that's the ongoing challenge for investors," Whineray says. "But we think there's a genuine prize for taking on that challenge in the sense of better performance."
Rickey Ward, New Zealand equity manager at JBWere, says the events at Rakon's meeting should be a lesson for all company directors.
"If there's anything to come out of this, it's that boards should be listening to owners of companies," he says. "If they're not heard then this could be the consequence."
Like Hawkins, Ward thinks governance and management issues are better resolved outside of AGMs.
"You want to address these kinds of things before you get to a public forum because that means you've exhausted all avenues and you end up with a very personal situation and egg on your face."
Roger Wallis, a partner with law firm Chapman Tripp, says Rakon's AGM could be a taste of things to come.
"Where there's non-performance, particularly if there aren't shareholders holding significant blocks who can dictate the outcome, then it's quite likely you'll see more of it," he says.
Wallis says it will be interesting to see if companies change their behaviour following the events at the Rakon meeting.
"You might find that there's a bit more earlier engagement, rather than playing chicken with shareholders," he says.
Wallis says it is difficult to gauge whether investors are becoming more or less apathetic.
"The NZX is at strong highs still and there has been reasonable total shareholder return performance in terms of the dividends, which for a lot of companies means the shareholders are pretty happy.
"I suppose one indicator of that is there have been quite a few proposals for director fee increases that have been strongly supported by shareholders."
That dynamic could change, Wallis says, if New Zealand's strong economic growth takes a turn for the worse.
"It's hard to generalise about [shareholder engagement] because it's often a function of the economic circumstances," he says.
Participation rates at annual meetings, which remain stubbornly low in this country, would suggest there is an epidemic of apathy among New Zealand investors.
In a recent newsletter, investor services provider Computershare said voting response rates averaged just 4.9 per cent of total investors across the 101 AGMs it ran in New Zealand during the 2015-16 financial year.
In July, a mere 19 people turned up to Z Energy's annual meeting in Wellington.
That said, more than 100 investors packed out the Rangitoto Room at Auckland's Viaduct Events Centre for Rakon's AGM, although the promise of a spectacle may have bumped up the numbers in that case.
Growth in online voting could help address low annual meeting participation rates, Wallis says.
With regard to Rakon's future, Hawkins hopes the company will turn its fortunes around with a new board.
"The company is not a total basket case - it's still cashflow positive but it's essentially going nowhere at the moment," he says. "It's jogging on the spot and I think a new set of eyes and some strategic direction towards management can't go astray."