The recent AGMs of both Westpac and Woolworth’s came and passed with remarkably little stress for the incumbent boards. Whilst the Westpac Board received a rebuff of 16% against its remuneration report it was well short of the required 25% to make the Board stand up and take notice.

However, the more extraordinary vote was the one taken for the remuneration report of Woolworth’s. Readers may recall three things about the Woolworth’s AGM.

1. Woolworth’s was and remains heavily shorted and thus we questioned as to how the Institutional owners/lenders of shares would vote their shares;

2. The Woolworth’s Remuneration Report was highly contentious given that the departing Managing Director was granted a notice period that took him to an entitlement to receive his Woolworth’s pension; and

3. The Woolworth’s Board had been so inept in their risk management that they had no replacement for the Managing Director in the event of his sudden departure or incapacity.

At the Woolworth’s AGM about 50% of shareholders registered a vote and 91% of these votes were in favour of the remuneration report. This is remarkable because it was in-spite of widespread media dissatisfaction with Woolworth’s performance and the decisions of its Board. Indeed what a slap in the face for so-called proxy advisors whom recommended against the adoption of the remuneration report.

So how could the vote be so positive?

The first chart below shows the broad makeup of the Woolworth’s register in the context of the other major Consumer/retail companies listed on the ASX.

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Figure. Australian Consumer – Estimated Composition of Shareholder Base

Sources. Company Data, Morgan Stanley Research

We can see that Woolworth’s is very largely held by retail investors. More so then any other company in the peer group. The balance is held by local and overseas institutions.

Woolworth’s does not have a major shareholder (unlike say Harvey Norman or Flight Centre) and it is heavily shorted at present. The next chart shows how much stock is currently borrowed from institutional owners – some 16%.

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Figure. Short Interest Levels – December 2015

Sources. Bloomberg, Morgan Stanley Research

The above charts and the level of voting suggest that the institutional owners of Woolworth’s ignored the weak share price, poor governance and risk management and voted with Board. We suspect that retail shareholders would have voted against the remuneration report but were swamped by the institutions.

Some of the institutions who voted would also be lenders of their stock. Although we note that major institutional owners of Woolworth’s have been silent on their voting intentions. However, it is of no consequence now for they voted for continued mediocrity and that is what Woolworth’s is delivering.

In passing we suspect that foreign institutions didn’t vote their shares and this is the current source of most of the shorted stock on the ASX.

What does this mean for Australian corporate performance?

Shareholders have limited opportunity to send a clear message to Boards and the recent AGM was an opportunity to send a strong one to Woolworth’s. That opportunity was lost and one wonders what is the point of remuneration reports if the major institutional shareholders are reticent to rebuff poor decisions and performance? Further, how useful is foreign ownership of our equity market if the owners are big index funds whom do not vote on significant ssues of governance and who lend their stock out willy nilly?

We noted above that Woolworth’s recent operating performance has been poor and this is now magnified by an ACCC action regarding trading pressure with suppliers.

Australia desperately needs corporate performance to lift and capital providers need to take responsibility if they continue to support mediocracy by public companies.

Today many Australian institutions are crowing about how underweight they are in Australian listed equities as an asset class. What a wonderful position to take after supporting hundreds of billions of capital raisings over the last ten years by Australian companies.

The managers of capital need to think and act like owners of companies. If they default into index type investing with no notion of enforcing accountability then it is likely that the mediocre index performance of the Australian market evident over the last nine long years will continue.