Cross shareholdings and cross energy consumers

 

For ten years, energy security in Australia has been held hostage to more of a political than a reasoned policy debate. So it was with interest that we watched the Federal Government announce Australia’s latest energy policy last week. It remains to be seen whether this new attempt to use a more market based approach to marry energy security with environmental concerns while improving investment certainty and encouraging a transition to renewable power will actually work (and stick).  While we’re waiting to see though, it’s worth reflecting on the impact that successive policy failures are having on even well run businesses.

A few weeks back, Brickworks’ managing director Lindsay Partridge, told the Australian Financial Review that earnings would fall despite projected revenue increases because of an expected 40% rise in energy prices over the next 15 months.  This pain will presumably be felt throughout the Australian industrial sector as our producers lose one of their few remaining natural competitive advantages.

Partridge said that he raised the looming gas crisis with Canberra five years ago but nothing was done to prevent it.

Lots of industry participants are making the same complaints – everyone saw the power crisis coming but there was no foresight, strategic vision or coherence in Australia’s energy policymaking. The reason that Partridge’s comments are particularly salient is because his business has just had its own governance structure scrutinised in an unprecedented way.

Activist shareholders famously took Brickworks (and Soul Patts) to the Federal Court, challenging a near 50 year old cross shareholding structure which they argued oppressed shareholders by protecting incumbent directors and suppressing the market value of both companies.

So here was a very modern (shareholder activism) challenge to an antiquated corporate ownership structure that would be illegal if established today.

 

The defenders won.  In throwing out the claim earlier this year, Justice Jagot held that the cross shareholding did support long term decision-making because of the stability it created in board membership.  Her Honour accepted the cross shareholding could facilitate entrenchment of an under-performing board but weighing up the benefits of this arrangement versus the risks was something perfectly open to the directors.

Her Honour was not convinced that the cross shareholding depressed the market value of the shares (substantial price increases for both companies in recent times tended to work against that argument).  Jagot J found the range of views regarding the cross shareholding were as diverse as the range of potential investors - some would be put off from investing due to the cross shareholding, some would be ambivalent and some would see it as a positive.  Perpetual (the activists) was also unable to prove that it was more likely than not that unwinding the arrangement would increase the share price. 

Simply put, the decision reinforces the proposition that directors have wide latitude in decision-making, and it was hard to say that shareholders in Brickworks or Soul Patts, both well-performing businesses, had been oppressed by an arrangement that facilitated stable management and governance, particularly given the arrangement was known to them before they invested.

So then, in Brickworks, you have a business with a very unusual shareholding and governance structure, but after going through the ringer of activist shareholder litigation, one that we see has supported long term value creation.  Juxtapose this now with the pain that the company is suffering from a decade of policy inconsistencies, short-termism, political bickering and opportunism. 

I’ll leave the analysis of the last ten years of energy policy in this country (and the new energy plan) to the experts (I highly recommend the Wrestling with the Electricity Market Transformation white paper by some of my partners). It has become so bad though that the paper’s authors have wondered if Australia’s energy markets might be headed for ‘Competitive Federalism’ where the fruits of the politicisation of energy policy (including pitting carbon abatement and energy security against each other or bundling carbon reduction with renewables policies in a way that was not constructive to either) is the total dismantling of any coherent and integrated approach towards a national energy policy (kicked off by South Australia’s plan to go it alone).    

How did we get here?

In reflecting on the Court’s endorsement of Brickworks’ governance structure, we should give some serious thought to how we can change our politics to foster that kind of stable, long-term decision making. 

Energy policy failures are a perfect example of the price of getting it wrong – with deleterious impacts on the biggest of business to the most vulnerable of consumers. 

In the same interview with the Australian Financial Review I mentioned above, Lindsay Partridge said “if a company was ever run as badly as Australia has been in the past 10 years by its politicians, the entire board would step down”. Hopefully the new energy policy heralds the start of a better decade.  As with all things, time will tell.

 

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