What happens when billionaires don’t get what they want? Westfield Retail Trust shareholders found out last month when property maestro Frank Lowy threatened to take his bat and ball and go home – in this case, the bat and ball being approximately $15 billion in Australasian property assets held by Westfield Group.
It was an extraordinary outburst prompted by Westfield Retail Trust shareholders’ decision to reject Mr Lowy’s proposal to merge the two companies (after spinning off Westfield Group’s international property assets) at a meeting on May 29.
Rather than accept defeat – or renegotiate the deal – Mr Lowy said Westfield Group would spin off its Australasian property assets into a new company, which would effectively compete with Westfield Retail Trust. It was news to the Trust’s shareholders and brought the meeting to a grinding halt – they are now set to re-cast their votes on Friday.
Whether Mr Lowy’s strong-arm tactics bend Westfield Retail Trust shareholders to his will remains to be seen, with the vote again expected to go down to the wire. Mr Lowy is certainly not the first wealthy executive to bully shareholders, nor will he be the last.
The ride that long-term company founders offer has often been a good one for investors but the price of taking a company public – and therefore accepting shareholders’ cash – is to give up a level of control.
Mr Lowy (alongside former business partner John Saunders) built a single shopping centre in Sydney’s western suburbs into the global Westfield empire although today, but the Lowy family only owns about 8 per cent of the company.
That loss of control does not always sit comfortably – just ask Rupert Murdoch.
In 2004, the media kingpin obtained shareholder approval to reincorporate News Corp to the US state of Delaware, where corporate governance standards are considerably more lax than in Australia.
But institutional shareholders were aghast when Mr Murdoch quickly spurned a promise that the company would extend a “poison-pill” defence to hostile takeovers without their approval – a move aimed at entrenching his family’s control over the company. After a lengthy court case, News Corp agreed to put its takeover defence plan to a shareholder vote at its next annual meeting.
The same characteristics which can drive company founders to success and wealth are often the same ones that ultimately lead them to quarrel with shareholders.
“One of the reasons self-made millionaires are self-made millionaires is because they don’t take not getting their own way very well,” says Martin Lawrence, an analyst at corporate governance advisors Ownership Matters. “It’s something they tend to avoid and get around – that’s why they’ve been successful.”
A study published in the Journal of Financial and Quantitative Analysis in 2009 found that 11 per cent of the largest public US firms were still headed by the company’s founder. Those companies produced an annualised investment return of 10.7 per cent during 1992-2002 – an adjusted outperformance of 4.4 per cent.
“Founder-CEO firms not only have a higher firm valuation than non-founder-CEO firms but also a higher stock market performance,” the paper said.
“Furthermore, they undertake more acquisitions in their core business and invest more in R&D and capital expenditures.”
The singular vision of dominant company founders is not always a negative and, in fact, is clearly often a positive for investors. Mr Lawrence says wealthy founders are usually deeply involved in their companies – it’s not just a 9-to-5 job – even when it potentially crosses a line with shareholders.
“One person’s determination is another person’s stubbornness,” he says.
Even so, at times that stubbornness can not only lead to decisions which work against shareholders, but potentially against the interests of the wealthy.
In recent years, Australia’s richest person, mining magnate Gina Rinehart, built a major stake in publisher Fairfax Media although she has, unusually, been denied a board seat.
Despite being a major investor, she sued Fairfax senior investigative journalist and Ms Rinehart biographer Adele Ferguson in an attempt to find her sources. The action failed and, earlier this year, Western Australia’s Supreme Court ordered her company, Hancock Prospecting, to pay Ferguson’s costs.
Arguably, if Ms Rinehart won the case, a costly payout would only serve to devalue her investment in Fairfax and encourage other executives to take action against the company’s journalists.
While Ms Rinehart still remains engaged in a bizarre battle with her children for control of the family’s business assets, most billionaires have also been more than comfortable mixing family with business. It is a common practice in privately-held companies, less-so in public ones.
Mr Murdoch has groomed his children for years to take over News Corp (Lachlan Murdoch is currently co-chairman alongside his father while James Murdoch is co-chief operating officer). Kerry Packer’s son James was appointed executive chairman of Publishing and Broadcasting (which he later split up), while Kerry Stokes’ two sons, Ryan and Bryant, have also been closely involved in running his public media and machinery businesses.
Meanwhile, Frank Lowy’s two sons Peter and Steven remain co-chief executive officers of Westfield. The future of Westfield and its existence (and extraordinary success) as a company not entwined with the Lowy family is difficult to imagine.
Despite intense lobbying over the past several days, influential Westfield Retail Trust shareholders such as UniSuper are not backing down from their right to assert that they know best, rather than the Lowys.
They say the price the company is offering for Westfield Retail Trust is too low amid ongoing concerns about the extra debt the new merged company (called Scentre Group) will assume and the estimated $425 million in transaction and refinancing costs.
It is a key test in the corporate governance landscape – shareholder versus wealthy company founder. The bat and ball remain well and truly up for grabs.
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